diff --git a/raw/aaer/2016/AAER-3731.txt b/raw/aaer/2016/AAER-3731.txt new file mode 100644 index 0000000000000000000000000000000000000000..42dc8ce662afa20f261e26dcd7e1cc348041439f --- /dev/null +++ b/raw/aaer/2016/AAER-3731.txt @@ -0,0 +1,556 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3732.txt b/raw/aaer/2016/AAER-3732.txt new file mode 100644 index 0000000000000000000000000000000000000000..49777bf30b3b19032c8a072c0a463a8bf6191048 --- /dev/null +++ b/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 + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3733.txt b/raw/aaer/2016/AAER-3733.txt new file mode 100644 index 0000000000000000000000000000000000000000..919b3391cbe50220ba162f9e55174ef3bd9ef070 --- /dev/null +++ b/raw/aaer/2016/AAER-3733.txt @@ -0,0 +1,470 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3734.txt b/raw/aaer/2016/AAER-3734.txt new file mode 100644 index 0000000000000000000000000000000000000000..e613a0067418fc40828e89c04578705b9b900751 --- /dev/null +++ b/raw/aaer/2016/AAER-3734.txt @@ -0,0 +1,1379 @@ + + + + + + + + + + + + + + + + SEC.gov | Andrew M. 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Miller + + + + + + + + + + + + Andrew M. Miller + + + + + + + + + + + + + + + + + + + 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). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2016/AAER-3735.txt b/raw/aaer/2016/AAER-3735.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6bad0eeae52c672d337469ffdc8e3926a10da31 --- /dev/null +++ b/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 + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3736.txt b/raw/aaer/2016/AAER-3736.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba700c14f501ffdfdab7fc0d41970f1c3ec64813 --- /dev/null +++ b/raw/aaer/2016/AAER-3736.txt @@ -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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3738.txt b/raw/aaer/2016/AAER-3738.txt new file mode 100644 index 0000000000000000000000000000000000000000..f82f157c072849f9c7a58e40b082d47642b629a9 --- /dev/null +++ b/raw/aaer/2016/AAER-3738.txt @@ -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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3739.txt b/raw/aaer/2016/AAER-3739.txt new file mode 100644 index 0000000000000000000000000000000000000000..c30c5b68474e5053dc8cd9ba5ed23f65b52ed8ed --- /dev/null +++ b/raw/aaer/2016/AAER-3739.txt @@ -0,0 +1,366 @@ + + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3740.txt b/raw/aaer/2016/AAER-3740.txt new file mode 100644 index 0000000000000000000000000000000000000000..59de25b258da6d8144cace518c07e10d67acb752 --- /dev/null +++ b/raw/aaer/2016/AAER-3740.txt @@ -0,0 +1,530 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3741.txt b/raw/aaer/2016/AAER-3741.txt new file mode 100644 index 0000000000000000000000000000000000000000..73d750f4c105cabb4caaef053c4df41dd7f18f1d --- /dev/null +++ b/raw/aaer/2016/AAER-3741.txt @@ -0,0 +1,842 @@ +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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3742.txt b/raw/aaer/2016/AAER-3742.txt new file mode 100644 index 0000000000000000000000000000000000000000..ee476024ec32725eef34f425a2f2ca926fed6bea --- /dev/null +++ b/raw/aaer/2016/AAER-3742.txt @@ -0,0 +1,821 @@ + +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3743.txt b/raw/aaer/2016/AAER-3743.txt new file mode 100644 index 0000000000000000000000000000000000000000..98a09a878586b30c6b942af1d466bdb938a76255 --- /dev/null +++ b/raw/aaer/2016/AAER-3743.txt @@ -0,0 +1,525 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3744.txt b/raw/aaer/2016/AAER-3744.txt new file mode 100644 index 0000000000000000000000000000000000000000..69028ee9326f0a6941d26e88c8af22a603fded37 --- /dev/null +++ b/raw/aaer/2016/AAER-3744.txt @@ -0,0 +1,303 @@ + + + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3745.txt b/raw/aaer/2016/AAER-3745.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc0fe3f2aa5cc0ae1ff9897614548f1296865e99 --- /dev/null +++ b/raw/aaer/2016/AAER-3745.txt @@ -0,0 +1,357 @@ +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 + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3746.txt b/raw/aaer/2016/AAER-3746.txt new file mode 100644 index 0000000000000000000000000000000000000000..b4bbccd2cc8c98f977be34a83f05116662e25273 --- /dev/null +++ b/raw/aaer/2016/AAER-3746.txt @@ -0,0 +1,372 @@ + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3747.txt b/raw/aaer/2016/AAER-3747.txt new file mode 100644 index 0000000000000000000000000000000000000000..5183272ed6f00a13f0864dd8390d9085c1932224 --- /dev/null +++ b/raw/aaer/2016/AAER-3747.txt @@ -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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3748.txt b/raw/aaer/2016/AAER-3748.txt new file mode 100644 index 0000000000000000000000000000000000000000..85574998dfffefef6b7bb58576dff046da8b2d08 --- /dev/null +++ b/raw/aaer/2016/AAER-3748.txt @@ -0,0 +1,127 @@ +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 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3751.txt b/raw/aaer/2016/AAER-3751.txt new file mode 100644 index 0000000000000000000000000000000000000000..ce2a7dbd110031f53acffb56bb83e1f69a89a279 --- /dev/null +++ b/raw/aaer/2016/AAER-3751.txt @@ -0,0 +1,509 @@ + + + + +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3752.txt b/raw/aaer/2016/AAER-3752.txt new file mode 100644 index 0000000000000000000000000000000000000000..c8301ee326b121d39eab151e6969a6e5234127e1 --- /dev/null +++ b/raw/aaer/2016/AAER-3752.txt @@ -0,0 +1,460 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3753.txt b/raw/aaer/2016/AAER-3753.txt new file mode 100644 index 0000000000000000000000000000000000000000..ef4158899eff1517fdaa21a9ac8e662d42e3f730 --- /dev/null +++ b/raw/aaer/2016/AAER-3753.txt @@ -0,0 +1,508 @@ + 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 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3754.txt b/raw/aaer/2016/AAER-3754.txt new file mode 100644 index 0000000000000000000000000000000000000000..8e1185616702b698789721897764d26075123163 --- /dev/null +++ b/raw/aaer/2016/AAER-3754.txt @@ -0,0 +1,558 @@ + + + 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 + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3755.txt b/raw/aaer/2016/AAER-3755.txt new file mode 100644 index 0000000000000000000000000000000000000000..771343d903b8d0c4d3934cdf27c4fcefcfb24e06 --- /dev/null +++ b/raw/aaer/2016/AAER-3755.txt @@ -0,0 +1,548 @@ + + + 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 + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3757.txt b/raw/aaer/2016/AAER-3757.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf028c5f9a5114569b7575ca1b6d7b4c21296518 --- /dev/null +++ b/raw/aaer/2016/AAER-3757.txt @@ -0,0 +1,511 @@ + 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 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3758.txt b/raw/aaer/2016/AAER-3758.txt new file mode 100644 index 0000000000000000000000000000000000000000..208d9f967b8b5b1a643fe1c29f621e7c153f161c --- /dev/null +++ b/raw/aaer/2016/AAER-3758.txt @@ -0,0 +1,642 @@ + + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3759.txt b/raw/aaer/2016/AAER-3759.txt new file mode 100644 index 0000000000000000000000000000000000000000..8cbf70f026226f3ca12e73444753fc8b8c2d1b26 --- /dev/null +++ b/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 + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3760.txt b/raw/aaer/2016/AAER-3760.txt new file mode 100644 index 0000000000000000000000000000000000000000..5206398d192474ae62fe78c1d9998de6d5580db0 --- /dev/null +++ b/raw/aaer/2016/AAER-3760.txt @@ -0,0 +1,946 @@ +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 + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3761.txt b/raw/aaer/2016/AAER-3761.txt new file mode 100644 index 0000000000000000000000000000000000000000..edfc80f2b3ef85311b139081448ade7bfa111e64 --- /dev/null +++ b/raw/aaer/2016/AAER-3761.txt @@ -0,0 +1,589 @@ + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3762.txt b/raw/aaer/2016/AAER-3762.txt new file mode 100644 index 0000000000000000000000000000000000000000..60bf9e62461b3fe0a33540290f98be7cccbbf5ca --- /dev/null +++ b/raw/aaer/2016/AAER-3762.txt @@ -0,0 +1,108 @@ + + +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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3763.txt b/raw/aaer/2016/AAER-3763.txt new file mode 100644 index 0000000000000000000000000000000000000000..b497dadd07d8ca8ca26479724c93a4180e39e61c --- /dev/null +++ b/raw/aaer/2016/AAER-3763.txt @@ -0,0 +1,721 @@ + 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 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3764.txt b/raw/aaer/2016/AAER-3764.txt new file mode 100644 index 0000000000000000000000000000000000000000..493a01620a752172867aeaa12e233e861ef81ac4 --- /dev/null +++ b/raw/aaer/2016/AAER-3764.txt @@ -0,0 +1,273 @@ + +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3765.txt b/raw/aaer/2016/AAER-3765.txt new file mode 100644 index 0000000000000000000000000000000000000000..ea53b491aa409f2420b8e603dd478598e5fa1256 --- /dev/null +++ b/raw/aaer/2016/AAER-3765.txt @@ -0,0 +1,803 @@ + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3766.txt b/raw/aaer/2016/AAER-3766.txt new file mode 100644 index 0000000000000000000000000000000000000000..c24341d0393099c0ad2391ee91d119d385c22900 --- /dev/null +++ b/raw/aaer/2016/AAER-3766.txt @@ -0,0 +1,594 @@ + + +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3767.txt b/raw/aaer/2016/AAER-3767.txt new file mode 100644 index 0000000000000000000000000000000000000000..102e2a0aa385629850393afca530e57ef96e4d26 --- /dev/null +++ b/raw/aaer/2016/AAER-3767.txt @@ -0,0 +1,384 @@ + + + + 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 + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3768.txt b/raw/aaer/2016/AAER-3768.txt new file mode 100644 index 0000000000000000000000000000000000000000..5e64caca6c7adc5eb132ed117f97ce3d98129411 --- /dev/null +++ b/raw/aaer/2016/AAER-3768.txt @@ -0,0 +1,112 @@ + + + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3769.pdf b/raw/aaer/2016/AAER-3769.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6fa51616017074a38830f750064df99fcc514dcc Binary files /dev/null and b/raw/aaer/2016/AAER-3769.pdf differ diff --git a/raw/aaer/2016/AAER-3769.txt b/raw/aaer/2016/AAER-3769.txt new file mode 100644 index 0000000000000000000000000000000000000000..11151f965e7130156ceb8f4124dfaf377861ac76 --- /dev/null +++ b/raw/aaer/2016/AAER-3769.txt @@ -0,0 +1,154 @@ +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). \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3770.txt b/raw/aaer/2016/AAER-3770.txt new file mode 100644 index 0000000000000000000000000000000000000000..f1d680c781b9aace0544985e0cef739606d2601d --- /dev/null +++ b/raw/aaer/2016/AAER-3770.txt @@ -0,0 +1,452 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3772.txt b/raw/aaer/2016/AAER-3772.txt new file mode 100644 index 0000000000000000000000000000000000000000..2bcf77ff8e0684d30bcf0a9f9acf526e19316d70 --- /dev/null +++ b/raw/aaer/2016/AAER-3772.txt @@ -0,0 +1,610 @@ +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3773.txt b/raw/aaer/2016/AAER-3773.txt new file mode 100644 index 0000000000000000000000000000000000000000..bd1aa68b25d49d0714ad705478695b53ecddb75e --- /dev/null +++ b/raw/aaer/2016/AAER-3773.txt @@ -0,0 +1,1069 @@ + + + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3774.pdf b/raw/aaer/2016/AAER-3774.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bb5ba262091c0ab25f5912362335e92a72084ab2 Binary files /dev/null and b/raw/aaer/2016/AAER-3774.pdf differ diff --git a/raw/aaer/2016/AAER-3774.txt b/raw/aaer/2016/AAER-3774.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5904982736913476736bf4dfb4f5c2ee05520ea --- /dev/null +++ b/raw/aaer/2016/AAER-3774.txt @@ -0,0 +1,42 @@ + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3775.txt b/raw/aaer/2016/AAER-3775.txt new file mode 100644 index 0000000000000000000000000000000000000000..56e1d6f8aab0cedb6dac76581f7255249ef2d92e --- /dev/null +++ b/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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3776.txt b/raw/aaer/2016/AAER-3776.txt new file mode 100644 index 0000000000000000000000000000000000000000..aaba2c4635b22a4a6e1e951b4bd06bcdc6b9948e --- /dev/null +++ b/raw/aaer/2016/AAER-3776.txt @@ -0,0 +1,158 @@ +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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3778.txt b/raw/aaer/2016/AAER-3778.txt new file mode 100644 index 0000000000000000000000000000000000000000..c34cad97d8bf0aea41fd9bca57c637181eb1874f --- /dev/null +++ b/raw/aaer/2016/AAER-3778.txt @@ -0,0 +1,615 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3779.txt b/raw/aaer/2016/AAER-3779.txt new file mode 100644 index 0000000000000000000000000000000000000000..d372ff9a37a5d0dd9ce09d83d6c1499223fa6620 --- /dev/null +++ b/raw/aaer/2016/AAER-3779.txt @@ -0,0 +1,502 @@ + + + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3780.txt b/raw/aaer/2016/AAER-3780.txt new file mode 100644 index 0000000000000000000000000000000000000000..497685a6b3a0e84ad36df552f66531c8d98b96c3 --- /dev/null +++ b/raw/aaer/2016/AAER-3780.txt @@ -0,0 +1,640 @@ + 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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3781.txt b/raw/aaer/2016/AAER-3781.txt new file mode 100644 index 0000000000000000000000000000000000000000..c2cfc1616fb64a880fe33c34f8496b72daa620b3 --- /dev/null +++ b/raw/aaer/2016/AAER-3781.txt @@ -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 + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3782.txt b/raw/aaer/2016/AAER-3782.txt new file mode 100644 index 0000000000000000000000000000000000000000..71ecd7e241c4c42d6fc7e84c9a9d7657c22b1e76 --- /dev/null +++ b/raw/aaer/2016/AAER-3782.txt @@ -0,0 +1,544 @@ + + 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 + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3783.txt b/raw/aaer/2016/AAER-3783.txt new file mode 100644 index 0000000000000000000000000000000000000000..1e55cd8bc52ec94d11ef606e92025a2afec07a78 --- /dev/null +++ b/raw/aaer/2016/AAER-3783.txt @@ -0,0 +1,670 @@ + + + +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3784.txt b/raw/aaer/2016/AAER-3784.txt new file mode 100644 index 0000000000000000000000000000000000000000..d85229936331ffed678821a82dd33eade76411d5 --- /dev/null +++ b/raw/aaer/2016/AAER-3784.txt @@ -0,0 +1,441 @@ +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 + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3785.txt b/raw/aaer/2016/AAER-3785.txt new file mode 100644 index 0000000000000000000000000000000000000000..740dd2e5ca0f631c2b89ddf71ae79d2845dc93db --- /dev/null +++ b/raw/aaer/2016/AAER-3785.txt @@ -0,0 +1,111 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78145 / June 23, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3785 / June 23, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17134 + + : + : + : +In the Matter of : ORDER MAKING FINDINGS AND + : IMPOSING REMEDIAL SANCTIONS +TIMOTHY QUINTANILLA, CPA, : PURSUANT TO RULE 102(e) OF THE + : COMMISSION’S RULES OF PRACTICE + Respondent. : + : + : +____________________________________ : + +I. + + On February 25, 2016, the Securities and Exchange Commission (“Commission”) +instituted public administrative proceedings against Timothy Quintanilla (“Respondent” or +“Quintanilla”) pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice.1 + +II. + + Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . [p]ermanently enjoined by any court of competent jurisdiction, by reason of +his or her misconduct in an action brought by the Commission, from violating or aiding and +abetting the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + 2 +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 Making Findings and Imposing +Remedial Sanctions Pursuant to Rule 102(e) of the Commission’s Rules of Practice (“Order”), as +set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Quintanilla, age 48, is and has been a certified public accountant licensed to +practice in the State of California. From at least 2006 through December 2009, Quintanilla was a +partner at Mendoza Berger & Co. LLP (“Mendoza Berger”), a public accounting firm registered +with the Public Company Accounting Oversight Board (“PCAOB”) that issued audit opinions +concerning the financial statements of Electronic Game Card, Inc. (“EGMI”). + +2. EGMI was, at all relevant times, a Nevada corporation that marketed +patented, credit-card sized electronic games. Most recently headquartered in Irvine, California, it +has maintained offices in New York City and London, England. During the relevant period, the +company’s shares were registered under Section 12(g) of the Exchange Act and dually quoted on +the OTC Bulletin Board and Pink Sheets (now known as OTC Link), trading under the ticker +symbol EGMI. On September 28, 2010, EGMI filed for Chapter 7 bankruptcy protection in the +United States Bankruptcy Court for the District of Nevada. + + 3. On November 8, 2012, the Commission filed a complaint against +Quintanilla in Securities and Exchange Commission v. Lee Cole et al,. (Civil Action Number 12- +CV-8167, in the United States District Court for the Southern District of New York). On +December 4, 2015, the court entered an order permanently enjoining Quintanilla, by consent, from +future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 10A(a)(1), and +10A(b)(1) of the Exchange Act, and Rule 10b-5 thereunder. Quintanilla was also ordered to pay a +$100,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Quintanilla +was the engagement partner for Mendoza Berger’s audits of EGMI’s financial statements. The +complaint alleged Quintanilla made the final decision to issue unqualified audit opinions with +respect to such financial statements for the years ended December 31, 2006, December 31, 2007, +and December 31, 2008, even though those statements contained material misstatements and +omissions. The complaint alleged that in those audit opinions, Mendoza Berger and Quintanilla +knowingly or recklessly misrepresented that the firm had conducted audits of EGMI’s financial +statements in accordance with the standards of the PCAOB and that, in Mendoza Berger’s +opinion, those statements presented fairly, in all material respects, the financial position of +EGMI. The complaint alleged that Mendoza Berger had not audited critical aspects of EGMI’s +financial statements, its work did not conform to the standards of the PCAOB, and it had no +basis to issue an opinion on EGMI’s financial statements. The complaint alleged that in the +course of its audit work, Quintanilla and the audit team he supervised failed to properly + 3 +investigate a series of red flags, any number of which, if appropriately pursued, would have +revealed significant fraud in EGMI’s financial reporting + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Quintanilla’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: Quintanilla is +suspended from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3786.txt b/raw/aaer/2016/AAER-3786.txt new file mode 100644 index 0000000000000000000000000000000000000000..d25a7a94a0be1427d499cbac78ff761848d6aeaa --- /dev/null +++ b/raw/aaer/2016/AAER-3786.txt @@ -0,0 +1,1371 @@ + + + + + + + + + + + + + + + + SEC.gov | David Rivard + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/518436","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + David Rivard + + + + + + + + + + + + David Rivard + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23585 / June 28, 2016 + Accounting and Auditing Enforcement Release No. 3786 / June 28, 2016 + Securities and Exchange Commission v. David Rivard, 15 Misc. 0221 (E.D.N.Y. filed February 5, 2015) + Securities and Exchange Commission v. David Rivard , Civil Action No. 04 Civ. 1464 (E.D.N.Y. filed Apr. 8, 2004) + + headline --> + + + Court Enters, On Consent, Judgment Requiring Former Certified Public Accountant to Pay Over $1 Million in Disgorgement and Prejudgment Interest For Violating Commission Suspension Order, and Orders Payment Plan Addressing Accountant's Contempt of Prior Final Judgment for Failing to Pay Monies Owed + + The Commission today announced that, on June 24 and 27, 2016, the Honorable I. Leo Glasser of the United States District Court for the Eastern District of New York entered an Order and Judgment on consent in two cases against David Rivard, a former certified public accountant. In the first case, the Judgment enforces a prior Commission order suspending Rivard from practicing accounting before the Commission as the Court requires Rivard to pay disgorgement totaling $986,870.87, moneys he obtained in connection with violating the Commission order suspending him, together with prejudgment interest of $153,438.46, totaling $1,140,309.33. Securities and Exchange Commission v. David Rivard, 15 Misc. 0221 (E.D.N.Y. Feb. 5, 2015). In the second case, the Court entered an Order imposing a payment plan against Rivard addressing the Court's previous finding that Rivard is in contempt of a money judgment previously entered against him in SEC v. Rivard, No. 04 Civ. 1464 (E.D.N.Y. Apr. 8, 2004), and directs Rivard to make payments over the next 5 years to fully pay that money judgment. Previously on June 3, 2015, the Court on consent entered an Order directing Rivard to comply with the Commission's suspension order, finding him in contempt for not paying the prior money judgment, and providing remedies for the Commission to collect on the prior money judgment, such as execution of a mortgage deed on a residential property in favor of the Commission to secure the amounts owed under the money judgment. The mortgage deed in the Commission's favor remains filed against that property. Rivard is a resident of East Setauket, New York, and had previously been licensed as a certified public accountant by the State of New York from February 1992, until he surrendered his license, effective March 2008. + + See prior litigation releases ## 18665 , 18954 , 23190 , 23277 . + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2016/AAER-3787.pdf b/raw/aaer/2016/AAER-3787.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c85dcbb3bea97be51c5c90d786a94593726fcde1 Binary files /dev/null and b/raw/aaer/2016/AAER-3787.pdf differ diff --git a/raw/aaer/2016/AAER-3787.txt b/raw/aaer/2016/AAER-3787.txt new file mode 100644 index 0000000000000000000000000000000000000000..6c60720883f08b59f76fac6269c523e57e81441c --- /dev/null +++ b/raw/aaer/2016/AAER-3787.txt @@ -0,0 +1,97 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78270 / July 8, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3787 / July 8, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17330 + + + +In the Matter of + +TONI TONG CHEN, CPA + +Respondent. + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Toni +Tong Chen (“Respondent” or “Chen”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice. +1 + +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his or +her misconduct in an action brought by the Commission, from violating or aiding and abetting the +violation of any provision of the Federal securities laws or of the rules and regulations thereunder. + 2 +which the Commission is a party, and without admitting or denying the findings herein, except as to +the Commission’s jurisdiction over her and the subject matter of these proceedings, and the findings +contained in Section III.2 below, which are admitted, Respondent consents to the entry of this Order +Instituting Administrative Proceedings Pursuant to 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. Chen, age 47, was a certified public accountant licensed to practice in the State of +California from 1997 through approximately October 2014. +2. On June 29, 2016, a judgment was entered by consent against Chen, permanently +enjoining her from future violations of Sections 5 and 17(a) of the Securities Act of 1933 +(“Securities Act”), Sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5 thereunder, in the +civil action entitled Securities and Exchange Commission v. CKB168 Holdings Ltd., et al +, Civil +Action Number 13-CV-5584, in the United States District Court for the Eastern District of New +York. + +3. The Commission’s complaint alleged, among other things, that from approximately +May 2012 through at least October 2013, Chen solicited investments in an entity that was falsely +portrayed as a profitable multi-level marketing company that sells web-based children’s educational +courses. The complaint alleged that, in fact, the company was a fraudulent pyramid scheme. The +complaint also alleged that Chen sold unregistered securities and acted as an unregistered broker- +dealer. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Chen’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Chen is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3788.txt b/raw/aaer/2016/AAER-3788.txt new file mode 100644 index 0000000000000000000000000000000000000000..7781ebf87e26ff780a451c482ec1f110fcb4005f --- /dev/null +++ b/raw/aaer/2016/AAER-3788.txt @@ -0,0 +1,185 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78273 / July 11, 2016 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4447 / July 11, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3788 / July 11, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17332 + + +In the Matter of + +BLAIR D. ACKMAN, CPA + +Respondent. + + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Blair D. +Ackman (“Respondent” or “Ackman”) pursuant to Section 203(f) of the Investment Advisers Act +of 1940 (“Advisers Act”) and Rule 102(e)(3) of the Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section +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. Ackman was the chief financial officer and a 5% shareholder of +MayfieldGentry Realty Advisors, LLC (“MGRA”), an investment adviser registered with the +Commission from 2004 through July 2013. He is a certified public accountant licensed in Illinois. +Ackman, 44 years old, is a resident of Livonia, Michigan. + + 2. On June 23, 2016, a final judgment was entered by consent against +Ackman, permanently enjoining him from future violations of Sections 206(1) and 206(2) of the +Advisers Act, in the civil action entitled United States Securities and Exchange Commission v. +MayfieldGentry Realty Advisors, LLC, et al., Civil Action Number 13-CV-12520, in the United +States District Court for the Eastern District of Michigan. + + 3. The Commission’s complaint alleged that, in early 2008, MGRA and its +CEO, Chauncey C. Mayfield (“Mayfield”), misappropriated approximately $3.1 million belonging +to one of the Detroit public employee pension funds and used the money to purchase two retail +shopping centers on behalf of MGRA affiliates. + + 4. The complaint alleged that Ackman learned of the misappropriation by late +March 2008. The complaint further alleged that, despite his fiduciary obligations, Ackman kept +the misappropriation a secret from the pension fund, and devised a plan with MGRA’s other +principals to secretly pay back the pension fund without the pension fund ever learning of the theft. + + 5. The complaint alleged that Ackman and the other MGRA principals +affirmatively misled the pension fund through financial reporting and an extensive budget +presentation. The complaint further alleged that MGRA eventually disclosed the misappropriation +to the pension fund in late April 2012, after which the pension fund promptly fired MGRA. + + 6. The complaint alleged that Ackman’s actions aided and abetted MGRA’s and +Mayfield’s violations of Sections 206(1) and 206(2) of the Advisers Act. + +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. + + 3 +Accordingly, it is hereby ORDERED, effective immediately, that + +A. Ackman is suspended from appearing or practicing before the Commission as an +accountant. + +B. After 3 years from the date of this order, Respondent may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission. Such an +application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms of +or potential defects in the respondent’s or the firm’s quality control system that would indicate that +the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as Respondent +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is current +and he has resolved all other disciplinary issues with the applicable state boards of +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. + + 4 +D. Pursuant to Section 203(f) of the Advisers Act, Respondent Ackman is barred from +association with any broker, dealer, investment adviser, municipal securities dealer, municipal +advisor, transfer agent, or nationally recognized statistical rating organization, with the right to +apply for reentry after three (3) years to the appropriate self-regulatory organization, or if there is +none, to the Commission. + + Any reapplication for association by the Respondent will be subject to the applicable +laws and regulations governing the reentry process, and reentry may be conditioned upon a +number of factors, including, but not limited to, the satisfaction of any or all of the following: +(a) any disgorgement ordered against the Respondent, whether or not the Commission has +fully or partially waived payment of such disgorgement; (b) any arbitration award related to +the conduct that served as the basis for the Commission order; (c) any self-regulatory +organization arbitration award to a customer, whether or not related to the conduct that +served as the basis for the Commission order; and (d) any restitution order by a self- +regulatory organization, whether or not related to the conduct that served as the basis for the +Commission order. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3790.txt b/raw/aaer/2016/AAER-3790.txt new file mode 100644 index 0000000000000000000000000000000000000000..b6b51a30349b3b89ad91e1b76cbcc09523593cc5 --- /dev/null +++ b/raw/aaer/2016/AAER-3790.txt @@ -0,0 +1,695 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78393 / July 22, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3790 / July 22, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17356 + +In the Matter of + EFP ROTENBERG, LLP and + NICHOLAS BOTTINI, 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, IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER. + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections 4C1 +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules 102(e)(1)(ii) and (iii) of +the Commission’s Rules of Practice2 against Nicholas Bottini (“Bottini”) and EFP Rotenberg, LLP +(“EFP Rotenberg”). + +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.” 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 or regula tions +thereunder.” +2 +II. +In anticipation of the institution of these proceedings, EFP Rotenberg and Bottini 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, EFP Rotenberg and Bottini, except as provided herein in Section V, 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, Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. +III. +On the basis of this Order and EFP Rotenberg’s and Bottini’s Offers, the Commission finds3 that +Summary +1. This matter concerns violations of the federal securities laws and improper professional +conduct by EFP Rotenberg and Bottini in connection with the audit of the financial statements of +ContinuityX Solutions, Inc. (“ContinuityX”). After incorporating, ContinuityX filed one Form 10-K +with the Commission, which was its Form 10-K for the fiscal year ending June 30, 2012 (“2012 Form +10-K”). EFP Rotenberg acted as the auditor of the financial statements included in the 2012 Form 10-K +(the “ContinuityX Audit”). Bottini was the engagement partner for the ContinuityX Audit. +2. EFP Rotenberg willfully4 violated and Bottini willfully aided and abetted and caused EFP +Rotenberg’s violations of Section 10A(a) of the Exchange Act when it conducted the ContinuityX Audit +without including procedures which were designed to: (1) provide reasonable assurance of detecting +illegal acts; and (2) identify related party transactions. +3. Additionally, EFP Rotenberg and Bottini failed to comply with the standards of the +Public Company Accounting Oversight Board5 (“PCAOB”). EFP Rotenberg and Bottini repeatedly +engaged in improper professional conduct that resulted in violations of professional standards and +demonstrated a lack of competence to practice before the Commission. Specifically, during the +ContinuityX Audit, EFP Rotenberg and Bottini failed to: (1) appropriately respond to risks of material +misstatement; (2) identify related party transactions; (3) obtain sufficient audit evidence; (4) perform +procedures to resolve and properly document inconsistencies; (5) investigate management +representations that contradicted other audit evidence; and (6) exercise due professional care. + +3 The findings herein are made pursuant to EFP Rotenberg’s and Bottini’s Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +4 A willful violation of the securities laws means “no more than that the person charged with the duty knows what he is +doing.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. +1949)). +5 All references in this Order to standards issued by the PCAOB are to those standards that were in effect at the time of the +relevant conduct. +3 +Additionally, EFP Rotenberg failed to maintain adequate policies and procedures regarding +documentation. +4. Finally, EFP Rotenberg willfully violated and Bottini willfully aided and abetted and +caused EFP Rotenberg’s violations of Rule 2-02(b)(1) of Regulation S-X when it stated that the +ContinuityX Audit had been conducted in accordance with PCAOB standards, when it was not. Bottini +caused this violation by approving the issuance of the ContinuityX audit report, the audit of which he +failed to conduct in accordance with PCAOB standards. +Respondents +5. EFP Rotenberg, LLP is a PCAOB registered accounting firm based in Rochester, NY. +On July 1, 2014, the Commission censured and fined EFP Rotenberg for its part in the audit of Universal +Travel Group. See In the Matter of EFP Rotenberg, LLP and Nicholas R. Bottini, Exchange Act Rel. +No. 72503 (July 1, 2014). +6. Nicholas Bottini, age 54, was the engagement partner on the ContinuityX Audit. Bottini +was a partner in EFP Rotenberg’s public company auditing group, and also served on various +committees within the firm. Bottini was dismissed for cause from EFP Rotenberg on March 5, 2014. +On July 1, 2014, Bottini was suspended from appearing or practicing before the Commission as an +accountant with the right to apply for reinstatement after two years and ordered to pay a $25,000 civil +penalty for his actions as part of EFP Rotenberg’s audit of Universal Travel Group. See Exchange Act +Rel. No. 72503 (July 1, 2014). +Relevant Party +7. ContinuityX Solutions, Inc. was a Delaware corporation headquartered in Metamora, +IL. ContinuityX was formed in March 2011 and filed for bankruptcy in February 2013. It is currently +under the control of a chapter 7 bankruptcy trustee. Its common stock was registered with the +Commission under Section 12(g) of the Exchange Act and was quoted on the OTC Link operated by +OTC Markets Group, Inc. under the symbol “CUSXQ.”6 On June 5, 2014, an indictment was filed in +the U.S. District Court for the Northern District of Illinois, United States of America v. David Godwin, +et al., No 1:14-cr-00326 (N.D. Ill), for violation of Title 18, USC, Section 1343, alleging multiple counts +of fraud against David P. Godwin (“Godwin”), the former CEO, president, and chairman of +ContinuityX, and John Coletti (“Coletti”), a former sales representative of ContinuityX. On September +30, 2015, the Commission charged Godwin and Anthony G. Roth (“Roth”), ContinuityX’s former Chief +Financial Officer, with engineering a fraudulent scheme to inflate the company’s revenues. See U.S. +Securities and Exchange Commission v. David P. Godwin and Anthony G. Roth, No. 25-cv-1414 (C.D. +Ill. September 30, 2015). On December 10, 2015, a grand jury convened in the Northern District of +Illinois returned a superseding indictment charging Roth with multiple counts of wire fraud in violation +of Title 18, USC, Section 1343. Additional wire fraud counts against Godwin were also included in the +superseding indictment. + +6 On September 30, 2015, the Commission issued an order revoking ContinuityX’s securities pursuant to Section 12(j) of the +Exchange Act. In the Matter of ContinuityX Solutions, Inc., Exchange Act Rel. No. 76028 (Sept. 30, 2015). +4 +Background +8. ContinuityX’s business was primarily to serve as a commission-based sales agent, selling +enterprise internet services provided by “Internet Provider A” and “Internet Provider B” (collectively +“Internet Providers”). Pursuant to agreements with ContinuityX, the Internet Providers would pay a +commission to ContinuityX each time ContinuityX arranged for a customer to purchase internet services +from the Internet Providers. +9. ContinuityX filed its 2012 Form 10-K on September 28, 2012. In its 2012 Form 10-K, +ContinuityX reported revenue of $18.6 million. Nearly all of this revenue was derived from purported +commissions from the Internet Providers. +10. EFP Rotenberg acted as ContinuityX’s auditor and issued an audit report containing an +unqualified opinion. Bottini was the engagement partner. Bottini supervised several employees of EFP +Rotenberg as part of the ContinuityX Audit. Included in the 2012 Form 10-K was EFP Rotenberg’s +audit report in which it stated that it conducted the ContinuityX Audit in accordance with the auditing +standards of the PCAOB. +11. On December 13, 2012, ContinuityX filed a Form 8-K that stated it had been sued by +Internet Provider A to recoup commissions associated with the sale of internet services to certain +customers who failed to make payments for the services and stated that previously issued financial +statements and audit reports could no longer be relied upon. +12. On January 31, 2013, ContinuityX filed a Form 8-K that stated its Board of Directors had +removed the company’s chief executive officer and the company had recently become aware of “the +existence of substantial financial irregularities including, but not limited to, potential forgeries of +purchase orders, emails and other documents.” +13. On February 13, 2013, ContinuityX filed for chapter 11 bankruptcy in the Southern +District of New York. Later, ContinuityX’s bankruptcy proceeding was involuntarily converted to a +chapter 7 proceeding, and the company was placed under the control of a chapter 7 trustee. +14. ContinuityX’s 2012 Form 10-K contained several material misstatements and omissions +of material fact, including: (1) grossly overstating revenue by improperly recognizing commissions from +fraudulent transactions; (2) failing to disclose related party transactions; (3) overstating assets by +recognizing third party assets as its own; (3) falsely stating that Internet Provider A was not able to +charge back previously paid commissions; and (4) failing to recognize revenue from the Internet +Providers in accordance with their contractual agreements. +EFP Rotenberg and Bottini Did Not Plan or Perform Procedures Designed to Detect Illegal Acts +Including Fraud +15. Section 10A(a)(1) of the Exchange Act requires that the audit of the financial statements +of an issuer by a registered public accounting firm shall include procedures designed to provide +reasonable assurance of detecting illegal acts that would have a direct and material effect on the +determination of financial statement amounts. No showing of scienter is necessary to establish a +violation of Section 10A. See SEC v. Solucorp Indus., Ltd., 197 F. Supp. 2d 4 (S.D.N.Y. 2002). +5 +16. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of Material +Misstatement (“AS No. 13”), states “the auditor should design and perform audit procedures in a manner +that addresses the assessed risks of material misstatement for each relevant assertion of each significant +account and disclosure” (¶ 8). AS No.13 also states that “[f]or significant risks, the auditor should +perform substantive procedures, including tests of details, that are specifically responsive to the assessed +risks” (¶ 11). PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement, states that a fraud risk is a significant risk (¶ 71). Thus, PCAOB Audit Standards required +EFP Rotenberg and Bottini to perform substantive audit procedures specifically designed to be +responsive to fraud risk. +17. During the planning of the ContinuityX Audit, EFP Rotenberg and Bottini deemed +accounts receivable, revenue, and security deposits as areas of the audit with a significant risk of fraud. +In response to this identified risk, to comply with Section 10A(a)(1) and AS No. 13, EFP Rotenberg and +Bottini should have included as part of the ContinuityX Audit procedures designed to address the risk of +material misstatement due to fraud on the determination of the amounts in these accounts. +18. In addition to deeming certain areas of the ContinuityX Audit as a significant risk, EFP +Rotenberg and Bottini were also on notice of potential irregularities in ContinuityX’s accounting. +During the ContinuityX Audit, ContinuityX’s management attempted to limit the scope of EFP +Rotenberg’s procedures to obtain sufficient audit evidence on accounts receivable. Specifically, EFP +Rotenberg and Bottini requested that ContinuityX’s management prepare accounts receivable +confirmations for the Internet Providers. ContinuityX’s management refused to prepare and sign the +confirmations. EFP Rotenberg and Bottini acquiesced to ContinuityX’s management’s scope limitation +and instead spoke to people purporting to be employees of the Internet Providers. However, the +engagement team failed to obtain sufficient audit evidence over the existence of accounts receivable. +19. EFP Rotenberg and Bottini did not plan or perform procedures to obtain sufficient +appropriate audit evidence that ContinuityX’s revenue was legitimate or that it was being recognized +correctly. During the ContinuityX Audit, EFP Rotenberg and Bottini obtained signed agreements +between ContinuityX and the Internet Providers’ customers that showed that the customers who +purchased internet services via ContinuityX did not intend to use or pay for the internet services. These +agreements stated that the customers: (1) were not responsible for paying for the internet services they +purchased from the Internet Providers; (2) ContinuityX was responsible for paying the Internet +Providers for the customers’ monthly internet service bills; and (3) Continuity X would pay the +customers a one-time commission. In short, these agreements, when read in light of the agreements +between ContinuityX and the Internet Providers, showed that ContinuityX would pay the customers a +kick-back for purchasing internet services so that ContinuityX could earn a commission from the +Internet Providers. +20. ContinuityX received commission payments from the Internet Providers based on the +fraudulent sales. Under Generally Accepted Accounting Principles (“GAAP”), revenue is recognized +when it is realized or realizable and earned. There must be persuasive evidence that an actual +arrangement exists and that the parties are committed to performing their respective obligations. 7 Here, +these agreements clearly showed that the customers had no intention of performing their obligations to + +7 See, A.S.C. 605-10-25-1, See, also, FASB Statement of Concepts No. 5, Recognition and Measurement in Financial +Statements of Business Enterprises; Staff Accounting Bulletin No. 104. +6 +the Internet Providers. EFP Rotenberg and Bottini failed to perform sufficient procedures to detect these +fraudulent sales despite possessing all of the documents necessary to identify them. Furthermore, EFP +Rotenberg and Bottini failed to design or perform sufficient substantive procedures to determine if +ContinuityX’s revenue was legitimately earned. +21. Internet Provider A required that its customers pay security deposits. ContinuityX paid +the security deposits on behalf of its customers and the deposits were held by Internet Provider A in the +name of the customers. When the customers did not pay their bills, Internet Provider A applied the +security deposits to the past due account balance. ContinuityX recorded the security deposits as its own +assets. In its 2012 Form 10-K ContinuityX reported $2.1 million of security deposits as an asset. +ContinuityX should not have recorded the security deposits as an asset. +22. EFP Rotenberg and Bottini did not plan or perform procedures to evaluate whether +ContinuityX had the rights to or ownership of the security deposits. During the ContinuityX Audit, +ContinuityX’s management represented to EFP Rotenberg and Bottini that the security deposits held by +Internet Provider A were ContinuityX’s assets. To support this assertion ContinuityX’s management +provided EFP Rotenberg and Bottini with cashier’s checks drawn from ContinuityX’s bank account. +However, the cashier’s checks had the customer listed as the remitter. EFP Rotenberg and Bottini +accepted the cashier’s checks as evidence of ContinuityX’s ownership of the security deposits and did +not question why ContinuityX was using cashier’s checks to pay security deposits or why a check drawn +from ContinuityX’s bank would list the customer as the remitter. Furthermore, in an email +correspondence with Internet Provider A, Bottini was told that Internet Provider A held the security +deposits for the customers. EFP Rotenberg and Bottini failed to take further steps or perform additional +procedures after being told by Internet Provider A that the security deposits were ContinuityX +customers’ deposits, and not ContinuityX’s. EFP Rotenberg and Bottini failed to resolve inconsistencies +in the audit evidence obtained to become reasonably assured that ContinuityX was properly recording +the security deposits as assets. +23. Based on the foregoing, EFP Rotenberg and Bottini’s did not plan or perform sufficient +procedures to provide reasonable assurance of detecting illegal acts that would have a direct and +material effect on the determination of ContinuityX’s financial statement amounts, as required by +Section 10A(a)(1) of the Exchange Act. This was demonstrated by EFP Rotenberg and Bottini’s failure +to obtain sufficient appropriate audit evidence that was responsive to the significant risks identified by +the engagement team. Specifically, EFP Rotenberg and Bottini failed to perform sufficient alternative +procedures after management refused to prepare accounts receivable confirmations. Furthermore, +despite possessing information that contradicted management’s assertions, EFP Rotenberg and Bottini +failed to resolve inconsistencies in the audit evidence. As a result, EFP Rotenberg and Bottini failed to +identify ContinuityX’s improper revenue recognition and the inclusion of customer security deposits as +company assets. +EFP Rotenberg and Bottini Failed to Perform Procedures to Identify Related Party Transactions +24. Section 10A(a)(2) of the Exchange Act requires that the audit of the financial statements +of an issuer by a registered public accounting firm shall include procedures designed to identify related +party transactions that are material to the financial statements or otherwise require disclosure therein. +7 +25. PCAOB Standard AU Section 334, Related Parties (“AU Section 334”), provides +guidance on procedures to identify related party relationships and transactions and to satisfy the auditor +concerning the required disclosure of related party transactions. The guidance in AU Section 334 for +identifying material transactions that may be indicative of the existence of previously undetermined +relationships includes that the auditor “[r]eview the extent and nature of business transacted with major +customers, suppliers, borrowers, and lenders for indications of previously undisclosed relationships” (at +.08 (e)). Additionally, AU Section 334 requires that an “auditor should view related party transactions +within the framework of existing [accounting] pronouncements, placing primary emphasis on the +adequacy of disclosure” (at .02), and the auditor should satisfy himself on the basis of his professional +judgement that the transaction has been adequately disclosed in the financial statements (at .11). +26. EFP Rotenberg and Bottini did not perform sufficient procedures designed to identify +related party transactions. ContinuityX was involved in transactions with certain customers that should +have been disclosed as related party transactions. However, in its financial statements included in its +2012 Form 10-K, ContinuityX did not disclose these related party transactions. +27. EFP Rotenberg and Bottini possessed documents in which the CFO of ContinuityX +signed internet service agreements and a security deposit agreement on behalf of a customer named +AARMG, LLC. During the ContinuityX Audit, the audit manager sent an email to ContinuityX +management and Bottini that noted the CFO signed an internet service contract on behalf of AARMG +and inquired if AARMG was a related party. EFP Rotenberg and Bottini failed to obtain an answer +from ContinuityX management and to conduct additional procedures to determine if AARMG was a +related party. ContinuityX recognized $695,000 in commission revenue purportedly earned from sales +to AARMG. However, the AARMG transactions were not disclosed in the financial statements included +in its 2012 Form 10-K as related party transactions. +28. In April 2012, ContinuityX hired the owners and principals of two of ContinuityX’s +customers (“Customer A and Customer B”), and then later purchased Customer A and Customer B +outright. EFP Rotenberg and Bottini documented in the ContinuityX Audit preliminary analytical +review workpaper that ContinuityX hired Customer A’s and Customer B’s owners. However, EFP +Rotenberg and Bottini failed to identify the sales to Customer A and Customer B as related party +transactions during revenue testing even though sales to Customer A and Customer B were selected for +testing. ContinuityX recognized more than $8 million in commission revenue (43% of total revenue) +purportedly earned from sales to Customer A and Customer B. However, the transactions with +Customer A or Customer B were not disclosed in the financial statements included in its 2012 Form 10- +K as related party transactions. +29. EFP Rotenberg willfully violated and Bottini willfully aided and abetted and caused EFP +Rotenberg’s violations of Section 10A(a)(2) of the Exchange Act and failed to comply with AU Section +334 because it did not conduct procedures after it identified possible related party transactions to “obtain +satisfaction concerning the purpose, nature, and extent of these transactions and their effect on the +financial statements” (AU Section 334 at .09). The related party transactions with AARMG, Customer +A, and Customer B were not disclosed in the financial statements included in its ContinuityX’s 2012 +Form 10-K. +8 +EFP Rotenberg and Bottini Failed to Obtain Sufficient Appropriate Audit Evidence to Support +the Audit Opinion +30. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires the auditor to +“plan and perform audit procedures to obtain sufficient appropriate audit evidence to provide a +reasonable basis for his or her opinion” (¶ 4). +31. EFP Rotenberg issued an audit report containing an unqualified opinion and Bottini +approved the issuance of the audit report. However, EFP Rotenberg and Bottini failed to obtain +sufficient appropriate audit evidence to provide a reasonable basis for this opinion. Specifically, EFP +Rotenberg and Bottini did not obtain sufficient appropriate audit evidence to support management’s +assertions regarding ContinuityX’s recognition of revenue and security deposits. Additionally, EFP +Rotenberg and Bottini failed to obtain sufficient audit evidence that ContinuityX’s revenue recognition +policy was consistent with the terms and conditions of ContinuityX’s agreements with the Internet +Providers. +32. ContinuityX reported $18.6 million in commission revenue purportedly earned from the +Internet Providers. However, EFP Rotenberg and Bottini did not obtain sufficient evidence to support +the revenue recognized. In fact, the evidence that EFP Rotenberg and Bottini obtained supported a +conclusion that ContinuityX should not have recognized any of these commission payments. +Specifically, EFP Rotenberg and Bottini obtained agreements which showed that ContinuityX’s +customers had no intention of paying for or using the internet services. Thus, under GAAP, the revenue +from these transactions should not have been recognized. EFP Rotenberg and Bottini failed to properly +evaluate these customer agreements despite the fact that accounts receivable and revenue were deemed +significant risk areas. They recalculated the commission payments paid to the customers and failed to +appreciate the significance of the terms of the agreements. ContinuityX recognized $18.6 million in +revenue (over 99.8% of ContinuityX’s total revenue) that it had not earned. +33. In the 2012 Form 10-K, ContinuityX reported $2.1 million in security deposits as assets. +These security deposits were not an asset of ContinuityX and should not have been recorded as such. +EFP Rotenberg and Bottini did not obtain any evidence, other than ContinuityX management’s +representations, that ContinuityX had the rights to or ownership of the security deposits. +34. ContinuityX entered into an agreement with Internet Provider A which specifically +outlined how and when ContinuityX would earn its commission. EFP Rotenberg and Bottini were +provided a copy of this agreement and maintained it in the workpapers. This agreement stated that +Internet Provider A could charge back ContinuityX when customers failed to pay for their internet +services. However, ContinuityX’s management told Bottini that Internet Provider A could not charge +back commissions. Despite possessing the agreement with Internet Provider A that directly contradicted +ContinuityX’s management’s representation, EFP Rotenberg and Bottini did not perform sufficient +additional procedures to resolve the inconsistent evidence. As a result of EFP Rotenberg and Bottini’s +failure to obtain sufficient appropriate audit evidence, they failed to detect that the statement that “in +these lump-sum compensation arrangements, the customer may not claw back – unreasonably withhold +– or transfer these orders and must pay the Company per agreement” in the ContinuityX Form 10-K for +2012 was false. +9 +35. ContinuityX’s revenue recognition policy for sales to Internet Provider A was based on +the erroneous premise that Internet Provider A was not able to charge back commissions. Internet +Provider A’s ability to charge back commissions was not consistent with ContinuityX’s policy of +recognizing 100% of its commission revenue upfront. Instead, ContinuityX should have recognized the +revenue over the life of the contract as it was earned, or set up a reserve account to offset potential +chargebacks. EFP Rotenberg and Bottini failed to obtain sufficient appropriate audit evidence to +support management’s assertion that ContinuityX could recognize 100% of the commission revenue +upfront. In fact, the agreement included in the audit documentation stated that Internet Provider A could +charge back commissions. +36. ContinuityX and Internet Provider B also entered into an agreement which outlined how +and when ContinuityX would earn commissions. EFP Rotenberg and Bottini received a copy of this +agreement and maintained it in the workpapers. The agreement with Internet Provider B stated that +Internet Provider B would pay ContinuityX a commission on a monthly pro rata basis after the customer +had paid Internet Provider B for the internet services. ContinuityX’s revenue recognition policy was +consistent with the terms of the agreement with Internet Provider B. However, ContinuityX did not +recognize revenue in accordance with its agreement with Internet Provider B or its own revenue +recognition policy. Instead of recognizing the commissions monthly on a pro rata basis, ContinuityX +recognized 100% of the commission after the customer had signed the sales contract. When EFP +Rotenberg and Bottini inquired about the discrepancy, ContinuityX’s management stated that the terms +of the agreement with Internet Provider B had changed. In fact, ContinuityX and Internet Provider B +never changed the terms of their agreement. EFP Rotenberg and Bottini never requested nor received +documentation to support this purported change. Despite possessing the agreement that contradicted +ContinuityX management’s representation, EFP Rotenberg and Bottini failed to obtain sufficient +appropriate evidence to support the revenue recognized from Internet Provider B. +EFP Rotenberg and Bottini Failed to Perform Procedures to Resolve Inconsistencies and Failed to +Document Findings that Contradicted its Conclusions +37. AS No. 15 states that “[i]f audit evidence obtained from one source is inconsistent with +that obtained from another, or if the auditor has doubts about the reliability of information to be used as +audit evidence, the auditor should perform the audit procedures necessary to resolve the matter and +should determine the effect, if any, on other aspects of the audit” (¶ 29). PCAOB Auditing Standard No. +3, Audit Documentation (“AS No. 3”), states that “audit documentation must include information the +auditor has identified relating to significant findings or issues that is inconsistent with or contradicts the +auditor’s final conclusions. The relevant records to be retained include, but are not limited to, +procedures performed in response to the information…” (¶ 8). +38. EFP Rotenberg and Bottini failed to comply with AS No. 15 and AS No. 3 because they +failed to perform sufficient audit procedures necessary to resolve inconsistencies between ContinuityX +management’s representations and the terms in ContinuityX’s agreements with the Internet Providers. +Additionally, EFP Rotenberg and Bottini failed to document the inconsistencies or the procedures +performed in response to the inconsistent information and how the inconsistencies were resolved. +39. ContinuityX’s management told EFP Rotenberg and Bottini that Internet Provider A was +not able to charge back commissions purportedly earned by ContinuityX. ContinuityX management’s +representation was false and EFP Rotenberg and Bottini obtained documents that were inconsistent with +10 +management’s representation. However, EFP Rotenberg and Bottini did not sufficiently resolve the +inconsistency between management’s representation and the underlying documents or document this +inconsistency. +40. ContinuityX’s management also told EFP Rotenberg and Bottini that Internet Provider B +paid ContinuityX 100% of its commission when Internet Provider B approved a customer’s contract. +ContinuityX recognized 100% of the commission revenue from Internet Provider B upfront, instead of +monthly over the life of the internet service contract as required by GAAP.8 ContinuityX’s +management’s representation was false. During the ContinuityX Audit, EFP Rotenberg and Bottini +obtained ContinuityX’s agreement with Internet Provider B that stated commissions were paid monthly +and only after the customer had paid for the internet services. EFP Rotenberg and Bottini did not +sufficiently resolve the inconsistency between management’s representation and the underlying +agreement or document this inconsistency. +41. ContinuityX’s management also represented to EFP Rotenberg and Bottini that certain +customers resold the internet services. If EFP Rotenberg and Bottini would have reviewed the +agreements between ContinuityX and the Internet Providers in any detail, it would have learned that +ContinuityX was required to receive authorization from the Internet Providers prior to selling to +companies that resold the internet services. ContinuityX never received authorization to sell to +companies that resold internet services. Furthermore, during the ContinuityX Audit, an employee from +Internet Provider A informed Bottini that ContinuityX’s customer base did not include any companies +authorized to resell the internet services. However, EFP Rotenberg and Bottini never sufficiently +resolved the inconsistency between representations from management and the employee of Internet +Provider A or documented this contradiction. +42. ContinuityX’s management also told EFP Rotenberg and Bottini that the security +deposits held by the Internet Providers were an asset of ContinuityX. However, an employee of Internet +Provider A told Bottini that the security deposits were held in the customers’ names, and not +ContinuityX’s. EFP Rotenberg and Bottini never documented or sufficiently resolved these inconsistent +statements. +EFP Rotenberg and Bottini Improperly Relied on Management’s Representations +43. PCAOB Standard AU Section 333, Management Representations, (“AU Section 333”) +states that representations from a company’s management “are part of the evidential matter the +independent auditor obtains, but they are not a substitute for the application of those auditing procedures +necessary to afford a reasonable basis for an opinion regarding the financial statements under audit” (at +.02). AU Section 333 also states that “[i]f a representation made by management is contradicted by +other audit evidence, the auditor should investigate the circumstances and consider the reliability of the +representation made. Based on the circumstances, the auditor should consider whether his or her +reliance on management’s representations relating to other aspects of the financial statements is +appropriate and justified” (at .04). +44. EFP Rotenberg and Bottini violated AU Section 333 because they improperly relied on +ContinuityX management’s representations. ContinuityX’s agreements with the Internet Providers + +8 A.S.C. 605-10-25 +11 +contradicted management’s representations regarding chargebacks, security deposits, revenue +recognition, and ContinuityX’s sales of internet services to companies that supposedly resold those +services. AU Section 333 requires conflicts between management representations and other audit +evidence to be investigated. However, EFP Rotenberg and Bottini did not perform the audit procedures +necessary to resolve these conflicts. +EFP Rotenberg and Bottini Failed to Exercise Due Professional Care +45. PCAOB Standard AU Section 230, Due Professional Care in the Performance of Work +(“AU Section 230”), states that auditors are required to exercise due professional care throughout the +audit. Due professional care requires that the auditor exercise professional skepticism. Under this +standard, “[p]rofessional skepticism is an attitude that includes a questioning mind and a critical +assessment of audit evidence” (at .07), and auditors “consider the competency and sufficiency of the +evidence” (at .08) and “neither assume[] that management is dishonest nor assume[] unquestioned +honesty” (at .09). +46. For the reasons outlined above, EFP Rotenberg and Bottini failed to meet AU Section +230 by violating AS No. 3, AS No. 13, AS No. 15, AU Section 333, and AU Section 334. +EFP Rotenberg’s Policies and Procedures were Deficient +47. PCAOB Quality Control Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice, (“QC Section 20”) requires that, “Policies and procedures should be +established to provide the firm with reasonable assurance that the work performed by engagement +personnel meets applicable professional standards, regulatory requirements, and the firm’s standards of +quality” (at .17). +48. EFP Rotenberg failed to comply with QC Section 20 because its inadequate policies and +procedures did not provide reasonable assurance that the work it performed during the ContinuityX +Audit met professional standards. Specifically, EFP Rotenberg’s policies and procedures regarding the +documentation of the review of material contracts were inadequate. EFP Rotenberg required that +material contracts were to be obtained, reviewed by a manager or partner of the engagement team, +maintained in the workpapers, and signed off as “reviewed” on the Supervision, Review and Approval +Form. However, the manager or partner who reviewed the documents was not required to document +their review of the individual documents in the workpapers. +49. EFP Rotenberg’s policies and procedures also failed to comply with AS No. 3. The +documentation was not sufficient “to determine who performed the work and the date such work was +complete as well as the person who reviewed the work and the date of such review” (¶ 6b). +50. EFP Rotenberg’s deficient policies and procedures contributed to EFP Rotenberg and +Bottini’s failures during the audit. During the ContinuityX Audit, the lack of sign-offs caused the audit +team members to wrongly believe that other individuals had properly reviewed the agreements with the +Internet Providers and the customers. As a result, the manager and Bottini documented that all material +contracts had been properly reviewed when they had not. The engagement quality reviewer relied on +this documentation to satisfy herself that all of the material contracts had been reviewed by the proper +personnel. +12 +EFP Rotenberg Violated Rule 2-02(b)(1) of Regulation S-X +51. Rule 2-02(b)(1) of Regulation S-X requires that an accountant’s audit report “state +whether the audit was made in accordance with generally accepted auditing standards. . . .” 17 C.F.R. +210.2-02(b)(1). As used in Commission regulations, the phrase “generally accepted auditing standards” +includes the standards issued by the PCAOB. +52. After performing the ContinuityX Audit, EFP Rotenberg issued a report that stated it had +conducted the audit in accordance with PCAOB auditing standards. Bottini approved the issuance of the +ContinuityX audit report. Based on the foregoing, that representation was false. +53. As a result of this misrepresentation EFP Rotenberg willfully violated and Bottini +willfully aided and abetted and caused EFP Rotenberg’s violations of Rule 2-02(b)(1) of Regulation S- +X. +Violations +54. Sections 10A(a)(1) and 10A(a)(2) of the Exchange Act: An auditor violates Section +10A(a) of the Exchange Act by failing to include audit procedures that, in accordance with generally +accepted auditing standards, are: (1) designed to provide reasonable assurance of detecting illegal acts +that would have a direct and material effect on the determination of financial statement amounts, and; +(2) designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein. +55. Rule 102(e)(1)(ii): Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides +that the Commission may deny the privilege of appearing or practicing before the Commission to any +person who is found to have engaged in improper professional conduct. Specifically, EFP Rotenberg +and Bottini engaged in improper professional conduct as defined in Rule 102(e)(1)(iv)(B)(2), i.e., +negligent conduct consisting of repeated instances of unreasonable conduct, each resulting in a violation +of applicable professional standards, that indicate a lack of competence to practice before the +Commission. +56. Rule 102(e)(1)(iii): Rule 102(e)(1)(iii) of the Commission’s Rules of Practice provides +that the Commission may deny the privilege of appearing or practicing before the Commission to any +person found “[t]o have willfully violated, or willfully aided and abetted the violation of, any provision +of the Federal securities laws or the rules and regulations thereunder.” +57. Rule 2-02(b)(1): An auditor violates Rule 2-02(b)(1) of Regulation S-X by issuing a +report stating that an audit was conducted in accordance with PCAOB standards, when it was not. +Findings +58. Based on the foregoing, the Commission finds that EFP Rotenberg and Bottini 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. +13 +59. Based on the foregoing, the Commission finds that EFP Rotenberg willfully violated and +Bottini willfully aided and abetted and caused EFP Rotenberg’s violations of Sections 10A(a)(1) and +10A(a)(2) of the Exchange Act. +60. Based on the foregoing, the Commission finds that EFP Rotenberg willfully violated and +Bottini willfully aided and abetted and caused EFP Rotenberg’s violations of Rule 2-02(b)(1) of +Regulation S-X. +EFP Rotenberg’s Remedial Efforts +61. In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by EFP Rotenberg and cooperation afforded the Commission staff. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to +in EFP Rotenberg’s and Bottini’s Offers. +Accordingly, pursuant to Sections 4C and 21C of the Exchange Act, and Rules 102(e)(1)(ii) and +(iii) of the Commission’s Rules of Practice, it is hereby ORDERED that: +A. EFP Rotenberg and Bottini shall cease and desist from committing or causing any +violations and any future violations of Sections 10A(a)(1) and 10A(a)(2) of the Exchange Act and Rule +2-02(b)(1) under Regulation S-X (17 C.F.R. §210.2-02). +B. EFP Rotenberg is censured. +C. EFP Rotenberg will not accept an audit engagement from any new client (i) registered +with the Commission or (ii) seeking an audit for the purpose of registering securities with the +Commission (together, “New Clients”) between the date of entry of this Order and the later of twelve +months or the date that an independent consultant, described in paragraph C.1. below, certifies in writing +that the undertakings discussed herein have been completed to the satisfaction of the independent +consultant, as described in paragraph C.e.3. below: +1. Independent Consultant. +a. EFP Rotenberg will retain an independent consultant (“Independent +Consultant”), not unacceptable to the Commission staff. EFP Rotenberg +shall provide to the Commission staff a copy of the engagement letter +detailing the scope of the Independent Consultant’s responsibilities. The +Independent Consultant’s compensation and expenses shall be borne +exclusively by EFP Rotenberg. +b. To ensure the independence of the Independent Consultant, EFP +Rotenberg: (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 +14 +and persons engaged to assist the Independent Consultant for services +rendered pursuant to this Order at their reasonable and customary rates. +c. EFP Rotenberg will require the Independent Consultant to enter into an +agreement that provides that, for the period of engagement and for a +period of two years from completion of the engagement, the Independent +Consultant shall not enter into any employment, consultant, attorney- +client, auditing or other professional relationship with EFP Rotenberg, or +any of its present or former affiliates, directors, officers, employees, or +agents acting in their capacity as such. The agreement will also provide +that the Independent Consultant will require that any firm with which +he/she is affiliated or of which he/she is a member, and any person +engaged to assist the Independent Consultant in performance of his/her +duties under this Order shall not, without prior written consent of the +Division of Enforcement, enter into any employment, consultant, attorney- +client, auditing or other professional relationship with EFP Rotenberg, or +any of its present or former affiliates, directors, officers, partners, +employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two years after the engagement. +2. Areas Independent Consultant Is To Review. Within the periods specified in +paragraph C.3. below, the Independent Consultant will review and evaluate EFP +Rotenberg’s audit and interim review policies and procedures regarding: +a. the exercise of due professional care and professional skepticism; +b. obtaining sufficient appropriate audit evidence; +c. third-party confirmations; +d. detecting and reporting misstatements resulting from illegal acts that have +a direct and material effect on the determination of financial statement +amounts, including fraud; +e. the identification and consideration of the adequacy of disclosures of +related parties and related party transactions; +f. evaluation of and reliance upon management representations; +g. supervision of individuals working on audits; and +h. adequate audit documentation, including work paper sign-off, archiving, +and dating. +EFP Rotenberg shall cooperate fully with the Independent Consultant and shall provide +reasonable access to firm personnel, information, and records as the Independent Consultant may +reasonably request for the Independent Consultant’s review and evaluation described herein and the +reports specified in paragraph C.3. below. +15 +3. Independent Consultant Reports and Certifications. +a. Within five months of the Independent Consultant being retained, EFP +Rotenberg shall require the Independent Consultant to issue a detailed +written report (“Report”) to EFP Rotenberg: (a) summarizing the +Independent Consultant’s review and evaluation of the areas identified in +paragraph C.2 above; and (b) making recommendations, where +appropriate, reasonably designed to ensure that audits conducted by EFP +Rotenberg comply with Commission regulations and with PCAOB +standards and rules. EFP Rotenberg shall require the Independent +Consultant to provide a copy of the Report to the Commission staff when +the Report is issued. +b. EFP Rotenberg will adopt all recommendations of the Independent +Consultant in the Report. Provided, however, that within thirty days of +issuance of the Report, EFP Rotenberg may advise the Independent +Consultant in writing of any recommendation that it considers to be +unnecessary, unduly burdensome, or impractical. EFP Rotenberg 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. EFP Rotenberg and the Independent Consultant will engage in +good-faith negotiations in an effort to reach agreement on any +recommendations objected to by EFP Rotenberg. +c. In the event that the Independent Consultant and EFP Rotenberg are +unable to agree on an alternative proposal within thirty days, EFP +Rotenberg either will abide by the determinations of the Independent +Consultant or seek approval from the Commission staff pursuant to +paragraph C.1.b above to engage, at EFP Rotenberg’s expense, a qualified +third party acceptable to the Commission staff to promptly resolve the +issue(s). +d. Within sixty days of issuance of the Report, but not sooner than thirty days +after a copy of the Report is provided to the Commission staff, EFP +Rotenberg will certify to the Commission staff in writing that it has +adopted and has implemented or will implement all recommendations of +the Independent Consultant (“Certification of Compliance”). EFP +Rotenberg will provide a copy of the Certification of Compliance to the +Commission staff. +e. Within six months of the issuance of the Report, EFP Rotenberg shall +require the Independent Consultant to test whether EFP Rotenberg has +implemented and enforced its written policies and procedures concerning +the areas specified in paragraph C.2. above and assess the effectiveness of +those policies and procedures. EFP Rotenberg shall require the +Independent Consultant to issue a written final report summarizing the +16 +results of the Independent Consultant’s test and assessment (“Final +Report”) and to provide a copy of the Final Report to the Commission +Staff. At this time, if the Independent Consultant determines that the +undertakings discussed herein have been completed to the satisfaction of +the Independent Consultant, EFP Rotenberg shall require the Independent +Consultant to certify in writing that the undertakings have been so +completed (“Independent Consultant Certification”) and provide a copy of +this certification to the Commission staff. EFP Rotenberg’s undertaking +to not accept any New Clients, as described in paragraph A above, shall +continue until the Independent Consultant has issued the Independent +Consultant Certification. +4. The Report, Final Report, Certification of Compliance, Independent Consultant +Certification, and any related correspondence or other documents shall be +submitted to Steven Klawans, Division of Enforcement, Securities and Exchange +Commission, 175 W. Jackson Blvd., Chicago, IL 60604, with a copy to the Office +of Chief Counsel of the Enforcement Division. +5. For good cause shown, the Commission staff may extend any of the procedural +dates relating to the undertakings. Deadlines for procedural dates shall be +counted in calendar days, except that if the last day falls on a weekend or federal +holiday, the next business day shall be considered to be the last day. +6. EFP Rotenberg agrees that if the Division of Enforcement believes that EFP +Rotenberg has not satisfied these undertakings, it may petition the Commission to +reopen the matter to determine whether additional sanctions are appropriate. +D. EFP Rotenberg shall, within 30 days of the entry of this Order, pay a civil money penalty +in the amount of $100,000 to the United States 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. Bottini shall, within 30 days of the entry of this Order, pay a civil money penalty in the +amount of $25,000 to the United States Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. 3717. +F. Payment must be made in one of the following ways: +1. 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 +17 +and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying EFP +Rotenberg LLP or Nicolas Bottini, 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 Steven L. Klawans, +Chicago Regional Office, Securities and Exchange Commission, 175 West Jackson Blvd, Suite 900, +Chicago, IL 60604. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they shall +not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondents’ payments 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. +H. Bottini is denied the privilege of appearing or practicing before the Commission as an +accountant. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section 523 +of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by Bottini, and +further, any debt for disgorgement, prejudgment interest, civil penalty or other amounts due by Bottini +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 Bottini of the federal securities laws or +any regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy +Code, 11 U.S.C. §523(a)(19). + +By the Commission. + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3791.txt b/raw/aaer/2016/AAER-3791.txt new file mode 100644 index 0000000000000000000000000000000000000000..40fdd42a71ce8d493c148b8e7e3c79269467b23c --- /dev/null +++ b/raw/aaer/2016/AAER-3791.txt @@ -0,0 +1,127 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78395 / July 22, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3791 / July 22, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-14171 + +In the Matter of +James M. Schneider, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On December 22, 2010, James M. Schneider, CPA (“Schneider”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Schneider pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice.1 This order is issued in response to +Schneider’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. +The Commission found that Schneider had been permanently enjoined by a United States +District Court from future violations of Section 17(a)(2) and Section 17(a)(3) of the Securities +Act of 1933 (“Securities Act”), Exchange Act Section 13(b)(5) and Rules 13a-14, 13b21, and +13b2-2 thereunder, and from aiding and abetting violations of Exchange Act Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, and 13a-13 thereunder. In its Complaint +in the injunctive action, the Commission alleged, among other things, Dell Inc. (“Dell”) +fraudulently committed various disclosure and accounting violations through the conduct of +Schneider and others. The Complaint alleged that Schneider made or was involved in making +material misrepresentations in earnings calls and material misrepresentations and omissions in +Dell’s annual reports on Form 10-K for the fiscal years 2003 through 2006 and in the company’s +quarterly reports on Form 10-Q for the first three quarters of fiscal years 2003 through 2006 and +the first quarter of fiscal 2007 relating to the impacts on Dell’s operating results from payments + +1 See Accounting and Auditing Enforcement Release No. 3222 dated December 22, 2010. Schneider was permitted, +pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +from Intel Corp. The material misrepresentations during earnings calls misled investors as to the +bases for Dell’s success in meeting or exceeding analyst consensus EPS estimates and the +reasons for Dell’s sharp drop in operating results in its second quarter of fiscal year 2007. The +disclosure violations misrepresented to investors the basis for Dell’s increasing profitability and +failed to disclose information required by Item 303 of Regulation S-K. The Commission’s +complaint also alleged, among other things, that Schneider directed and engaged in improper +accounting that resulted in Dell filing materially false and misleading financial statements in the +company’s annual reports on Form 10-K for the fiscal years 2002 through 2004, and in the +company’s quarterly reports on Form 10-Q for the first three quarters of fiscal years 2002 +through 2004 and the first two quarters of fiscal 2005. The Complaint alleged that Schneider +directed and engaged in a number of improper accounting practices in contravention of generally +accepted accounting principles that materially misstated Dell’s financial results and enabled the +company to report lower operating expense as a percentage of revenue. These practices included +improperly manipulating excess reserve balances and improperly accounting for certain +restructuring costs. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Schneider +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Further, Schneider attests that while serving +on an audit committee, he will undertake to (i) have any action taken as a member of the audit +committee subject to the scrutiny of the full audit committee, with no function or responsibility +independent of the audit committee as a whole; (ii) not accept any delegation of authority to act +on behalf of the chair of the audit committee or the audit committee as a whole; and (iii) not +serve as chair of an audit committee, absent review by the Office of the Chief Accountant in +good faith of whether any future offer to serve as chair complies with the requirement that +Schneider will have his work reviewed by the independent audit committee for which he works +or in some other acceptable manner. Schneider is not, at this time, seeking to appear or practice +before the Commission as an independent accountant. If he should wish to resume appearing +and practicing before the Commission as an independent accountant, he will be required to +submit an application to the Commission showing that he has complied and will comply with the +terms of the original suspension order in this regard. Therefore, Schneider’s suspension from +practice before the Commission as an independent accountant continues in effect until the +Commission determines that a sufficient showing has been made in this regard in accordance +with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + 3 + +On the basis of information supplied, representations made, and undertakings agreed to +by Schneider, including undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and, as to serving on an audit committee, +including undertaking to (i) have any action taken as a member of the audit committee subject to +the scrutiny of the full audit committee, with no function or responsibility independent of the +audit committee as a whole; (ii) not accept any delegation of authority to act on behalf of the +chair of the audit committee or the audit committee as a whole; and (iii) not serve as chair of an +audit committee, absent review by the Office of the Chief Accountant in good faith of whether +any future offer to serve as chair complies with the requirement that Schneider will have his +work reviewed by the independent audit committee for which he works or in some other +acceptable manner, Schneider has shown good cause for reinstatement. Therefore, it is +accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +James M. Schneider, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3792.txt b/raw/aaer/2016/AAER-3792.txt new file mode 100644 index 0000000000000000000000000000000000000000..bfd15906b40109a6ee41f3c69567f73a81fb91a2 --- /dev/null +++ b/raw/aaer/2016/AAER-3792.txt @@ -0,0 +1,751 @@ +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78402 / July 25, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3792 / July 25, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17357 + + +In the Matter of + +LAN Airlines S.A. + +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 LAN Airlines S.A. (“LAN” or “Respondent”), +now known as LATAM Airlines Group. + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as +set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + Summary +1. These proceedings arise from violations of the Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. 78dd] by Respondent LAN Airlines S.A. In 2006 and 2007, +LAN, through Ignacio Cueto Plaza (“the CEO”), the current CEO of 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.2 At the time, LAN 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 LAN understood would not occur. The CEO 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. 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.” +Relevant Entities +3. LATAM Airlines Group (“LATAM”) 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 (“TAM”) on June 22, 2012. Following the merger, +LATAM’s holdings 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.” +4. 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 + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +2 On February 4, 2016, the Commission instituted settled cease-and-desist proceedings against the CEO for +his role in this same conduct. + + 3 +operated domestic and international flights throughout Latin America. It continues to do business +as part of LATAM. LAN Argentina’s books and records were consolidated into the books and +records of LAN and later LATAM. +5. 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 books and records were consolidated into the financial +statements of LAN and later LATAM. +LAN’s Entry into Argentina + +6. 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 the CEO. +7. 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 break into the Argentine airline market. Following the meeting, they kept in touch. +8. 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 could 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. +9. In March 2005, the CEO 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 49% 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 President of Business Development and the General Manager of LAN Argentina, who later +became Chief Operating Officer of LAN. Both employees reported directly to the CEO. +LAN Faces Major Issues Upon Entering the Argentine Market +10. 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 + + 4 +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 engaged in discussions with +government officials with each of these issues. +11. LAN executives, including the CEO, 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 +12. The Argentine government in March 2005, required that LAN 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. +13. There were five unions representing airline employees in Argentina. They included +the grounds crew union, the Asociación del Personal Aeronautico (APA), the pilots’ union, the +Asociación de Pilotos de Líneas Aéreas (APLA), the mechanics’ union, Asociación del Personal +Tecnico Aeronautico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de +Pasajeros de Empresas Aerocomerdiales (ATCPEA), and the supervisors’ union, Unión del +Personal Superior y Profesional de Empresas Aerocomerciales (UPSA). +14. 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. +15. The mechanics’ union, the flight attendants’ union and the supervisors’ union each +had a single-function rule contained in their collective CBAs. The single-function rule was a +provision that limited workers from performing more than one work function 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. + +16. 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 the CEO, attempted to negotiate on the wage issues but +made no progress and things worsened over time. Eventually there were work stoppages and + + 5 +slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ +unions. + +17. 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 Cabinet +Advisor 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” pursuant to an unpublished Resolution3 + +LAN Makes Improper Payments + 18. Beginning in the summer of 2006, the consultant supplied some 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 the CEO that the +consultant was well connected with the unions and could effectively negotiate an agreement with +union officials, the CEO approved the retention of the consultant. + 19. During the summer of 2006, the CEO 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, the CEO understood that it was possible the consultant +would pass some portion of the $1.15 million to union officials in Argentina. The CEO 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 the CEO nor LAN conducted any due diligence on the consultant or any of +his related entities. + 20. Around August 2006, the CEO’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, the CEO 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 +15% of salary. The wage increase of approximately 15% was lower than the amount originally +sought by the mechanics’ union. + 21. 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. + + +3 The consultant resigned from the position on or about July 2, 2009. + + 6 +Sham Contract with Consultant’s Company + 22. 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 the CEO 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. The CEO knew that the consultant would not perform a study. The CEO did not +inform anyone at LAN that the contract falsely stated the purpose of the payments to the +consultant. + 23. 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. + 24. 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. The payment was in +addition to the $1.15 million already authorized by the CEO and paid to the consultant. The CEO +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 the CEO knew was inaccurate. In +November 2007, LAN paid the invoice. + 25. The CEO 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, the +CEO knew that the unsigned consulting contract with the consultant’s company was a sham +contract. The CEO 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, the CEO took no action to stop the payment, which +he knew contained false references to services never rendered. + + 7 + 26. LAN obtained a benefit of $6,743,932 as a result of the improper payments to +resolve LAN’s union issues. +Failure to Maintain Accurate Books and Records + +27. LAN, directly and through LAN Argentina and AAI, failed to make and keep +books, records, and accounts that accurately and fairly reflected LAN’s transactions with the +consultant’s company and the company owned by consultant’s son and wife. The improper +payments were concealed within AAI’s books and records in transitory holding accounts. Later, +the payments were mis-recorded in AAI’s accounts as “various other debtors’ debits.” LAN failed +to accurately disclose in its books and records that payments to consultant’s company and the +company owned by consultant’s son and wife could benefit union officials in Argentina. + +Failure to Maintain Adequate Internal Controls + +28. LAN failed to devise and maintain an adequate system of internal accounting +controls. The controls in place during 2006 and 2007 were minimal and clearly deficient. The +conduct in Argentina involved executives at the highest levels of LAN. High level executives +approved the payments to the consultant’s company and to the company owned by consultant’s son +and wife, and other executives and managers made the payments while overlooking numerous red +flags. During the relevant period LAN had no internal controls requiring due diligence on third +parties, and as a result no due diligence was conducted on the consultant or his related entities, or +the company owned by his son and wife. If a due diligence review had been conducted on the +consultant, LAN might have become aware of his January 2005 appointment as a Cabinet Advisor +to Argentina’s Transportation Secretary. + +29. The payments to the consultant were supported by a sham contract between the +consultant’s company and AAI, a LAN subsidiary incorporated in Delaware that had no personnel +and was completely unrelated to LAN’s business in Argentina. LAN’s legal department reviewed +the sham contract with the consultant’s company and raised no concerns. The contract was never +finalized and never signed by the parties. LAN’s accounting division did not require any proof of +services before paying the $1,150,000 to the consultant’s company, and no one questioned why +payments were wired to a U.S. brokerage account in the name of the consultant and his wife rather +than to an account in the name of the consultant’s company. Similarly, LAN paid $58,000 to a +Costa Rican company owned by the consultant’s wife and son without any proof of services. +Despite the consultant’s receipt of illicit funds in 2006 and 2007, LAN executives considered +hiring him again in 2009 to work on another airline matter but ultimately did not retain him. + +30. LAN did not implement even the most basic compliance controls until 2008, when +it issued a new Code of Conduct, which for the first time contained anti-corruption policies. The +company did not offer any compliance training until about 2010, and the training was minimal and +did not apply to all employees. Training did not become compulsory for managers until about +2011. + + + 8 +31. LAN did not implement a comprehensive company-wide corporate compliance +program until early 2014. In addition, the primary individuals who caused the controls failures at +LAN and LAN Argentina are still with the company and no disciplinary action has been taken +against them. + +Legal Standards and Violations +32. As a result of the conduct described above, LAN violated Section 13(b)(2)(A) of +the Exchange Act, which requires issuers to make and keep books, records, and accounts which, in +reasonable detail, accurately and fairly reflect their transactions and dispositions of the assets of the +issuer. + 33. In addition, as a result of the conduct described above, LAN violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions are +recorded as necessary (I) to permit preparation of financial statements in conformity with generally +accepted accounting principles or any other criteria applicable to such statements, and (II) to +maintain accountability for assets; (iii) access to assets is permitted only in accordance with +management’s general or specific authorization; and (iv) the recorded accountability for assets is +compared with the existing assets at reasonable intervals and appropriate action is taken with respect +to any differences. + +Remedial Actions and Undertakings + + 34. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent. In 2008, LAN began steps to create a basic compliance program by +hiring a new General Counsel and Vice President who was tasked with monitoring the compliance +department. In 2013, LATAM adopted a new Code of Conduct, 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. The new compliance +program was implemented in early 2014. LAN also hired a new Compliance Manager who, along +with two deputies and a senior compliance analyst, oversees twenty people, including regional +heads of legal, located in nine different regions to ensure compliance. LATAM also now requires +annual training of employees who must certify compliance with LAN’s Code of Conduct. + + 35. 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 + + 9 +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. + + 36. Respondent undertakes to engage an Independent Compliance Monitor pursuant to +the provisions set forth in Attachment A of the Order. + + 37. Respondent undertakes to require the Independent Compliance Monitor to enter +into an agreement that provides that for the period of engagement and for a period of two years +from completion of the engagement, the Independent Compliance Monitor shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity. The agreement will also provide that the Independent Compliance +Monitor will require that any firm with which he/she is affiliated or of which he/she is a member, +and any person engaged to assist the Independent Compliance Monitor in performance of his/her +duties under this Order shall not, without prior written consent of the Division of Enforcement, +enter into any employment, consultant, attorney-client, auditing or other professional relationship +with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity as such for the period of the engagement and for a period of two years after +the engagement. + + 38. 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 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, 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. + +Deferred Prosecution Agreement + + 39. Respondent has entered into a deferred prosecution agreement with the Department +of Justice that acknowledges responsibility for criminal conduct relating to the findings in the +Order. Specifically, Respondent acknowledges responsibility for (i) violating the internal controls +provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”), as amended, 15 U.S.C. §§ +78m(b)(2)(B), 78m(b)(5), and 78ff(a); and (ii) violating the FCPA’s books and records provisions, +15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff(a). + + + + + + 10 +Non-Imposition of a Civil Penalty + + 40. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its payment of a $12,750,000 criminal fine as part of Respondent’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 Respondent LAN Airlines S.A.’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent LAN Airlines S.A. cease +and desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A) and13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. + + B. Respondent will comply with its Undertakings as enumerated in paragraphs 35 +through 38 above. + + C. Respondent shall pay disgorgement of $6,743,932 and prejudgment interest of +$2,693,856 for total payment of $9,437,788 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: LAN shall pay $4,718,894 within 14 days of +the entry of this Order and $4,718,894 within 360 days from 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 +$9,437,788, plus any additional interest accrued pursuant to SEC Rule of Practice 600, shall be due +and payable immediately, without further application. +Payment must be made in one of the following ways: + +(1) 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 + + 11 +Oklahoma City, OK 73169 + + Payments by check or money order must be accompanied by a cover letter identifying LAN +Airlines S.A. as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Tracy L. Price, Assistant +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5631. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + + + + + + + + + + + + + + + + + + + + + + + + + + + +1 + +Attachment A +Independent Compliance Monitor +Retention of Monitor and Term of Engagement +1. The Company shall engage an independent compliance monitor (the “Monitor”) +not unacceptable to the Commission staff within sixty (60) calendar days of the issuance of the +Order. The Monitor shall have, at a minimum, the following qualifications: (i) demonstrated +expertise with the Foreign Corrupt Practices Act (“FCPA”) and other applicable anti-corruption +laws, including experience counseling on FCPA issues; (ii) experience designing and/or +reviewing corporate compliance policies, procedures, and internal accounting controls, including +FCPA and anti-corruption policies, procedures, and internal accounting controls; (iii) the ability +to access and deploy resources as necessary to discharge the Monitor’s duties; and (iv) sufficient +independence from the Company to ensure effective and impartial performance of the Monitor’s +duties. The Commission staff may extend the Company’s time period to retain the Monitor in its +sole discretion. If the Monitor resigns or is otherwise unable to fulfill the obligations herein, the +Company shall retain a Monitor that is not unacceptable to the Commission staff within thirty +(30) calendar days. +2. The Company shall retain the Monitor for a period of not less than twenty-seven +(27) months from the date the Monitor is retained (the “Term of the Monitorship”), unless the +Commission staff finds, in its sole discretion, that there exists a change in circumstances +sufficient to terminate the Monitorship early or extend the Monitorship as set forth in paragraphs +24-25 (Termination or Extension of Monitorship). + + + 2 +Company’s Obligations +3. The Company shall cooperate fully with the Monitor, and provide the Monitor +with access to all information, documents, records, facilities, and employees as reasonably +requested by the Monitor. The Company shall use its best efforts to provide the Monitor with +access to the Company’s former employees and its third-party vendors, agents, and consultants. +4. The parties agree that no attorney-client relationship shall be formed between the +Company and the Monitor. In the event that the Company seeks to withhold from the Monitor +access to information, documents, records, facilities, current or former employees of the +Company, its third-party vendors, agents, or consultants that may be subject to a claim of +attorney-client privilege or to the attorney work-product doctrine, or where the Company +reasonably believes production would otherwise be inconsistent with applicable law, the +Company shall work cooperatively with the Monitor to resolve the matter to the satisfaction of +the Monitor. If, during the Term of the Monitorship, the Monitor believes that the Company is +unreasonably withholding access on the basis of a claim of attorney-client privilege, attorney +work-product doctrine, or other asserted applicable law, the Monitor shall promptly notify the +Commission staff. +5. Any disclosure by the Company to the Monitor concerning corrupt payments, +false books and records, and internal accounting control failures shall not relieve the Company of +any otherwise applicable obligation to truthfully disclose such matters to the Commission staff. +Monitor’s Mandate +6. The Monitor shall evaluate the effectiveness of the internal accounting controls, +record-keeping, and financial reporting policies and procedures of the Company as they relate to + + 3 +the Company’s current and ongoing compliance with the anti-bribery, books and records, and +internal accounting controls provisions of the FCPA and other applicable anti-corruption laws +(the “anti-corruption laws”), and make recommendations reasonably designed to improve the +effectiveness of the Company’s internal accounting controls and corporate compliance program +(the “Mandate”). This Mandate shall include an assessment of the Board of Directors’ and +senior management’s commitment to, and effective implementation of, the corporate compliance +program. In carrying out the Mandate, to the extent appropriate under the circumstances, the +Monitor may coordinate with Company personnel, including in-house counsel, compliance +personnel, and internal auditors. The Monitor may rely on the product of the Company’s +processes, such as the results of studies, reviews, sampling and testing methodologies, audits, +and analyses conducted by or on behalf of the Company, as well as the Company’s internal +resources (e.g., legal, compliance, and internal audit), which can assist the Monitor in carrying +out the Mandate, provided the Monitor has confidence in the quality of those resources and the +use of those resources are maintained independent of the Company’s normal functions to ensure +the Monitor’s independence. +7. During the Term of the Monitorship, the Monitor shall conduct an initial review +and two follow-up reviews and prepare an initial report and a first and second follow-up report, +and issue a Certification Report if appropriate, as described below. +Initial Review and Report +8. Promptly upon being retained, the Monitor shall prepare a written work plan, +which shall be submitted to the Company and the Commission staff for comment no later than +forty five (45) calendar days after being retained. + + 4 +9. In order to conduct an effective initial review and to understand fully any existing +deficiencies in the Company’s internal accounting controls and corporate compliance program, +the Monitor’s work plan shall include such steps as are reasonably necessary to understand the +Company’s business and FCPA risks faced throughout its business. The steps shall include: +a. inspection of relevant documents, including the internal accounting +controls, record-keeping, and financial reporting policies and procedures +as they relate to the Company’s compliance with the books and records, +internal accounting controls and anti-bribery provisions of the FCPA; +b. onsite observation of selected systems and procedures comprising the +Company’s corporate compliance program, including anti-corruption +compliance procedures, internal accounting controls, record-keeping, due +diligence, and internal audit procedures, including at sample sites; +c. meetings with, and interviews of, relevant Company employees, officers, +directors, its third-party vendors, agents, or consultants and other persons +at mutually convenient times and places; and +d. risk-based analyses, studies and testing of the Company’s corporate +compliance program. +10. The Monitor may take such steps as are reasonably necessary to develop an +understanding of the facts and circumstances surrounding prior FCPA violations that may have +occurred, but shall not conduct his or her own inquiry into those historical events. +11. The Company and Commission staff shall provide any comments concerning the +work plan within twenty five (25) calendar days in writing to the Monitor. Any disputes + + 5 +between the Company and the Monitor with respect to the written work plan shall be decided by +the Commission staff in its sole discretion. Following comments by the Company and +Commission staff, the Monitor will have fifteen (15) calendar days to make revisions to the +initial work plan. +12. The initial review shall commence no later than ninety (90) calendar days from +the date of the engagement of the Monitor (unless otherwise agreed by the Company, the +Monitor, and the Commission staff). The Monitor shall issue a written report within one +hundred fifty (150) calendar days of commencing the initial review, setting forth the Monitor’s +assessment and, if necessary, making recommendations reasonably designed to improve the +effectiveness of the Company’s internal accounting controls and corporate compliance program +as they relate to the Company’s compliance with the anti-corruption laws. The Monitor should +consult with the Company concerning his or her findings and recommendations on an ongoing +basis and should consider the Company’s comments and input to the extent the Monitor deems +appropriate. The Monitor may also choose to share a draft of his or her report with the Company +and Commission staff prior to finalizing them. The Monitor shall provide the report to the Board +of Directors of the Company and contemporaneously transmit a copy to Commission staff. +13. Within ninety (90) calendar days after receiving the Monitor’s initial report, the +Company shall adopt and implement all recommendations in the report, provided, however, that +as to any recommendation that the Company considers unduly burdensome, impractical or +costly, or inconsistent with applicable law or regulation, the Company need not adopt that +recommendation at that time, but may submit in writing to the Monitor and the Commission staff + + 6 +within fifteen (15) days of receiving the report, an alternative policy, procedure, or system +designed to achieve the same objective or purpose. +14. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal, the Company shall promptly consult with the Commission staff. Any +disputes between the Company and the Monitor with respect to the recommendations shall be +decided by the Commission staff in its sole discretion. The Commission staff may consider the +Monitor’s recommendation and the Company’s reasons for not adopting the recommendation in +determining whether the Company has fully complied with its obligations. Pending such +determination, the Company shall not be required to implement any contested +recommendation(s). +15. With respect to any recommendation that the Monitor determines cannot +reasonably be implemented within ninety (90) calendar days after receiving the report, the +Monitor may extend the time period for implementation with prior written approval of the +Commission staff. +Follow-Up Reviews +16. The Monitor shall conduct a minimum of two Follow-Up Reviews. The Monitor +shall submit a written work plan for each follow-up review to the Company and Commission +staff within sixty (60) calendar days after the issuance of either the initial report, or the +applicable follow-up report. The Company and Commission staff shall provide any comments +concerning the work plan within fifteen (15) calendar days in writing to the Monitor. Any +disputes between the Company and the Monitor with respect to the written work plan shall be +decided by the Commission staff in its sole discretion. Following comments by the Company + + 7 +and Commission staff, the Monitor will have fifteen (15) calendar days to make revisions to the +follow up work plan. +17. The Monitor shall commence the follow-up review pursuant to the work plan no +later than ninety (90) calendar days after the issuance of the initial report, or applicable follow-up +report, (unless otherwise agreed by the Company, the Monitor and the Commission staff). The +Monitor shall issue its written follow-up report within one hundred-twenty (120) calendar days +of commencing the follow-up review. The follow-up report shall set forth the Monitor’s +assessment of, and any additional recommendations regarding, the Company’s internal +accounting controls and corporate compliance program as they relate to the Company’s +compliance with the anti-corruption laws; the Monitor’s assessment of the implementation by the +Company of any recommendations made in the initial report, or follow-up report if applicable; +and the Monitor’s assessment of the commitment of the Company’s Board of Directors and +senior management to compliance with the FCPA. +18. Within ninety (90) calendar days after receiving the Monitor’s follow-up report, +the Company shall adopt and implement all recommendations in the report, provided, however, +that as to any recommendation that the Company considers unduly burdensome, impractical or +costly, or inconsistent with applicable law or regulation, the Company need not adopt that +recommendation at that time, but may submit in writing to the Monitor and the Commission staff +within fifteen (15) days of receiving the report, an alternative policy, procedure, or system +designed to achieve the same objective or purpose. + + 8 +19. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within fifteen (15) days, the Company shall promptly consult with the +Commission staff. Any disputes between the Company and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff may consider the Monitor’s recommendation and the Company’s reasons for +not adopting the recommendation in determining whether the Company has fully complied with +its obligations. Pending such determination, the Company shall not be required to implement +any contested recommendation(s). The Monitor shall repeat the process of Follow-Up Reviews +until the terms in paragraph 21 (Certification of Compliance) or paragraphs 24-25 (Termination +or Extension of Monitorship) are met. +20. Throughout the Term of the Monitorship, the Monitor shall disclose to the +Commission staff any credible evidence that corrupt or otherwise suspicious transactions +occurred, or payments of things of value were offered, promised, made or authorized by any +entity or person within the Company, or any entity or person working directly or indirectly for or +on behalf of the Company, or that related false books and records may have been maintained by +or on behalf of the Company. The Monitor shall contemporaneously notify the Company’s +General Counsel, Chief Compliance Officer, or Audit Committee for further action unless at the +Monitor’s discretion he or she believes disclosure to the Company would be inappropriate under +the circumstances. The Monitor shall address in his or her reports the appropriateness of the +Company’s response to all improper activities, whether previously disclosed to the Commission +staff or not. + + + 9 +Certification of Compliance + +21. At the conclusion of the ninety (90) calendar day period following the issuance of +the second follow-up report, or later follow-up report if applicable, if the Monitor believes that +the Company’s compliance program is reasonably designed and implemented to detect and +prevent violations of the anti-corruption laws and is functioning effectively, the Monitor shall +certify the Company’s compliance with its compliance obligations under the Order. The Monitor +shall then submit to the Commission staff a written report (“Certification Report”) within sixty +(60) calendar days. The Certification Report shall set forth an overview of the Company’s +remediation efforts to date, including the implementation status of the Monitor’s +recommendations, and an assessment of the sustainability of the Company’s remediation efforts. +The Certification Report should also recommend the scope of the Company’s future self- +reporting. Also at the conclusion of the ninety (90) calendar day period following the issuance +of the second follow-up report, the Company shall certify in writing to the Commission staff, +with a copy to the Monitor, that the Company has adopted and implemented all of the Monitor’s +recommendations in the initial and follow-up report(s), or the agreed-upon alternatives. The +Monitor or the Company may extend the time period for issuance of the Certification Report or +the Company’s certification, respectively, with prior written approval of the Commission staff. +Self-Reporting Period +22. At such time as the Commission staff approves the Certification Report and the +Company’s certification, the monitorship shall be terminated, and the Company will be permitted +to self-report to the Commission staff on its enhanced compliance obligations for the remainder +of the term of the Order. The Commission staff, however, reserves the right to terminate the + + 10 +monitorship absent certification by the Monitor, upon a showing by the Company that +termination is, nevertheless, in the interests of justice. +23. If permitted to self-report to the Commission staff, the Company shall thereafter +submit to the commission staff a written report after seven (7) months setting forth a complete +description of its remediation efforts to date, its proposals to improve the Company’s internal +accounting controls, policies, and procedures for ensuring compliance with the anti-corruption +laws, and the proposed scope of the subsequent reviews. The Company shall disclose any +credible evidence that corrupt or otherwise suspicious transactions occurred, or payments of +things of value were offered, promised, or provided to foreign officials, that it learns of that +occurred after the date of this Consent. The Company may extend the time period for issuance +of the self-report with prior written approval of the Commission staff. +Termination or Extension of the Monitorship +24. If at the conclusion of the ninety (90) calendar-day period following the issuance +of the second follow-up report, or later follow-up report if applicable, the Commission staff +concludes in its sole discretion that the Company has not by that time successfully satisfied its +compliance obligations under the Order, the Term of the Monitorship shall be extended for nine +(9) months. Under such circumstances, the Monitor shall commence the Follow-Up Reviews in +accordance with Paragraphs 16-19. +25. If at the conclusion of the thirty-six (36) month period the Commission staff +concludes the Company has not met its obligations under the Order, the Commission staff in its +sole discretion may extend the Monitorship or Self-Reporting requirements up to forty-eight (48) + + 11 +months from the issuance of the Order, and require reporting as set forth for Follow-Up Reviews +or Self-Reporting. +Extensions of Time +26. Upon request by the Monitor or the Company, the Commission staff may extend +any procedural time period set forth above for good cause shown. +Confidentiality of Reports +27. The reports submitted by the Monitor and the periodic reviews and reports +submitted by the Company will likely include confidential financial, proprietary, competitive +business or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations or undermine the 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 (i) pursuant to court order, +(ii) as agreed to by the parties in writing, (iii) to the extent that the Commission determines in its +sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (iv) is otherwise required by law. +Address for All Written Communications and Reports +28. All reports or other written communications by the Monitor or the Company +directed to the Commission staff shall be transmitted to the Chief of the FCPA Unit and to Tracy +L. Price, Assistant Director, Division of Enforcement, U.S. Securities and Exchange +Commission, 100 F Street, N.E., Washington, DC. 20549. + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3793.txt b/raw/aaer/2016/AAER-3793.txt new file mode 100644 index 0000000000000000000000000000000000000000..fc1c60bab6f776d5cb7c2ce10426d7c534d18ce2 --- /dev/null +++ b/raw/aaer/2016/AAER-3793.txt @@ -0,0 +1,317 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78413 / July 26, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3793 / July 26, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17361 + + + +In the Matter of + +YI CHEN, 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 Yi +Chen, CPA (“Respondent” or “Chen”) 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)(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 her 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: + +Summary + +1. These proceedings involve insider trading by Yi Chen, a certified public accountant +(“CPA”) and the former Corporate Controller of Oplink Communications, Inc. (“Oplink” or “the +company”). In October 2014, Chen learned, in the course of her employment, material nonpublic +information regarding a planned acquisition of Oplink (“the acquisition”) by Koch Industries, Inc. +(“Koch”). Soon thereafter, Chen secretly purchased a total of 4,740 shares of Oplink stock at prices +ranging from $16.57 to $16.98 per share in two brokerage accounts held in the names of her +relatives. On November 19, 2014, Oplink and Koch announced the acquisition to the market, and +Oplink’s stock price increased nearly 14%, to $24.18 per share. In the weeks after, Chen sold all +of the Oplink stock in her family members’ accounts, realizing ill-gotten gains of $34,678.44. + +Respondent + +2. Chen, age 46, is a resident of Fremont, California and since 2004 has been a CPA +licensed to practice in California. Before joining Oplink, Chen worked as an accountant for a + +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 + +series of publicly-traded companies. From August 2011 until 2016, Chen served as Oplink’s +Corporate Controller, which allowed her access to Oplink’s confidential financial information. + +Other Relevant Entity + +3. Oplink is a Delaware corporation headquartered in Fremont, California. Oplink +designs, manufactures, and sells optical networking components and subsystems. From 2000 to +2015, Oplink filed periodic reports with the Commission and traded on NASDAQ under the ticker +symbol “OPLK.” On January 2, 2015, Oplink filed a certification and notice of termination of +registration under Section 12(g) of the Exchange Act in connection with its acquisition by Koch. + +Facts + + 4. As Oplink’s Corporate Controller, Chen was subject at all relevant times to the +company’s insider trading policies, which prohibited employees from trading in Oplink stock +while in possession of “inside information.” The policies specifically defined “inside +information” to include information regarding “potential tender offers” or a “merger or an +acquisition or disposition of significant assets.” Chen signed an acknowledgement indicating +that she had received, understood, and agreed to comply with these policies. + +5. Chen was also subject at all relevant times to Oplink’s policy on stock trading by +directors, officers, and other members of management. Under this policy, certain Oplink +insiders, including Chen, were permitted to trade in Oplink stock only during specified +“window” periods following the general public release of the company’s annual or quarterly +revenues and were otherwise subject to blackout periods. This policy also restricted trading by +“family members whose trading activities [were] controlled or influenced” by insiders covered +by the policy. Chen signed an acknowledgment indicating that she had received, understood, +and agreed to comply with this policy. Chen was subject to a trading blackout period from at +least August 30, 2014 through October 30, 2014. + +6. After engaging in preliminary discussions regarding a potential business +combination, in August 2014 Oplink and Koch entered into a non-disclosure agreement. In the +following months, the two companies engaged in a due diligence process with the assistance of +outside advisors, and Koch submitted a series of written offers to acquire Oplink. + +7. Chen first learned material nonpublic information regarding the acquisition at an +October 13, 2014 meeting with Oplink’s Chief Financial Officer. Over the next several weeks, +Chen worked on due diligence for the acquisition. During that period, Chen participated in +meetings and calls with Koch representatives and prepared deal-related work product regarding +Oplink’s financial condition. Chen knew that information regarding the acquisition was +nonpublic, and that she had a duty to refrain from trading while in possession of such +information. + +4 + + 8. After obtaining material nonpublic information regarding the acquisition, and +although she was subject to a blackout period, Chen purchased 4,740 shares of Oplink stock in +two brokerage accounts held in the names of her relatives. From October 21 to 29, 2014, Chen +purchased – from her office at Oplink, during working hours – 2,388 shares of Oplink stock at +prices ranging from $16.57 to $16.93 per share in an account established in the name of her +sister. On October 30, 2014, Chen purchased 2,352 shares of Oplink stock at a price of $16.98 +per share in an account established in the name of her mother-in-law. + +9. Chen knew, or was reckless in not knowing, that these securities transactions were +in breach of her duty to Oplink. + + 10. Before the market opened on November 19, 2014, Oplink and Koch announced +that Koch had agreed to commence a tender offer to purchase all outstanding Oplink stock for +$24.25 per share. In response to the news, Oplink’s stock price rose nearly 14%, from $21.25 +per share at the close of the previous day’s trading to $24.18 per share at the close of trading on +November 19. + +11. In the following weeks, Chen sold all of the Oplink stock in her family members’ +accounts, realizing total profits of $34,678.44. In December 2014, the proceeds of trading in +Oplink were withdrawn from each of the brokerage accounts. On January 20, 2015, Chen +personally received $28,500 from one of the accounts. + +Findings + +12. Based on the foregoing, the Commission finds that Chen willfully violated +Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Chen’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pursuant to Section 21C of the Exchange Act, Chen 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 promulgated thereunder. + + B. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, Chen is denied the privilege of appearing or practicing before +the Commission as an accountant. + +5 + + C. After five (5) years from the date of this Order, Chen 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 +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +D. The Commission will consider an application by Chen 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 +6 + +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + E. Pursuant to Section 21C(f) of the Exchange Act, Chen is prohibited for a period of +five (5) years from the date of this Order from acting as an officer or director of any issuer that has a +class of securities registered pursuant to Section 12 of the Exchange Act, or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. + +F. Chen shall, within 10 days of the entry of this Order, pay disgorgement of +$34,678.44, prejudgment interest of $1,407.87, and a civil monetary penalty of $34,678.44, for a +total of $70,764.75, 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 Yi +Chen 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 Director, +Division of Enforcement, Securities and Exchange Commission, San Francisco Regional Office, +44 Montgomery Street, Suite 2800, San Francisco, CA 94104. + + 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 +7 + +Action, she shall not argue that she is entitled to, nor shall she 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 she 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 + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3794.txt b/raw/aaer/2016/AAER-3794.txt new file mode 100644 index 0000000000000000000000000000000000000000..1dc44306c650015493ba6d4667ae4fa759d7df6a --- /dev/null +++ b/raw/aaer/2016/AAER-3794.txt @@ -0,0 +1,393 @@ +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78558 / August 11, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3794 / August 11, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17379 + + +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 Key Energy Services, Inc. (“Key +Energy” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Key Energy 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, Key Energy consents to the entry of this Order +Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange +Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth +below. + +In the Matter of + +KEY ENERGY +SERVICES, INC., + +Respondent. +2 + + +III. +On the basis of this Order and Key Energy’s Offer, the Commission finds1 that: +Summary +1. These proceedings arise from violations of the books and records and internal +control provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 U.S.C. § +78m(b)(2)] by Respondent Key Energy. From August 2010 through at least April 2013, Key +Energy’s Mexican subsidiary (“Key Mexico”) made improper payments to a contract +employee at Petróleos Mexicanos (“Pemex”), the Mexican state-owned oil company, to +induce him to provide Pemex inside information as well as advice and assistance on +contracts with Pemex and amplifications or amendments to those contracts. These funds +were transferred to the Pemex employee via an entity that provided purported consulting +services to Key Mexico (the “Consulting Firm”) despite the absence of appropriate +authorization of the relationship with the Consulting Firm and lack of supporting +documentation regarding the purported consulting work performed. +2. Key Mexico improperly recorded the transfers to the Consulting Firm as +legitimate business expenses in Key Mexico’s books and records. Key Mexico’s books and +records were consolidated into Key Energy’s books and records. During the relevant +period, Key Energy failed to implement and maintain sufficient internal controls including +within Key Mexico relating to interactions with Pemex officials and failed to respond to +indicia of risk relating to Key Mexico’s improper use of consultants. +Respondent and Related Entities +3. Key Energy is a Maryland corporation with its headquarters in Houston, TX. +The company’s common stock is registered under Section 12(b) of the Exchange Act and listed on +the New York Stock Exchange (ticker: KEG). Key Energy and its various subsidiaries provide +rig-based well-services. On September 4, 2015, Key Energy announced that for 30 consecutive +trading days the price for Key's common shares was below the minimum $1.00 per share +requirement for continued listing on the NYSE. Key Energy’s common shares have continued to +trade below $1.00 since that time. Between December 2014 and October 2015, Moody’s +downgraded Key Energy’s bonds three times and changed its outlook to “negative.” +4. Key Mexico consists of two legal entities: an operating company, Key Energy +Services de Mexico S. de R.L. de C.V., and a service payroll company, Recursos Omega S. de +R.L. de C.V., which is the legal employer of Key Energy’s employees in Mexico. Both are +Mexican entities and indirectly wholly-owned subsidiaries of Key Energy. Key Mexico was +formed to service wells owned by Pemex. It currently has one remaining contract with Pemex, +which expires in October 2016. Throughout the relevant time period, Key Mexico’s financial +results were included in the consolidated financial statements that Key Energy filed with the +Commission. Key Mexico provides rig-based services such as maintenance, workover, and + +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 + + +recompletion of existing wells, completion of newly-drilled wells, and plugging and +abandonment of wells at the end of their useful lives. +Facts +Key Energy’s Business in Mexico +5. In 2004, Key Energy began taking steps to enter the Mexican market. In 2007, +Pemex awarded Key Mexico its first contract in Mexico, and subsequently awarded the +company additional contracts and contract extensions. Both Key Energy and Key Mexico +officers and employees were involved in Key Mexico’s obtaining of Pemex business. From +2010 through 2013, Mexico accounted for 3.5%-10% of Key Energy’s annual consolidated +revenue. In April 2015, Key Energy announced that it was winding down its international +business outside of North America, and intends to exit Mexico once its current contractual +obligations to Pemex are complete. +Contact between Key Mexico and the Consulting Firm +6. In 2008, Pemex announced a call for bids on a public tender for Contract +Number 424048861 (“Contract No. 8861”), through which Pemex sought field production +solutions and well workover services in its North Region. Key Mexico competed against three +other bidders as part of a public tender and was awarded Contract No. 8861. Contract No. 8861 +was signed on September 26, 2008. The initial contract was for a 24-month term and provided +for Key Mexico to be paid $65 million. The contract term and amount were subsequently +increased through a series of amendments or “amplifications.” +7. In or around August 2010, Key Mexico hired the Consulting Firm to “provide +expert advice on contracts with . . . Pemex,” including Contract No. 8861. The hiring of the +Consulting Firm was arranged and approved by the Key Mexico country manager. Although +the country manager knew that the Consulting Firm had ties to the Pemex employee and that +payments to the Consulting Firm were used to funnel Key Mexico funds to the Pemex employee +in exchange for his assistance with obtaining Pemex business, the country manager never +disclosed the nature of this relationship to Key Energy. +8. The Pemex employee was employed in the department that negotiated and +approved Key Mexico’s contracts with Pemex. Over a period of three years, the Key Mexico +country manager approved payments to the Consulting Firm with ties to the Pemex employee in +exchange for the employee providing assistance to Key Mexico in bidding for and obtaining +amendments to contracts with Pemex, including providing Key Mexico with non-public +information about upcoming Pemex tenders and lobbying internally at Pemex for lucrative +amendments to Key Mexico contracts with Pemex. Some of the communications were sent +from the Pemex employee’s official Pemex email account and some from a personal email +account. From 2010 through at least 2013, Key Mexico paid the Consulting Firm tied to the +Pemex employee at least $229,000 for purported consulting services. +4 + + +9. While Key Energy personnel eventually became aware at least as early as 2011 +that Key Mexico was doing business with the Consulting Firm, Key Energy allowed Key +Mexico to continue using the vendor even though Key Mexico did not enter into a written +agreement or contract with the Consulting Firm until 2013. Moreover, Key Energy and Key +Mexico failed to conduct due diligence on the Consulting Firm, despite Key Energy policies +requiring that such due diligence be performed. As a result, Key Energy did not uncover the +Consulting Firm’s relationship to the Pemex employee until 2014, when Key Energy began an +investigation into other allegations concerning the country manager. +The Amendment to Contract No. 8861 +10. In 2011, Key Mexico continued performing under Contract No. 8861. On +February 15, 2011, the Pemex employee, from his official Pemex email account, forwarded the +Key Mexico country manager an internal chain of emails among Pemex officials writing “I am +sending you this for your information and so we are ready.” The attachments to the email string +included Pemex internal memoranda concerning certain new contracts that Pemex intended to +put out for tender. +11. At that time, Pemex’s plan to put out the tenders on the new contracts had not +yet been publicly announced. However, it is clear that Key Energy and Key Mexico had already +learned of the forthcoming tenders. Upon receiving the email from the Pemex employee, Key +Mexico’s country manager forwarded it to Houston, to Key Energy employees including a +senior vice president, writing “The tenders are coming now.” It was clear from the e-mail that it +contained detail of internal Pemex deliberations, but the recipients at Key Energy apparently did +not question how or why the country manager was in possession of and sharing such +communications. Rather, after discussing the potential new contracts that had been flagged by +the Pemex employee, the senior vice president wrote, “Why don’t we convince them to add 90 +million to the current package?” The “current package” was the existing contract, Contract No. +8861. The country manager suggested scheduling a conference call with the senior vice +president to discuss the matter further. +12. One week later, on February 23, the Pemex employee, again from his Pemex +e-mail account, forwarded the Key Mexico country manager an unexecuted internal Pemex +memo, under which Pemex personnel recommended an increase of $60 million to the funds +available to pay Key Mexico under Contract No. 8861. The Pemex employee wrote in the cover +e-mail to the country manager: “I am sending this to you so you can see I am working.” +13. On March 24, 2011, a little more than a month later, Key Mexico and Pemex +executed an amendment to Contract No. 8861 increasing the contract amount by approximately +an additional $60 million. +14. The Pemex employee, through the Consulting Firm, continued to provide Key +Mexico with assistance and information in connection with Contract No. 8861 and with bids for +and execution of other contracts with Pemex through at least 2013. +5 + + +The Payments to the Pemex Employee and the Consulting Firm +15. Starting in August 2010, Key Mexico paid the Consulting Firm a monthly +consulting fee of approximately $4,500. This amount was increased to approximately $8,000 a +month in July 2011, after Key Mexico obtained an additional contract with Pemex. Between +August 16, 2010 and May 7, 2014, Key Mexico made 58 payments to the Consulting Firm +totaling approximately $561,000. Of that amount, at least $229,000 were payments made +through April 2013 in connection with consulting services that were described in Key Mexico’s +accounting system as “Expert advice on contracts with the new regulations of +Pemex/Preparation of technical and economic proposals/Contract Execution.” In addition, the +Pemex official received four wire transfers directly to his personal bank accounts from the +personal bank account of Key Mexico’s country manager totaling approximately $6,400. +16. There is no record that the Pemex employee or the Consulting Firm provided +any legitimate consulting services for Key Mexico. Instead, the Consulting Firm was used as a +conduit through which the Pemex employee received payment from Key Mexico. +17. The country manager resigned from Key Mexico in February 2014. +Key Energy’s FCPA Related Policies and Internal Accounting Controls - Lax +Internal Controls +18. During the relevant period, Key Energy had various written compliance policies, +including a Code of Conduct, an FCPA Compliance Manual (which included an FCPA Policy +and an FCPA Procedure), and a Procurement Policy. But despite having a compliance program +on paper, Key Energy failed to implement accounting controls in its Mexico subsidiary +sufficient to prevent improper payments to a vendor with ties to a Pemex employee. At some +point during the course of the payments to the Consulting Firm Key Energy’s then legal +department became aware of the relationship with the Consulting Firm (but not the Consulting +Firm’s connection to the Pemex employee). Although the consulting arrangement with the +Consulting Firm violated Key Energy compliance policies because it had been entered without +pre-approval from Key Energy legal, because no due diligence had been conducted on the +Consulting Firm and because no written contract had been entered with the firm, Key Energy +allowed the relationship and payments to continue, and Key Mexico allowed payment of the +invoices from the Consulting Firm despite a lack of sufficient documentation supporting the +purported services and the ties between the Consulting Firm and the Pemex employee. +19. In addition to failing to respond to various indicia of risk concerning the +relationship with the Consulting Firm tied to the Pemex employee, Key Energy also failed to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions were executed in accordance with management’s general or specific +authorization and recorded as necessary to maintain accountability of assets by failing to +respond effectively to signs indicating that gifts provided by Key Mexico to Pemex officials +were being given as rewards for providing Key Mexico with increased business that year. +Specifically, in 2012, Key Energy approved Key Mexico’s contribution of gifts totaling +approximately $118,000 to Pemex’s annual Christmas season celebration with the +understanding that the gifts were to be intended for a raffle. However, employees of Key +6 + + +Mexico did not disclose to Key Energy that Key Mexico planned to give at least $55,000 of +these gifts to approximately 130 specific Pemex officials working in the regions in which Key +Mexico operated. In approving the gifts Key Energy ignored that the amount spent on approved +gifts was more than nine times what had been spent on purported raffle gifts in 2010 and +approximately 26 times what had been spent in 2011. Key Energy also failed to consider the +implications of the explanation by Key Mexico’s country manager that the higher gift amount in +2012 was correlated to Key Mexico having done more business with Pemex that year. Had Key +Energy sought more information, it may have learned that Key Mexico was providing gifts to +Pemex officials during a period Key Mexico was engaged in ongoing negotiations with Pemex, +including negotiations to obtain additional funding for work required under its contracts with +Pemex. +20. Key Energy also failed to adequately monitor and supervise the senior +executives at Key Mexico to ensure they complied with and enforced anti-corruption policies +and kept accurate records concerning payments to consultants and gifts to Mexican government +officials. Key Mexico had no independent compliance staff or internal audit function that had +authority to intervene into management decisions and, if appropriate, take remedial actions. +Key Energy also failed to enforce its pre-approval processes for consultants in Mexico, instead +allowing Key Mexico to engage consultants without the required due diligence, pre-approval, or +written contract—even once members of Key Energy’s then legal department became aware +that Key Mexico was using the Consulting Firm. As a result, in many instances, the senior +employees of Key Mexico had unsupervised control over the compliance process; these +employees in turn abused their privileges, approving suspect arrangements with and payments +to consultants and gifts to Mexican government officials at Pemex, and concealing these +arrangments and payments from Key Energy. +Internal Investigation and Remedial Efforts +21. In or around January 2014, the staff of the Commission contacted Key Energy +with respect to potential FCPA violations by Key Energy. In April 2014, Key Mexico +employees reported to Key Energy information they had received suggesting the recently +resigned country manager had promised bribes to one or more Pemex employees during his +employment with Key Mexico. Upon learning of these allegations, Key Energy reported the +allegations to the staff of the Commission. Thereafter, Key Energy undertook a broad internal +investigation and risk assessment of Key Energy’s international operations. To the extent the +internal investigation identified additional issues of concern, Key Energy provided updates to +the Commission staff. +22. In conjunction with its internal review and investigation, Key Energy promptly +and simultaneously undertook significant remedial measures including hiring a new Chief +Compliance Officer (“CCO”) who oversaw a renovation and enhancement of Key Energy’s +compliance program. These steps included: (1) the suspension of payments to all vendors and +third parties in Mexico shortly after the independent investigation/internal review began; (2) +the engagement of a manual review of over 600 vendors in Mexico for purposes of clearing +legitimate payments and assessing whether to move forward with those vendors in current and +future operations; (3) reviewing all vendors in use in Russia and Colombia and instituting an +enhanced due diligence procedure for all vendors globally; (4) establishing enhanced financial +7 + + +controls around the procedure-to-pay process in Mexico, Colombia, and Russia including +interim employee certifications requirements, revised vendor onboarding requirements, and +heightened payment approval requirements; (5) implementing a new business opportunities +protocol to help Key Energy legal better understand business risks including the role played by +agents, consultants or other vendors/business partners, so as to enable better assessment of +corruption-related risks in future business opportunities; (6) installing new controllers in the +Colombia and Mexico businesses and more effectively enforcing a solid line reporting +relationship to the U.S. Controller and ultimately the CFO; (7) in-person visits to each +international location by the CCO and others to, among other things, conduct training of all +international employees; and (8) developing and/or reviewing several company policies and +procedures including the Code of Business Conduct, the FCPA and Anti-Corruption policy, +the Travel and Expense policy, and the New Hire Screening Form; and (9) a coordinated +wind-down and exit of all markets outside of North America, and a commitment to exit +Mexico by the end of 2016. +23. Throughout the process, Key Energy provided cooperation with the staff. In +addition to reporting to the staff after discovering the FCPA allegations relating to Mexico, +Key Energy provided the staff with investigation updates and shared its translations of certain +important documents. These actions assisted the staff in its investigation. + +Legal Standards and FCPA Violations +24. 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. +25. 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. [15 U.S.C. § 78m(b)(2)(A)] +26. Section 13(b)(2)(B) of the Exchange Act requires such issuers to, among other +things, devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that (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)] + + +8 + + +27. As a result of the conduct described above, Key Energy violated Section +13(b)(2)(A) because its books and records did not, in reasonable detail, accurately and fairly +reflect the purpose of the payments. These improper payments were falsely recorded as +legitimate business expenses in the books and records of the subsidiary which were consolidated +into Key Energy’s books and records. Accordingly, Key Energy violated Section 13(b)(2)(A) of +the Exchange Act. As described above, Key Energy also violated Section 13(b)(2)(B) of the +Exchange Act by failing to devise and maintain sufficient accounting controls to prevent and +detect these improper payments. +Commission Consideration of Key Energy’s Cooperation, Remedial Efforts and +Current Financial Condition +28. In determining to accept the Offer, the Commission considered cooperation Key +Energy afforded to the Commission staff and the remedial acts undertaken by Key Energy. In +addition, in determining the disgorgement amount and not to impose a penalty, the Commission +has considered Key Energy’s current financial condition and its ability to maintain necessary +cash reserves to fund its operations and meet its liabilities. +Undertakings +In the event Respondent is or becomes a debtor under Title 11 of the United States +Bankruptcy Code (“Bankruptcy Code”), whether voluntarily or involuntarily, Respondent agrees +to undertake all reasonable efforts to obtain authorization from the bankruptcy court having +jurisdiction over Respondent’s bankruptcy to pay the disgorgement amount ordered in +Paragraph IV. B. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A)-(B)]. +B. Respondent shall, within 14 days of entry of this Order, pay disgorgement of +$5,000,000.00 (the “Disgorgement Amount”) 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 within 14 days of when due additional interest shall +accrue pursuant to SEC Rule of Practice 600. If Respondent has become a debtor under the +Bankruptcy Code before the Disgorgement Amount is paid to the Commission, then, unless +otherwise ordered by the bankruptcy court having jurisdiction over Respondent’s bankruptcy +case, Respondent shall pay the Disgorgement Amount to the Commission within 14 days of the +bankruptcy court’s approval of such payment. If timely payment is not made within 14 days of +when due additional interest shall accrue pursuant to SEC Rule of Practice 600, unless 11 U.S.C. +§ 502(b)(2) applies. Payment must be made in one of the following ways: +9 + + + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC Web site at http://www.sec.gov/about/offices/ofm.htm; +or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch HQ +Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying Key +Energy Services, Inc. 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 Kara +Brockmeyer, Unit Chief, FCPA Unit, Division of Enforcement, Securities and Exchange +Commission, 100 F St., NE, Washington, DC 20549. +C. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its cooperation in a Commission investigation and related enforcement action. If at +any time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission, or in a related proceeding, the Division may, at its +sole discretion and with prior notice to the Respondent, petition the Commission to reopen this +matter and seek an order directing that the Respondent pay a civil money penalty. Respondent +may contest by way of defense in any resulting administrative proceeding brought by the +Commission, whether it knowingly provided materially false or misleading information, but +may not: (1) contest the findings in the Order; or (2) assert any defense to liability or remedy, +including, but not limited to, any statute of limitations defense. +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3795.txt b/raw/aaer/2016/AAER-3795.txt new file mode 100644 index 0000000000000000000000000000000000000000..6c8f6544b30a3a2db1890d7394582b84bd3aadef --- /dev/null +++ b/raw/aaer/2016/AAER-3795.txt @@ -0,0 +1,384 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78607 / August 17, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3795 / August 17, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17126 + +In the Matter of + +JASON MAIHER, + +Respondent. + +ORDER MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER 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 to accept the Offer of Settlement submitted by Jason Maiher (“Maiher” or +“Respondent”) pursuant to Rule 240(a) of the Rules of Practice of the Commission, 17 C.F.R. § +201.240(a), for the purpose of settlement of these proceedings initiated against Respondent on +February 23, 2016, pursuant to Sections 4C, 15(b), and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and 102(e)(1)(iii) of the Commission’s Rules of Practice. + +II. + + 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 and a Cease-and-Desist Order 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 (“Order”), as set +forth below. + + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. SUMMARY + +1. These proceedings concern Respondent’s role in KeyBanc Capital Market Inc.’s +(“KBCM”) failure to make and keep accurate books and records. + +2. Beginning at some point prior to January 2011, and through January 2012, +Respondent, who was KBCM’s CFO (until November 2011) and Series 27 Financial and +Operations Principal (“FinOp”), directed that unsubstantiated entries (commonly known as “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. + +3. The plug entries resulted in KBCM overstating its assets and income in the +financial statements included in its fiscal year 2010 Annual Audited Report filed with the +Commission in February 2011, and also resulted in inaccurate financial information being included +in KBCM’s monthly reporting to FINRA (which furnished such monthly reports to the +Commission), including those filed in 2011and January 2012 . + +4. 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). 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.” + +B. RESPONDENT + +5. Maiher, age 42, was KBCM’s CFO from April 2007 through November 2011 and +FinOp from April 2007 through December 2011. 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 reconciled to, the underlying back-office system +information. + + + +3 +C. RELEVANT ENTITY + +6. KBCM is a broker-dealer registered with the Commission and is a subsidiary of +KeyCorp, a financial services company headquartered in Cleveland, Ohio. + +D. FACTS + +KBCM’S BOOKS AND RECORDS WERE INACCURATE + +7. Beginning at some point prior to January 2011, and through January 2012, +Respondent directed that unsubstantiated (i.e., “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 these entries varied over time. + +8. 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 R eport +filed with the Commission in February 2011. Respondent signed this report, affirming that the +accompanying financial statements were “true and correct.” + +9. The plug entries to the general ledger also resulted in inaccurate financial +information being included in KBCM’s FOCUS Reports that Respondent 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. + +10. 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). 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.” + +RESPONDENT DIRECTED THAT UNSUBSTANTIATED ENTRIES +BE MADE TO KBCM’S GENERAL LEDGER + +11. KeyCorp’s written policies and procedures1 that were applicable to KBCM required +KBCM’s finance department, led by Respondent, 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. + +12. 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 + +1 These included “Policy ACC-403: KeyCorp Reconciliation and Certification Policy” and +“Procedure AR-5001: Reconcilement Process & Account Certification.” + + +4 +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.” + +13. 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. + +14. Among the accounts that Respondent and his team were required to reconcile were +the firm’s inventory accounts. Despite the fact that the inventory accounts did not have “very low +transaction volume,” they were reconciled only monthly. + +15. The applicable policies and procedures required Respondent 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 Respondent was responsible for certifying them. +Specifically, Respondent was responsible for timely certifying the inventory accounts in +KeyCorp’s On-Line Certification System. + +16. As explained in KeyCorp’s policies and procedures, Respondent’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 supporting sub-system, which is Broadridge in +this instance, was in agreement with the general ledger. +17. Further, as stated in the policies and procedures, by certifying an account, +Respondent 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.” + +18. 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. Respondent’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. + +19. 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 + + +5 +“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. +20. It was Respondent’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. Respondent 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. + +21. Beginning at some point prior to 2011, and through January 2012, Respondent +directed that unsubstantiated entries be made to the general ledger in order to balance and be able +to close the books on a monthly basis. +22. During 2010, 2011, and January 2012, as part of the monthly close-the-books +process, at Respondent’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 Respondent’s direction, the staff accountant also prepared a +corresponding “correcting entry” spreadsheet that, in more 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. 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 Respondent as certifier, +post-close. +23. 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.” Respondent +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. +24. If all of the month-end adjusting entries did not result in MSA balancing, the staff +accountant, at Respondent’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, Respondent directed that this 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. + + + +6 + +25. Below are 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 +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 22,170,007.11 Trade Date Adjustment +Dec. 2011 196727 Trade Date Receivable 18,674,052.00 Trade Date Adjustment + +26. 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 Respondent 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 Respondent as +reconciled. For example, for February, March, April and June 2011, Respondent certified the +inventory accounts without an exception of any kind. For other months, he certified with certain +exceptions but did not disclose that unsubstantiated adjustments had been made to the general +ledger. + +27. 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, Respondent also failed to ensure appropriate segregation of duties, in violation of +the applicable policies and procedures. + +28. 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. Respondent was subsequently terminated from KBCM in May 2012. + +29. Through the conduct described above, Respondent caused unsubstantiated entries to +be made in the records of KBCM; caused the records of KBCM to be inaccurate; caused false +FOCUS Reports and financial statements to be filed with FINRA, which then furnished the +FOCUS Reports to the Commission; and caused a false Annual Audited Report to be filed with the +Commission. + + + +7 +E. VIOLATIONS + +30. As a result of the conduct described above Respondent 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, which require registered broker-dealers to make and +keep accurate records, including current ledgers reflecting all assets and liabilities relating to the +firm’s business, and to make and disseminate accurate reports prescribed by Commission rule, +including a balance sheet and income statement certified by a public accounting firm, annual +audited reports, and periodic FOCUS Reports. + +F. FINDINGS + +31. Based on the foregoing, the Commission finds that 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. + +G. CIVIL PENALTIES + + Respondent has submitted a sworn Statement of Financial Condition dated May 19, 2016, +and other evidence and has asserted his inability to pay a civil penalty. + +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. Respondent Maiher shall cease and desist from committing or causing any violations +and any future 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) promulgated thereunder. + + B. Respondent Maiher be, and hereby is: + +barred from association with any broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization; and + +barred from participating in any offering of a penny stock, including: +acting as a promoter, finder, consultant, agent or other person who +engages in activities with a broker, dealer or issuer for purposes of the +issuance or trading in any penny stock, or inducing or attempting to induce +the purchase or sale of any penny stock; + + + +8 +with the right to apply for reentry after two (2) years to the appropriate self- +regulatory organization, or if there is none, to the Commission. + +C. Any reapplication for association by the Respondent will be subject to the +applicable laws and regulations governing the reentry process, and reentry may be conditioned +upon a number of factors, including, but not limited to, the satisfaction of any or all of the +following: (a) any disgorgement ordered against the Respondent, whether or not the Commission +has fully or partially waived payment of such disgorgement; (b) any arbitration award related to the +conduct that served as the basis for the Commission order; (c) any self-regulatory organization +arbitration award to a customer, whether or not related to the conduct that served as the basis for +the Commission order; and (d) any restitution order by a self-regulatory organization, whether or +not related to the conduct that served as the basis for the Commission order. + +D. Respondent Maiher is denied the privilege of appearing or practicing before the +Commission as an accountant. + + E. After two (2) years from the date of this order, Respondent Maiher may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) to resume appearing or practicing before the +Commission as an accountant. + + F. Based upon Respondent Maiher’s sworn representations in his Statement of +Financial Condition dated May 19, 2016 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent. + +G. The Division of Enforcement (“Division”) may, at any time following the entry of +this Order, petition the Commission to: (1) reopen this matter to consider whether Respondent +provided accurate and complete financial information at the time such representations were made; +and (2) seek an order directing payment of the maximum civil penalty allowable under the law. +No other issue shall be considered in connection with this petition other than whether the financial +information provided by Respondent was fraudulent, misleading, inaccurate, or incomplete in any +material respect. Respondent may not, by way of defense to any such petition: (1) contest the +findings in this Order; (2) assert that payment of a penalty should not be ordered; (3) contest the +imposition of the maximum penalty allowable under the law; or (4) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + + + +9 +V. + + It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree or +settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3796.txt b/raw/aaer/2016/AAER-3796.txt new file mode 100644 index 0000000000000000000000000000000000000000..9e34a492e9dfefaf7dba56a07a08c0da0aa8e979 --- /dev/null +++ b/raw/aaer/2016/AAER-3796.txt @@ -0,0 +1,323 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4495 / August 24, 2016 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 32236 / August 24, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3796 / August 24, 2016 + +Admin. Proc. File No. 3-16462 + + +In the Matter of +LYNN TILTON, PATRIARCH PARTNERS, LLC, +PATRIARCH PARTNERS VIII, LLC, +PATRIARCH PARTNERS XIV, LLC, and +PATRIARCH PARTNERS XV, LLC + + + + + +ORDER DENYING PETITION FOR INTERLOCUTORY REVIEW AND PETITION TO +APPLY THE COMMISSION’S AMENDED RULES OF PRACTICE +Petition filed: July 25, 2016 +Last brief received: August 3, 2016 +Lynn Tilton; Patriarch Partners, LLC; Patriarch Partners VII, LLC; Patriarch Partners +XIV, LLC; and Patriarch Partners XV, LLC (collectively, “Respondents”), petition the +Commission for interlocutory review of an administrative law judge’s order that the hearing in +this proceeding begin on October 24, 2016. Respondents also petition for interlocutory review of +the law judge’s refusal to seek an extension of the deadline for filing an initial decision (currently +set to expire on November 12, 2016) under Commission Rule of Practice 360.1 Respondents + +1 See 17 C.F.R. § 200.360(a)(2). Respondents style their filing as a “petition directly to the +Commission” and, “in the alternative,” as a petition for interlocutory review. Because +interlocutory review under Rule of Practice 400 “is the exclusive remedy of a hearing officer’s +ruling prior to Commission consideration of the entire proceeding,” we construe their request +regarding the hearing date and initial decision deadline as a petition for interlocutory review. See +(continued…) + 2 +further petition for an order that would apply the Commission’s recent amendments to the Rules +of Practice (the “Amended Rules”)2 to this proceeding. The Division of Enforcement (the +“Division”) opposes Respondents’ petition. +Respondents’ petition for interlocutory review is denied. The law judge’s rulings +regarding the hearing date and initial decision deadline are not appropriate for immediate +Commission review. With respect to the Amended Rules, the Commission has already +determined how the Amended Rules should apply to pending proceedings. +I. Background +The Commission instituted this proceeding on March 30, 2015, alleging that Respondents +violated the antifraud provisions of the Investment Advisers Act of 1940.3 Two days later, +Respondents filed an injunctive action in federal district court on the ground that, among other +things, the presiding administrative law judge’s appointment violated the Appointments Clause +of Article II of the U.S. Constitution. +As Respondents pursued their civil suit, this proceeding continued. Among other things, +the parties exchanged witness and exhibit lists and expert reports. The law judge also conducted +a prehearing conference on May 7, 2015, and scheduled a hearing to begin on October 13, 2015. +On June 30, 2015, the district court dismissed Respondents’ civil suit for lack of subject- +matter jurisdiction, concluding that Respondents must first raise their claims through the +administrative remedial scheme established by Congress.4 Respondents appealed to the court of +appeals, which stayed the Commission’s administrative proceeding on September 17, 2015, +while it considered Respondents’ appeal. The court of appeals affirmed the district court’s +dismissal of Respondents’ suit on June 1, 2016, and ordered that its stay be vacated.5 +On July 8, 2016, two days after the stay was ultimately lifted,6 attorneys from Gibson, +Dunn & Crutcher LLP filed notices of appearance on behalf of Respondents.7 Respondents and + +(…continued) +17 C.F.R. § 201.400(a). Although the Commission retains the “right to review the action of any +. . . administrative law judge . . . upon its own initiative,” 15 U.S.C. § 78(d)-1(b), we find no +basis for doing so for the same reasons we find interlocutory review inappropriate. +2 Amendments to the Commission’s Rules of Practice, Exchange Act Release No. 78319, 2016 +WL 3853756, at *32 (July 13, 2016). +3 Order Instituting Administrative and Cease-and-Desist Proceedings, Lynn Tilton, Investment +Advisers Act Release No. 4053, 2015 WL 1407564 (Mar. 30, 2015). +4 Tilton v. SEC, No. 15-CV-2472 (RA), 2015 WL 4006165, at *13 (S.D.N.Y. June 30, 2015). +5 See Tilton v. SEC, 824 F.3d 276, 291 (2d Cir. June 1, 2016). +6 In response to a motion for clarification from the Commission, the court of appeals +confirmed on June 28, 2016 that “the stay is vacated, subject, however, to a continuation of the +(continued…) + 3 +the Division jointly proposed that the law judge schedule a hearing date for early December +2016. On July 15, 2016, the law judge declined to do so, stating that “a December 2016 hearing +date [wa]s inconsistent with a timely resolution of this proceeding consistent with 17 C.F.R. § +201.360” and ordered the parties to propose a hearing date in September 2016. +On July 20, 2016, Respondents requested that the law judge reconsider and vacate her +July 15 order. Respondents also requested, in the alternative, that the law judge certify her July +15 order for interlocutory review. That same day, Respondents also requested that the law judge +ask the chief administrative law judge to submit a motion to the Commission requesting an +extension of time for filing an initial decision.8 +Later that day, the law judge rescheduled the hearing for October 24, 2016, but denied +Respondents’ request for a December 2016 hearing date. The law judge explained: +This case involves a single individual respondent and four related entities, +charged with violations of Advisers Act Sections 206(1), 206(2), and +206(4)9 and Rule 206(4) -8.10 More than five months elapsed from the +institution of this proceeding until the time this proceeding was stayed in +September 2015, with the hearing originally schedu led to commence on +October 13, 2015. Most of the prehearing steps had already been +completed, as noted in the July 15 Order. The Second Circuit vacated its +stay order on June 1, 2016, thus making the parties aware that this +proceeding would soon continue. +Respondents’ hiring new counsel and intent to file a large number of +prehearing motions are not an adequate basis for substantial delay. It is +also unnecessary for Respondents to file numerous motions simply to +preserve issues, such as constitutional issues, for appeal; they may simply +note such objections for the record. As to Respondents’ concerns about + +(…continued) +stay until July 6, 2016, to permit Tilton to file a motion seeking a stay from the Supreme Court.” +Respondents declined to file such a motion, and the stay expired on July 6, 2016. +7 Attorneys from Skadden, Arps, Slate, Meagher & Flom LLP noticed their withdrawal on the +same day. Attorneys from Brune Law P.C. noticed their appearance as Respondents’ counsel on +April 13, 2015, and have remained Respondents’ counsel of record since that date. +8 See 17 C.F.R. § 201.360(a)(3) (allowing a presiding law judge to seek an extension of time +in which to file an initial decision if that request is supported by a motion from the Chief +Administrative Law Judge and if the Commission determines that "additional time is necessary +or appropriate in the public interest"). +9 15 U.S.C. § 80b-6(1), (2), and (4). +10 17 C.F.R. § 275.206(4)-8. + 4 +the schedules of hearing particip ants, the parties can use available means, +including use of subpoenas, to compel attendance of witnesses, or can +make arrangements for expert witnesses to appear by video conference if +necessary. +The law judge also declined to certify her July 15 order for interlocutory review, finding that +Respondents’ request “patently fails to meet the standards of 17 C.F.R. § 201.400(c) and must be +denied.” Finally, the law judge did not grant their request for an extension of the initial decision +deadline and did not certify that ruling for interlocutory review. +II. Analysis +A. Respondents’ petition does not raise issues appropriate for interlocutory review. +The Commission’s “emphatic preference—which embodies the ‘general rule’ disfavoring +piecemeal, interlocutory appeals—is that claims should be presented in a single petition for +review after ‘the entire record [has been] developed’ and ‘after issuance by the law judge of an +initial decision.’”11 A party’s disagreement with a law judge’s determination “does not make a +ruling ‘appropriate for interlocutory review.’”12 Interlocutory review is appropriate “only in a +truly unusual case, where serious and prejudicial error [is] plainly apparent upon even a cursory +review of the record, and where deferring review until issuance of an initial decision might well +postpone an inevitable later vacatur and remand.”13 Indeed, Rule 400 provides that petitions for +interlocutory review are “disfavored” and will be granted only in “extraordinary circumstances” +to “make clear that petitions for interlocutory review . . . rarely will be granted.”14 We do not +find such extraordinary circumstances to be present here. +The law judge decided to set the hearing for October 2016 rather than December 2016 +and did not request an extension of the initial decision deadline.15 Setting a hearing date and +deciding whether to seek an extension of time to file an initial decision fits squarely within the +law judge’s authority under Rule of Practice 111 to “regulat[e] the course of a proceeding.”16 + +11 John Thomas Capital Mgmt. Grp. LLC, Exchange Act Release No. 71021, 2013 WL +6384275, at *2 (Dec. 6, 2013) (footnotes omitted). +12 Id. (citation omitted). +13 Gary L. McDuff, Exchange Act Release No. 78066, 2016 WL 3254513, at *5 (June 14, +2016) (internal quotation marks and citation omitted). +14 Warren Lammert, Exchange Act Release No. 56233, 2007 WL 2296106, at *3 (Aug. 9, +2007) (quoting Adoption of Amendments to the Rules of Practice, Exchange Act Release +No. 49412, 2004 WL 503739, at *12 (Mar. 12, 2004)). +15 We note that the law judge remains free to seek an extension of the deadline for the initial +decision at any time under Rule 360 if she determines circumstances warrant doing so. +16 China-Biotics, Inc., Exchange Act Release No. 70800, 2013 WL 5883342, at *17 (Nov. 4, +2013) (quoting Rule of Practice 111, 17 C.F.R. § 201.111). + 5 +That rule is “‘broadly worded’ to accommodate a law judge’s discretion to manage a case plan +within the limits of our Rules of Practice and governing statutes.”17 The Commission has +repeatedly emphasized that it will not grant petitions for interlocutory review of such “fact- +bound, discretionary procedural rulings.”18 Moreover, the law judge’s decisions about when to +hold the hearing and whether to request an extension of time in which to issue an initial decision +involve quintessentially mixed questions of law and fact that are inappropriate for interlocutory +review.19 +These decisions also do not satisfy the standards for obtaining certification of a ruling for +interlocutory review from the law judge—that (1) the ruling “involves controlling questions of +law as to which there is a substantial ground for difference of opinion” and (2) an “immediate +review of the order may materially advance completion of the proceeding.”20 As the law judge +recognized, the rulings that Respondents seek to challenge “fail[] to meet the[se] + + +17 China-Biotics, 2013 WL 5883342, at *17 (quoting Conrad P. Seghers, Advisers Act Release +No. 2656, 2007 WL 2790633, at *6 (Sept. 26, 2007)). +18 Nat. Blue Res., Inc., Exchange Act Release No. 74215, 2015 WL 470453, at *3 (Feb. 5, +2015); accord Harding Advisory LLC, Exchange Act Release No. 9561, 2014 WL 988532, +at *4–5 (Mar. 14, 2014); see also, e.g., Gregory M. Dearlove, Admin. Proc. Release No. 3- +12064, 2006 SEC LEXIS 3191, at *6 (Jan. 6, 2006) (holding that the law judge’s decision not to +postpone a hearing date was “one of several that the hearing officer must make as part of his +regulation of the course of the proceeding and, absent extraordinary circumstances, should not be +immediately appealable to the Commission”); accord Underhill Sec. Corp., Exchange Act +Release No. 7668, 1965 WL 87065, at *8 (Aug. 3, 1965) (stating that “[t]he determination +whether to grant a continuance was a matter resting in the sound discretion of the [hearing] +examiner”). +19 See, e.g., Nat. Blue Res., 2015 WL 470453, at *3 (finding that law judge’s decision not to +postpone the hearing date presented a mixed question of law and fact that was inappropriate for +interlocutory review). +20 17 C.F.R. 201.400(c). + 6 +standards.”21 And “issues that do not satisfy Rule 400(c) will almost never be appropriate for +interlocutory consideration by the Commission.”22 +Respondents argue that interlocutory review is appropriate because the present hearing +schedule denies them “the opportunity to fully and fairly litigate their defense” and violates their +“right to counsel of [their] choice by effectively punishing Respondents for changing counsel +recently.” But the Supreme Court has made clear that “only an unreasoning and arbitrary +‘insistence upon expeditiousness in the face of a justifiable request for delay’ violates the right to +the assistance of counsel.”23 This is not a case in which there are “extraordinary circumstances” +warranting postponement, such as when respondents are left without assistance of counsel at or +near the hearing date through no fault of their own.24 Although Respondents recently replaced + +21 We do not believe that granting interlocutory review will materially advance completion of +the proceeding. To the contrary, immediate Commission review of the law judge’s pre-hearing +decisions is more likely to delay the proceedings further. If the law judge’s pre-hearing +decisions are later determined to be incorrect, those decisions can “‘be effectively reviewed post- +judgment’” by vacatur and remand. Nat. Blue Res., 2015 WL 470453, at *4 (quoting Dearlove, +2006 SEC LEXIS 3191, at *6 n.7) (finding that review of law judge’s refusal to postpone hearing +date was likely to delay proceeding further and could be effectively reviewed on appeal); accord +Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 107 (2009) (determining that, even though a +ruling “may burden litigants in ways that are only imperfectly reparable by appellate reversal,” +that possibility “has never sufficed” to warrant immediate interlocutory review (quoting Digital +Equip. Corp. v. Desktop Direct, Inc., 511 U.S. 863, 872 (1994))); United States v. Breeden, 366 +F.3d 369, 375 (4th Cir. 2004) (finding a trial court’s order granting or denying a continuance not +subject to interlocutory review because the order could be “effectively reviewed post- +judgment”); Scholl v. Felmont Oil Corp., 327 F.2d 697, 699–700 (6th Cir. 1964) (stating that +“[t]he denial of a motion for a continuance is not a final decision from which an appeal will lie” +but that “the propriety of such an order is subject to review by the Court of Appeals if and when +the case is properly before the court on a later appeal from the final decision in the case”). +22 McDuff, 2016 WL 3254513, at *5. +23 Morris v. Slappy, 461 U.S. 1, 11–12 (1983) (finding that the trial court did not abuse its +discretion or deny defendant’s right to counsel when the court denied his motion for a +continuance to allow better preparation by his attorney, who had been appointed to represent +petitioner six days before trial when his original appointed counsel had taken ill). +24 See, e.g., Philip L. Pascale, CPA, Admin. Proc. File No. 3-11194 (Nov. 24, 2003) (finding +that a short postponement of the hearing was warranted where respondent’s counsel became +incapacitated due to illness, and counsel learned about this condition so close to the hearing that +substitute counsel could not be obtained); Carleton Wade Fleming, Jr., Exchange Act Release +No. 36215, 1995 SEC LEXIS 2326, at *16–17 (Sept. 11, 1995) (holding that NASD’s refusal to +grant a continuance was improper where counsel had withdrawn and petitioner was required to +proceed and present his case without counsel for three days of the hearing); James Elderidge +Cartwright, Exchange Act Release No. 31087, 1992 WL 216695, at *3–4 (Aug. 25, 1992) +(continued…) + 7 +some of their attorneys, they have been represented by other attorneys from Brune Law P.C. +throughout this proceeding. +Nor are we persuaded by Respondents’ claim that their new counsel will have insufficient +time to review what they describe as a voluminous and complex record. When the court of +appeals initially stayed this proceeding, the hearing was set to begin in three weeks and, as the +Division notes, many phases of the proceeding had been completed, including the exchange of +witness and exhibit lists and expert reports. Once the court of appeals lifted that stay on July 6, +the law judge essentially granted the parties an additional 13 weeks in which to prepare by +rescheduling the hearing for October 24.25 The Commission has consistently declined to grant +interlocutory review based on similar claims of insufficient time to review large or complex +records.26 Moreover, Respondents’ claims about their alleged inability to prepare adequately, the +Division’s alleged failure to produce documents and information, and key witnesses’ alleged + +(…continued) +(holding that NASD’s refusal to grant a continuance was unreasonable where petitioner was ill +on the hearing date and demonstrated his inability to proceed). +25 See, e.g., Falcon Trading Grp., Ltd., Exchange Act Release No. 36619, 1995 WL 757798, at +*5 (Dec. 21, 1995) (finding no abuse of discretion in NASD’s denial of applicants’ motions for +continuance and adherence to the previously scheduled hearing date where applicants were given +six weeks’ notice of the hearing date and had sufficient time to obtain new counsel after +discovering that joint counsel had potential conflict of interest), aff’d, 102 F.3d 579 (D.C. Cir. +1996); Alexander V. Stein, Advisers Act Release No. 1497, 1995 WL 358127, at *3 (June 8, +1995) (finding that it was not unreasonable or arbitrary for the law judge not to postpone +proceedings where respondent “had well over a month to prepare any defense” and had not asked +for a postponement until less than a week before the hearing). +26 See, e.g., Nat. Blue Res., 2015 WL 470453, at *3 (finding respondent’s claim that he had +insufficient time to review the Division’s “voluminous” investigatory file to be unpersuasive for +purposes of granting interlocutory review); Harding Advisory, 2014 WL 988532, at *5 +(declining to grant interlocutory review of law judge’s decision not to postpone the proceeding +where respondents alleged that they would be deprived of due process if forced to go forward +given the “voluminous investigatory files”); Kevin Hall, CPA, Exchange Act Release No. 55987, +2007 WL 1892136, at *1–2 (June 29, 2007) (declining to grant interlocutory review of law +judge’s decision not to postpone the proceeding where respondents alleged that they needed +additional time to review “late-produced documents”); Dearlove, 2006 SEC LEXIS 3191, at *2, +6 (denying application for interlocutory review of law judge’s decision not to postpone +proceeding where respondent claimed that he had inadequate time to review “the massive +investigative file,” noting that respondent’s “argument about the legal and factual complexities +of his case is one that potentially many respondents in Commission cases could make”) + 8 +unavailability are, at this point, too speculative to interrupt the proceedings and order immediate +review.27 +B. The Commission has specified how the Amended Rules apply to pending +proceedings. +The Commission has already considered how the Amended Rules should apply to +pending proceedings, and many of the Amended Rules will apply to this proceeding. For +example, in adopting the Amended Rules, the Commission concluded that it would be “just and +practicable” for the amendments to Rules 180 (Sanctions), 232 (Subpoenas), 235 (Prior Sworn +Statements), and 320 (Evidence Admissibility) to apply to proceedings where, as here, the +hearing will begin after the effective date (which is September 27, 2016).28 The Commission +similarly concluded that rules concerning appellate procedure (e.g., Rule 410) will apply to +appeals filed on or after the Amended Rules’ effective date.29 +Nonetheless, Respondents request that the Commission order that the Amended Rules +concerning the timing of proceedings, depositions and expert discovery, and dispositive motions +also apply to this proceeding. The Commission has already determined that this is not “just and +practicable.”30 The Amended Rules apply to pending proceedings “depending on the stage of the +proceeding.”31 This is a case that was stayed on the eve of a final hearing, after discovery had +virtually been completed and the parties had made pre-trial disclosures of witness lists and expert +reports. Applying these Amended Rules to such a case—which would, among other things, +entail the parties’ conducting depositions—runs counter to the Commission’s determination that +for cases in a sufficiently advanced posture, application of these Amended Rules would delay +resolution and “unduly disrupt pending proceedings.”32 Respondents provide no compelling +reasons why we should treat their case uniquely from all the other pending cases in our +administrative tribunals, and deviate from our decision that the availability of the Amended +Rules for litigants in pending proceedings should depend on the stage of their proceeding. +* * * + +27 See, e.g., Midwestern Gas Transmission Co. v. FERC, 589 F.2d 603, 622 (D.C. Cir. 1978) +(finding that parties’ “alleged injury falls far short of what is required to overcome the Court’s +interest in denying consideration until the issues are more sharply defined”). We note, however, +that such issues rarely, if ever, would be appropriate for interlocutory review by the Commission. +28 Amendments to the Commission’s Rules of Practice, 2016 WL 3853756, at *31. +29 Id. at *32. +30 Id. at *31 (“[T]he tables below reflect the Commission’s determinations of what is just and +practicable.”). +31 Id. at *30. +32 Id. + 9 +Accordingly, it is ORDERED that Respondents’ petition for an order extending the time +for the law judge to file an initial decision in this proceeding and setting a December 2016 +hearing date; for interlocutory review of the law judge’s July 15 and July 20 Orders; and for an +order applying recent amendments to the Rules of Practice to this proceeding is denied. +By the Commission. + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3797.txt b/raw/aaer/2016/AAER-3797.txt new file mode 100644 index 0000000000000000000000000000000000000000..d03ff5c4c2ff52f77f022e8df9013ad1fe9a5688 --- /dev/null +++ b/raw/aaer/2016/AAER-3797.txt @@ -0,0 +1,469 @@ + +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78711 / August 29, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3797 / August 29, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17510 + + + + +In the Matter of + +THOMAS DULEK, 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 Thomas Dulek +(“Respondent” or “Dulek”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”), and Rule 102(e)(1)(ii)2 of the Commission’s Rules of Practice. + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over 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 + +These proceedings arise out of Dulek’s improper professional conduct as the engagement +partner of the fiscal year (“FY”) 2011 and 2012 audits of the financial statements of OCZ +Technology Group, Inc. (“OCZ”), a now-bankrupt manufacturer and seller of computer memory +storage and power supply devices. Dulek failed to conduct the audits in accordance with Public +Company Accounting Oversight Board standards. The deviations from PCAOB standards +related to the auditing of (a) purported customer marketing programs; (b) OCZ’s inventory +valuation accounting; (c) year-end sales cut-off; and (d) sales return reserves in FY 2011. + +B. RESPONDENT + +Thomas Dulek is a certified public accountant in California where he has been licensed +since 1994. Dulek was a partner at a PCAOB-registered public accounting firm from December +2008 through June 2012. Dulek was the engagement partner responsible for the FY 2011 and +2012 audits of OCZ. + +C. RELEVANT ENTITY + +OCZ Technology Group, Inc. was a Delaware corporation formed in 2002 that was +headquartered in San Jose, California. As of April 2010, OCZ’s common stock was registered +with the Commission pursuant to Section 12(b) of the Exchange Act and listed on the NASDAQ +Capital Market. OCZ’s common stock was de-listed from NASDAQ as of March 6, 2014. On +April 16, 2015, the Commission issued an Order Instituting Proceedings, Making Findings and + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 +Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of +1934. + +OCZ engaged in fraudulent financial reporting from at least FY 2011 through 2012. As a +result of this fraud and other accounting errors, OCZ significantly overstated its revenues and +gross profits in FY 2011 and 2012 (as well as in the first quarter of FY 2013).4 In October 2013, +OCZ restated its financial statements, decreasing previously reported revenues and gross profits +by over $100 million from the second fiscal quarter of FY 2011 through the first fiscal quarter of +2013—a nearly 20% reduction in previously reported revenues and a significant reduction in +previously reported gross profits. + +Shortly after it filed restated financial statements, OCZ filed for bankruptcy protection +and it has since liquidated its assets and is no longer operating. On October 6, 2015, the +Commission filed a complaint against OCZ’s former CEO alleging, among other things, that he +engaged in a fraud to materially inflate OCZ’s revenues and gross margins and violated the lying +to accountants rule of the Exchange Act. The Commission separately charged OCZ’s former +chief financial officer for certain accounting, disclosure, and internal accounting controls failures +at OCZ.5 + +D. FACTS + +Background + +1. Dulek was the engagement partner on the FY 2011 and 2012 audits of OCZ’s +financial statements. As the engagement partner, Dulek had overall responsibility for the +conduct of the audits, including supervision of team members and compliance with PCAOB +standards. + +2. Dulek signed off on the FY 2011 and 2012 audits and caused the issuance of audit +reports for those years containing an opinion that OCZ’s financial statements were presented +fairly, in all material respects, in conformity with generally accepted accounting principles +(“GAAP”). The audit reports also stated that the audits were conducted in accordance with +PCAOB standards. + +3. OCZ’s financial statements in FY 2011 and 2012, in fact, contained numerous +departures from GAAP that resulted in the significant overstatement of the company’s revenues +and gross profits. Moreover, as outlined below, the audits were not conducted in accordance +with PCAOB standards. + +4 OCZ’s fiscal year ended at the end of the month of February. +5 See Litigation Release No. 23379 (Oct. 6, 2015). + +4 + +Failure to Audit OCZ’s Customer Based Programs (CBPs) in Accordance with +PCAOB Standards in FY 2011 and 2012 + +4. Historically, OCZ had provided customers with several types of sales discounts, +which, consistent with GAAP, were reported as reductions to revenue. In addition to these +programs, OCZ enacted a program called “customer based programs” or “CBPs.” Pursuant to +the program, OCZ would purportedly offer short-term marketing reimbursement programs to its +customers. OCZ would pay for the purported marketing performed by customers by providing +credits to its customers that they could apply to their account receivable balances (“CBP credits”). +After enacting the program, OCZ began pushing its salespeople to provide CBPs to customers in +lieu of other types of sales discounts. Customers rarely if ever performed marketing activities +equal to the value of the credits they received and at times did not perform any marketing +activities at all. Rather, CBPs were used as a mechanism through which OCZ provided sales +discounts to customers, which should have been accounted for as revenue reductions, but were +instead improperly recorded as marketing expenses. Accordingly, the CBP credits did not +properly reduce OCZ’s revenues and gross profits as they should have. + +5. As part of its restatement, OCZ reclassified the CBP credits as reductions to +revenues. + +6. GAAP requires that consideration provided to a customer be recorded as a +reduction of revenue unless two criteria are met: (1) the vendor receives an identifiable benefit +for consideration that could have been obtained from a party other than the purchaser of its +product; and (2) the vendor can reasonably estimate the fair value of the benefit. (See ASC 605- +50-45). Dulek did not design adequate procedures for the engagement team to perform to obtain +audit evidence to verify that either of these criteria was satisfied. + +7. In FY 2011 and 2012, the engagement team’s testing with respect to CBPs +focused on whether OCZ had recorded sufficient liabilities to cover the CBP commitments it had +made to customers. Dulek did not have the engagement team sufficiently test whether OCZ +received an identifiable benefit from its customers or whether OCZ could reasonably estimate +the value of any such benefit. For example, the engagement team did not confirm with any +customers that marketing had actually been performed in exchange for CBP credits or the extent +of any such marketing. Nor did the engagement team test the value of the marketing that OCZ +purportedly received from customers in connection with any program to ensure that it equaled +the value of the credit given to the customer. Thus, insufficient testing was performed to +determine whether OCZ had properly characterized CBP credits as marketing expenses in its +income statements. + +8. The failure to perform adequate audit testing to determine whether OCZ was +properly accounting for CBP credits as marketing expenses was unreasonable in light of the +following risks relating to CBPs, among others, of which Dulek was or should have been aware: + + +5 +a. The audit work papers identified revenue as being a high risk area in 2011 and +2012. + +b. Revenues and gross margins were metrics about which OCZ management +regularly put out guidance in documents filed with the Commission that were +reviewed by Dulek. These metrics were directly affected by OCZ’s +classification of marketing and discount programs. + +c. Dulek drafted a June 2011 letter to OCZ’s Board noting that OCZ had no +written “accounting policies and methodology used in determining the sales +and marketing programs accruals (and related income statement +classification).” Dulek similarly reviewed a FY 2012 audit engagement team +memo to OCZ questioning the controls in place to ensure that OCZ was +properly accounting for sales programs, such as CBPs. In answering the +question, management did not identify any specific controls to address the +issue. + +9. By not planning or performing appropriate audit procedures to determine that +CBPs were properly accounted for in OCZ’s income statements, Dulek violated AS No. 15.4, +which requires that auditors “must plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion.”6 + + +6 The provision superseded AU § 326 for audits of fiscal years beginning on or after +December 15, 2010. AU § 326.22, which was effective during the FY 2011 audit of OCZ’s +financial statements, provides, in relevant part, that “[t]he independent auditor’s objective is to +obtain sufficient competent evidential matter to provide him or her with a reasonable basis for +forming an opinion.” + +6 +10. Dulek also failed to exercise the requisite due care in auditing OCZ’s CBPs +because he did not exercise appropriate skepticism or obtain sufficient audit evidence in +concluding that CBP credits were properly characterized as marketing expenses. Among other +things, due professional care “requires the independent auditor to plan and perform his or her +work with due professional care. Due professional care imposes a responsibility upon each +professional within an independent auditor’s organization to observe the standards of field work +and reporting.” AU § 230.02. It also “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. Moreover, PCAOB Standards provide that +“[i]n exercising professional skepticism, the auditor should not be satisfied with less than +persuasive evidence because of a belief that management is honest.” AU § 230.09. And “[t]he +independent auditor’s objective is to obtain sufficient appropriate evidential matter to provide +him or her with a reasonable basis for forming an opinion.” AU § 230.11. + + +Failure to Audit OCZ’s Inventory Accounting in Accordance with PCAOB +Standards in FY 2011 and 2012 + +11. In valuing its inventory in FY 2011 and 2012, OCZ included only raw materials +in inventory costs—it did not include the labor and overhead costs relating to the manufacture of +those goods. This practice was a departure from GAAP, which requires that all direct and +indirect acquisition and production expenditures be included in inventory cost. (ASC 330-10- +30). OCZ’s failure to include labor and overhead in its inventory costs resulted in OCZ’s +material understatement of costs of goods sold and inventory and overstatement of gross profits +in FY 2011 and 2012. + +12. The audit work papers indicate that labor and overhead will generally be included +in the valuation of inventory. The work papers, however, further state that OCZ did not follow +this standard practice and, instead, expensed manufacturing labor and overhead and only +included the costs of raw material in the costs recorded in valuing inventory. + +13. At the time of the FY 2011 and 2012 audits, Dulek had reviewed evidence that, at +a minimum, should have called into question OCZ’s failure to include labor and overhead costs +in inventory. For example, OCZ’s FY 2012 Form 10-K, which Dulek reviewed, stated that OCZ +was “a leader in the design, manufacturing, and distribution of high performance and reliable +Solid-State Drives (“SSDs”)” and “OCZ designs and manufactures SSDs in a variety of form +factors and interfaces.” (emphases added). OCZ made similar representations concerning its +manufacturing capabilities in its FY 2011 Form 10-K, which Dulek reviewed. + +14. PCAOB standards require that audit documentation should “[s]upport the basis +for the auditor’s conclusions concerning every relevant financial statement assertion” and +indicate “the procedures performed, evidence obtained, and conclusions reached” with respect to +relevant financial statement assertions. AS Nos. 3.5(b) and 3.6. Dulek failed to ensure that the +engagement team adequately documented any information it received or analyzed concerning the +magnitude of OCZ’s labor and overhead costs, or any procedures the team may have undertaken +to obtain and analyze such information, as required by AS Nos. 3.5(b) and 3.6. + +7 + +15. In addition, by failing to obtain a proper understanding of OCZ’s business, as is +required by AS No. 12.7, among other auditing standards,7 and failing to identify and rectify +OCZ’s clear GAAP departure, Dulek failed to exercise the requisite due care and skepticism as +required by AU § 230. + +Failure to Audit Sales Cut-Off in Accordance with PCAOB Standards in FY 2011 +and 2012 + +16. OCZ recognized revenues upon product shipment, even though its shipping terms +with most customers provided that OCZ held title to those products until the customer took +delivery. OCZ’s revenue recognition practice was inconsistent with GAAP, as the company had +not earned the revenue until the product was delivered. (See ASC 605-10-25-1). + +17. As part of its restatement, OCZ concluded that sales of goods that were in transit +at the end of its fiscal year had been improperly recorded as revenues in that fiscal year +(concluding that the revenues should have been recorded in the subsequent fiscal year). + +18. The performance of cut-off testing—a test to determine whether sales recorded +near the end of the fiscal year were recorded in the proper period—is a typical audit procedure. + +19. In assessing the appropriateness of the timing of revenue recognition, shipping +terms are a critical consideration as they determine the point at which title to the product, and +thus the risks and rewards of ownership, has legally passed to the buyer. + +20. In connection with the FY 2011 audit, the audit work papers, which Dulek signed +off on, do not indicate that any shipping terms were reviewed to confirm that the tested sales +were recorded in the proper period. + +21. In connection with the FY 2012 audit, the audit work papers, which Dulek +reviewed, document the shipping terms. However, because the shipping terms with most +customers provided that title would pass on product delivery, the engagement team relied on so- +called “title transfer letters” as evidence that the shipping terms of the relevant sales had been +altered from the terms that otherwise applied to the sales. The letters were conceived by OCZ to +purportedly allow it to recognize revenue upon shipment without changing the economic terms +of the sales. The only letter included in the audit work papers, which was undated, stated that +OCZ would continue to assume “all risks prior to the point that the goods are ready for unloading +by the buyer.” This indicated that the risk of ownership did not pass to the customer upon +shipment and, therefore, revenue recognition would not be appropriate until the product was +delivered. Nevertheless, Dulek concluded that the title transfer letters could alter the shipping +terms that otherwise applied to the sales to allow revenue recognition upon shipment rather than + +7 AS No. 12.7 provides, in relevant part, that “[t]he auditor should obtain an understanding of the +company and its environment (“understanding of the company”) to understand the events, conditions, and +company activities that might reasonably be expected to have a significant effect on the risks of material +misstatement. Obtaining an understanding of the company includes understanding: . . . The nature of the +company.” AU § 311, which was effective during the FY 2011 audit, similarly provides, among other +things, that “[t]he auditor should obtain a knowledge of matters that relate to the nature of the entity’s +business, its organization, and its operating characteristics.” AU § 311.07. + +8 +on the date of delivery. + +22. In auditing sales cut-off, Dulek failed to properly document the basis for the +conclusions that sales were recorded in the proper period in accordance with AS Nos. 3.5(b) and +3.6. + +23. Dulek also failed to exercise the requisite due professional care and skepticism, as +is required by AU § 230, in failing to obtain the audit evidence to support the conclusions that +sales were recorded in the proper period. See also AS No. 15 (in connection with the FY 2012 +audit) and AU § 326 (in connection with the FY 2011 audit). + +Failure to Take Appropriate Steps to Correct OCZ’s GAAP Departure with +Respect to its Accounting for Sales Returns in FY 2011 + +24. Under certain circumstances, OCZ permitted customers to return products they +purchased. GAAP requires that for sales made with a right of return, revenue reported in the +income statement “shall be reduced to reflect estimated returns.” (ASC 605-15-45). OCZ +improperly recorded only the gross margin on estimated product returns as a reduction in +revenues. For example, if OCZ expected $100 of goods to be returned, and had gross margins of +20%, OCZ recorded only $20 of sales returns accruals (which reduced net revenues), instead of +the full $100 of goods it expected to be returned. + +25. OCZ’s practice was documented in the FY 2011 audit work papers, which state: +“OCZ reserves the gross margin portion of the sales price (20 percent).” + +26. Nevertheless, Dulek failed to note that this was contrary to GAAP and evaluate +the effect on OCZ’s financial statements, and there is no indication in the audit work papers that +the issue was brought to OCZ’s attention. + +27. Dulek’s failure to recognize the GAAP departure in the audit work papers +demonstrates a lack of due care as required by AU § 230. + +Failure to Adequately Supervise Staff + +28. 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 engagement team +members and for compliance with PCAOB standards.” AS No. 10.3. The engagement partner +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, or evaluation of the results, of the +procedures. AS No. 10.5. In determining the extent of supervision, the engagement partner +should take into account, among other things, “[t]he risks of material misstatement.” AS No. +10.6. Additionally, the engagement partner should review the work of engagement team +members “to evaluate whether: (1) [t]he work was performed and documented; (2) [t]he +objectives of the procedures were achieved; and (3) [t]he results of the work support the +conclusions reached.” AS No. 10.5. + + +9 +29. As described further above, in supervising the FY 2011 and 2012 OCZ audits, +Dulek did not ensure that the work of the audit team supported the conclusions reached. Dulek +also failed to properly evaluate that the documentation obtained by the audit team supported the +conclusions reached by the team. He also failed to properly take account of the risk of material +misstatement in determining the extent of his supervision. Accordingly, he violated PCAOB AS +No. 10.8 + +FINDINGS + +30. Based on the foregoing, the Commission finds that Dulek engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice by engaging in repeated instances of +unreasonable conduct indicating a lack of competence to practice before the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Dulek’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent Dulek is denied the privilege of appearing or practicing before the +Commission as an accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + +8 AS No. 10 superseded AU § 311 for audits of fiscal years beginning on or after December +15, 2010. AU § 311, which was effective during the FY 2011 audit of OCZ’s financial statements, +provided, in relevant part, that (a) “Supervision involves directing the efforts of assistants who are +involved in accomplishing the objectives of the audit and determining whether those objectives +were accomplished” (AU § 311.11); and (b) “The work performed by each assistant should be +reviewed to determine whether it was adequately performed and to evaluate whether the results are +consistent with the conclusions to be presented in the auditor’s report.” (AU § 311.13). Dulek +failed to satisfy these standards with respect to the FY 2011 audit. + +10 + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that the Respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3798.txt b/raw/aaer/2016/AAER-3798.txt new file mode 100644 index 0000000000000000000000000000000000000000..3049e7918d77c0ffe334ba89b804897c5c3b07e1 --- /dev/null +++ b/raw/aaer/2016/AAER-3798.txt @@ -0,0 +1,318 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78730 / August 30, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3798 / August 30, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17517 + +In the Matter of + +ASTRAZENECA PLC + +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 AstraZeneca PLC (“AZN” 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 beh alf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +SUMMARY + +These proceedings arise out of violations of the internal controls and recordkeeping +provisions of the Foreign Corrupt Practices Act ( the “FCPA”) by AZN and its wholly-owned +subsidiaries in China and Russia. Through at least 2010, AZN failed to devise and maintain a +sufficient system of internal accounting controls relating to the interactions of its China and Russia +subsidiaries with government officials, the vast majority of whom were health ca re providers +(“HCPs”), at state-owned and state-controlled entities in China and Russia. Sales and marketing +staff, along with multiple levels of management at the two AZN subsidiaries, designed and +authorized several schemes to make improper payments of gifts, conference support, travel, cash +and other benefits to HCPs to reward or influence their purchases of AZN pharmaceuticals. In +addition, employees in the China subsidiary made cash payments to local officials to reduce or +avoid fines that were levied against the China subsidiary. AZN falsely recorded all of the improper +payments by its China and Russia subsidiaries as bona fide business expenses in its consolidated +financial statements. + + +RESPONDENT + +1. AZN is a global biopharmaceutical company incorp orated in the U.K. and +headquartered in London. Throughout the relevant period, AZN’s American Depositary Shares +have been registered with the Commission pursuant to Section 12(b) of the Exchange Act and +publicly traded on the New York Stock Exchange (NYS E: AZN), as well as the London and +Stockholm Exchanges. AZN files annual and quarterly reports as required under Section 13 of the +Exchange Act and Rules thereunder. + + +OTHER RELEVANT ENTITIES + + 2. AstraZeneca (Wuxi) Trading Co. Limited (“AZ China”) is a wholly-owned +subsidiary of AZN and was responsible for AZN’s sales and marketing functions in China during +the relevant period. + + 3. AstraZeneca UK Limited is a wholly -owned subsidiary of AZN and had a +representative office in Russia through which AZN operated in Russia prior to 2007. + + +1 The findings here in are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + 4. OOO AstraZeneca Pharmaceuticals is a wholly-owned subsidiary of AZN through +which it has operated in Russia since 2007. (AstraZeneca UK Limited’s representative office in +Russia and OOO AstraZeneca Pharmaceuticals are referred to individually or collectively herein as +“AZ Russia.”) +FACTS + + Improper Conduct at AZ China + + 5. From 2007 until 2010, AZ China sales staff made numerous improper payments in +cash, gifts and other items to HCPs as incentives to purchase or prescribe AZN pharmaceuticals. +Sales and marketing team members , including managers within various business units at AZ +China, designed and implemented the improper payment schemes. The HCPs who received the +improper incentives worked for various government entities in several regions throughout China. + + 6. Between at least 2006 and 2009, certain AZ China sales staff and their managers +maintained written charts and schedules that recorded the amount of forecasted or actual payments +of maintenance fees, gifts, entertainment and other expenses that AZ China would make per month +or year in numerous regions throughout China. In some cases, the payments referenced gifts, +entertainment and other expenses to individual physicians, and in other cases, maintenance fees to +a particular hospital or medical department, as designated by an individual physician. AZ China +sales staff management approved these payments with the expectation that the HCPs would +increase purchases of AZN products during the corresponding period, or favorably influence the +inclusion of AZN products on formulary or reimbursement drug listings. + + 7. In numerous instances, AZ China sales staff submitted, and managerial employees +knowingly approved, fake fa piao (tax receipts) for fraudulent reimbursements to generate cash +that was used to make improper payments to HCPs. + +8. Other methods were also used, such as establishing bank accounts in doctors’ +names as part of an improper payment scheme, or engaging a collusive travel vendor who +submitted fake or inflated invoices to generate cash that could be used to funnel money to HCPs. + +9. As a result of the deficient controls, AZ China employees were regularly +reimbursed for submitted expenses despite inadequate supporting documentation. + +10. Similarly, AZ China paid speaker fees to HCPs despite AZ China service contracts +that were incomplete, containing no meeting date, venue, subject or fees associated with the +particular speaker event. In some instances, the related speaker engagement was totally fabricated +and never occurred. Additionally, sales and marketing team members were able to bypass formal +approval procedures that required validation by a designated signatory in the company’s electronic +approval system. + +11. In addition, in connection with inquiries by local Chinese government officials in +2008, AZ China employees made payments in cash to the local officials to get reductions or +dismissals of proposed financial sanctions against the subsidiary. + 4 + + Improper Conduct at AZ Russia + +12. From at least 2005 until 2010, AZ Russia employees provided improper incentives +to government-employed HCPs in connection with sales of AZN pharmaceutical products. + +13. As was done by AZ China employees, AZ Russia employees created and +maintained charts tracking the names of HCPs, the regions in which they practiced, their level of +influence in making purchasing decisions for the respective entities where they worked and the +manner in which they could be motivated to purchase AZN products through gifts, conference +support and other means. + + 14. Employees at several levels of AZ Russia management directed or condoned their +subordinates’ practices of providing improper benefits to government-employed HCPs, which +occurred in multiple regions where AZ Russia operates. + +COOPERATION AND REMEDIAL EFFORTS + + 15. AZN did not self -report its violations; nevertheless, the company provided +significant cooperation to the Commission during the entire course of its investigation. AZN +immediately took a cooperative po sture and ensured that it consistently provided complete +information in a timely manner. AZN voluntarily and timely disclosed information obtained +during its own internal investigation, provided translations of key documents, and disclosed facts +that the Commission would not have been able to readily and independently discover. AZN also +kept the staff regularly informed of its ongoing remedial efforts throughout the course of the +investigation. + +16. AZN had begun independently remediating deficiencies in its compliance program +prior to the Commission’s investigation. The company incorporated information developed in the +course of the Commission’s investigation to further enhance its controls and compliance program. +AZN made significant increases to both capital and human resources available to compliance at the +corporate level and in the local markets. It has developed a centralized compliance program, +revamped its internal controls and procedures, and placed key compliance personnel in high -risk +local markets. Among the other improvements made are enhancements to AZN’s policies +governing interactions with HCPs and government officials, gifts, travel and entertainment, third- +party engagements, meetings, congresses, and contributions. AZN also enhanced its anti - +corruption training and audits. Additionally, AZN has taken various steps with regard to involved +employees, including targeted training, reassignment to lower -risk areas of responsibility, +voluntary separations, and dismissals. + +LEGAL STANDARDS + +17. 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 or any other person that is, was or would + 5 +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 Books and Records and Internal Controls Provisions of the FCPA + +18. Section 13(b)(2)(A) of the Exchange Act, the books and records provision of the +FCPA, 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.” 15 U.S.C. +§ 78m(b)(2)(A). As described above, AZN violated Section 13(b)(2)(A) when its subsidiaries +mischaracterized improper payments as legitimate expenses in AZN’s books and records. + +19. Section 13(b)(2)(B) of the Exchange Act , the internal controls provision of the +FCPA, requires every issuer with a class of securities registered pursuant to Section 12 of the +Exchange Act to “devise and maintain a system of in ternal 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). + +20. As described above, AZN violated Section 13(b)(2)(B) of the Exchange Act by +failing to devise and maintain a sufficient system of internal accounting controls relating to +employee reimbursements, third -party vendors, speaker fees, conferences, gifts, travel and +entertainment. AZN did not adequately enforce its corporate policy against making improper +payments to government officials with respect to its subsidiaries in Russia and China. Although +the company had a written policy that prohibited these unauthorized transactions, AZN did not +employ reasonable controls to detect and prevent such improper payments. AZN failed to ensure +that its Russia and China subsidiaries maintained accurate and complete recording of financial +transactions referencing payments to government official s. T hese records never appropriately +described the transactions, and were always inaccurate or incomplete , when the purpose of the +payment involved an improper incentive to the government official. The company also did not +employ reasonable measures to ensure that sponsorship activities involving government officials in +China were appropriately approved through the company’s established electronic system by a pre- +designated official in the country. Additionally, AZN did not provide adequate FCPA training to +its sales and marketing employees in China and Russia who had routine interactions with +government officials in the healthcare industry that posed a high risk for bribery and corruption. +Furthermore, AZN did not employ reasonable due diligence and mon itoring of third -party +contractors engaged by its China and Russia subsidiaries, such as travel vendors who provided +false invoices to the subsidiaries’ employees that facilitated the unauthorized use of corporate +funds to improperly incentivize HCPs. + + 6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent AZN’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent AstraZeneca PLC cease +and desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. + + B. Respondent shall, within fourteen (14) days of the entry of this Orde r, pay +disgorgement of $4,325,000, which represents profits gained as a result of the conduct described +herein, prejudgment interest of $822,000, and a civil money penalty of $375,000 to the Securities +and Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If timely payment of disgorgement and prejudgment interest is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 , and if timely +payment of a civil mo ney 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 b y 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 +AstraZeneca PLC as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Charles E. Cain, Deputy Chief, +Foreign Corrupt Practices Act Unit, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, N.E., Washington, DC 20549-5648. + + 7 +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $375,000 based upon its cooperation in a Commission investigation and related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the Division +may, at its sole discretion and with prior notice to the Respondent, petition the Commission to +reopen this matter and seek an order directing that the Respondent pay an additional civil money +penalty. Respondent may contest by way of defense in any resulting administrative proceeding +whether it knowingly provided materially false or misleading information, but may not: (1) contest +the findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited +to, any statute of limitations defense. + + + By the Commission. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3799.txt b/raw/aaer/2016/AAER-3799.txt new file mode 100644 index 0000000000000000000000000000000000000000..65f5b52830835ba3dff3d67c1bfe754c65b08310 --- /dev/null +++ b/raw/aaer/2016/AAER-3799.txt @@ -0,0 +1,416 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78824 / September 13, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3799 / September 13, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17534 + +In the Matter of + +PORTUGAL TELECOM, +SGPS, S.A., now known as +PHAROL SGPS, S.A. + +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 Portugal Telecom, SGPS, S.A., now known as +Pharol SGPS, S.A. (“Portugal Telecom” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 2 +Summary + +1. This financial reporting matter arises out of Portugal Telecom, SGPS, S.A.’s +(“Portugal Telecom”) misleading and inaccurate disclosures regarding its investments in debt +instruments issued by entities of Portuguese conglomerate, Grupo Espirito Santo (“GES”). Banco +Espirito Santo, S.A. (“BES”), one of Portugal Telecom’s largest shareholders, was part of GES. +Portugal Telecom invested in debt instruments issued by Espirito Santo International, S.A. (“ESI”), +a GES entity. After these ESI debt instruments matured in February 2014, Portugal Telecom +invested €897 million in commercial paper issued by Rio Forte Investments, S.A. (“Rio Forte”), +another GES entity. + +2. Portugal Telecom included this Rio Forte commercial paper as part of the operating +assets that it contributed to Oi, S.A. (“Oi”) of Brazil pursuant to the terms of a telecom merger +between Portugal Telecom and Oi. In connection with the merger, the parties had valued Portugal +Telecom’s operating assets to be contributed at + 1.75 billion as of December 31, 2013. The +merger was consummated on May 5, 2014. On June 30, 2014, Portugal Telecom disclosed for the +first time that its operating assets included €897 million in short-term commercial paper issued by +Rio Forte. Rio Forte defaulted on the debt in July 2014, resulting in substantial losses and causing +the parties to renegotiate the terms of the merger, with Oi returning the Rio Forte commercial +paper to Portugal Telecom. + +3. Portugal Telecom misrepresented the nature of the short-term investments in its +December 31, 2013 fiscal year end financial statements and also failed to disclose the nature and +extent of the credit risk to which it was exposed at December 31, 2013. In addition, Portugal +Telecom’s internal accounting controls were insufficient at December 31, 2013. + +Respondent + +4. Portugal Telecom, SGPS, S.A., now known as Pharol SGPS, S.A. is a foreign +private issuer incorporated in The Portuguese Republic with its principal place of business in +Lisbon, Portugal. Portugal Telecom’s American Depositary Shares (“ADSs”) were registered with +the Commission pursuant to Section 12(b) of the Exchange Act and traded on the New York Stock +Exchange under the ticker symbol PT until Portugal Telecom delisted its ADSs effective March +30, 2015. On April 26, 2016, Portugal Telecom filed a Form 15F to terminate the registration of its +ADSs. Portugal Telecom’s ADSs now trade on OTC Pink market under the ticker symbol +PTGCY. Portugal Telecom’s 2013 financial statements were audited by Deloitte & Associados, +SROC, S.A. + +Other Relevant Entities + +5. Oi S.A. is a foreign private issuer incorporated in The Federative Republic of Brazil +with its principal place of business in Rio de Janeiro, Brazil. Oi’s ADSs are registered with the +Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock +Exchange under the ticker symbol OIBR. On June 20, 2016, Oi filed a petition for judicial +reorganization. + 3 + +6. Grupo Espirito Santo (“GES”) is a large Portuguese conglomerate of the Espirito +Santo family. Its numerous entities1 include: + +Espirito Santo International, S.A. (“ESI”) is a GES holding company headquartered in +Luxembourg. ESI filed for creditor protection on July 18, 2014. + +Rio Forte Investments, S.A. (“Rio Forte”) is a privately held limited liability company +incorporated in Luxembourg. Rio Forte, which is owned 100% by ESI, held and managed +GES’s non-financial investments. Rio Forte filed for creditor protection on July 22, 2014. + +Banco Espirito Santo, S.A. (“BES”), one of Portugal Telecom’s three largest +shareholders, previously was Portugal’s second largest bank. It collapsed in the summer of +2014 amid reports of irregularities and received a €4.9 billion bailout from the Portuguese +government. BES had a 10.05% interest in Portugal Telecom at December 31, 2013, while +Portugal Telecom owned a 2.1% interest in BES at December 31, 2013. + +Facts + +A. The Oi/Portugal Telecom Merger + +7. In October 2013, Oi and Portugal Telecom announced that they had entered into a +memorandum of understanding in which Oi would acquire Portugal Telecom’s operating assets for +shares in Oi. A final merger agreement was signed on February 19, 2014. + +8. The merger was conditioned upon, among other things, the successful completion +of Oi’s capital raise. Oi issued approximately $6.2 billion of new shares in a global equity offering +in April 2014, including $2.5 billion of shares Oi issued to Portugal Telecom in exchange for +substantially all of Portugal Telecom’s operating assets. Oi’s global offering included $1.2 billion +of shares sold in the U.S. The global offering closed and the merger was consummated on May 5, +2014. Following the merger, Portugal Telecom held a combined direct and indirect interest of +39.7% in Oi. + +9. In connection with the merger, the parties valued Portugal Telecom’s operating +assets to be contributed at + 1.75 billion (approximately $2.5 billion) as of December 31, 2013. +However, after the assets were valued but before they were contributed to Oi, Portugal Telecom +invested in €897 million short-term commercial paper issued by Rio Forte, a privately-held GES +holding company that managed GES’s non-financial investments. Portugal Telecom made this +investment in February 2014 when the short-term investments it held at December 31, 2013 in +another GES non-financial holding company, ESI, matured. Portugal Telecom then renewed the +Rio Forte debt when it matured on April 15, 2014 (€847 million) and April 17, 2014 (€50 million). + + +1 The various Espirito Santo entities are referred to as GES or the GES entities. + 4 +10. In May and June 2014, several news articles reported concerns regarding the +financial condition of ESI and other GES entities. Then, on June 26, 2014, news outlets reported +that Portugal Telecom had bought Rio Forte commercial paper before Portugal Telecom merged +with Oi. In a June 30, 2014 announcement, Portugal Telecom disclosed for the first time its +investment in the Rio Forte commercial paper. In response to this news, the price at which +Portugal Telecom’s ADSs traded dropped more than 11% between June 27, 2014 and July 1, 2014. + +11. In July 2014, Rio Forte defaulted on the commercial paper and, on July 22, 2014, +filed for creditor protection. Thereafter, Oi and Portugal Telecom renegotiated the terms of the +merger, with Oi returning the Rio Forte commercial paper to Portugal Telecom and Portugal +Telecom surrendering a significant portion of the common and preferred Oi shares it had received +in the merger. As a result of the renegotiation, Portugal Telecom’s direct and indirect interest +declined from 39.7% to 27.5%.2 In January 2015, Oi sold the operating assets it had acquired from +Portugal Telecom. + +12. On August 25, 2014, in a Form 6-K, Portugal Telecom made supplemental and +clarifying disclosures to its December 31, 2013 financial statements. Among other matters, +Portugal Telecom disclosed for the first time that, as of December 31, 2013, its short-term +investments included commercial paper in the total amount of €750 million issued by ESI, an +unrated, non-financial GES holding company. Portugal Telecom also disclosed that the ESI +investment represented 82% of its short-term investments at December 31, 2013. Portugal +Telecom additionally disclosed for the first time the concentration of its cash deposits with BES +and further that it had not implemented an effective investment diversification policy at December +31, 2013. + +13. In August, 2014, Portugal Telecom’s Board engaged PricewaterhouseCoopers +(“PwC”) in Portugal to conduct an independent analysis of Portugal Telecom’s treasury +applications with GES. Portugal Telecom disclosed the results of PwC’s independent analysis in a +Form 6-K filing on January 8, 2015. + +B. Portugal Telecom’s Misleading and Inaccurate Financial Statements + +14. Portugal Telecom’s fiscal year end 2013 consolidated financial statements were +misleading and inaccurate. These financial statements, which were prepared in accordance with +International Financial Reporting Standards (“IFRS”), as issued by the International Accounting +Standards Board, were filed with the SEC on Form 6-K on March 12, 2014 and also included in +Portugal Telecom’s 2013 annual report filed with the SEC on Form 20-F on April 30, 2014. + + +2 Prior to the merger, Portugal Telecom owned a direct and indirect economic interest of 23.2% +in Oi. + + 5 +1. Portugal Telecom’s Mischaracterization of Short-Term Investments + +15. In its 2013 financial statements, Portugal Telecom mischaracterized its short-term +investment in ESI commercial paper. Specifically, in footnote 24 entitled “short-term investments” +to Portugal Telecom’s December 31, 2013 financial statements, Portugal Telecom +mischaracterized its €750 million investment in ESI commercial paper as “debt securities issued by +PT Finance and Portugal Telecom.” This disclosure was misleading and inaccurate because the +debt securities were not issued by Portugal Telecom but rather subscribed to by Portugal Telecom +(or its subsidiary PT Finance). Footnote 24 was also incomplete because it failed to identify the +issuer of the securities – ESI, a GES holding company – and thus did not allow a user of the +financial statements to evaluate the credit risk to which Portugal Telecom was exposed.3 + +16. Portugal Telecom corrected this error in its August 25, 2014 supplemental +disclosures by disclosing that the “total amount of Euro 750 million includes debt securities issued +by [ESI].” Portugal Telecom further disclosed that ESI was a “non-financial holding company” +and part of GES. + +2. Portugal Telecom’s Credit Risk Disclosure Failures + +17. Portugal Telecom failed to disclose the nature and extent of the credit risk to which +it was exposed at December 31, 2013, as required by IFRS No. 7, Financial Instruments: +Disclosures. The objective of IFRS No. 7 is to provide information that enables users to evaluate: +(1) the significance of financial instruments for the entity’s financial position and performance; and +(2) the nature and extent of risks arising from financial instruments to which the entity is exposed +and how the entity manages those risks. As an initial matter, Portugal Telecom did not disclose +that €750 million was invested in commercial paper at December 31, 2013, or that this amount was +concentrated in debt issued by ESI, a non-financial holding company, as discussed above. Portugal +Telecom also failed to disclose information about the credit quality of these financial assets, which +were not rated, as required by IFRS No. 7, ¶ 36(c) (an entity is required to disclose information +about the credit quality of financial assets that are neither past due nor impaired). As a result, +investors were unable to form an overall picture of the nature and extent of risks arising from these +financial instruments, particularly since the investments in ESI debt represented 82% of Portugal +Telecom’s short term investments and 29% of its short-term investments plus cash and cash +equivalents at December 31, 2013. The ESI debt also represented 40% of Portugal Telecom’s +December 31, 2013 equity. + +18. Portugal Telecom also failed to accurately disclose its objectives, policies, and +processes for managing its exposure to credit risks arising from financial instruments, as required +by IFRS No. 7, ¶ 33 (qualitative disclosures). At December 31, 2013, Portugal Telecom disclosed +in footnote 45.1.3: “Risks related to treasury activities result mainly from the cash deposits on +investments made by [Portugal Telecom and its subsidiaries]. In order to dilute these risks, + +3 In contrast, Portugal Telecom disclosed in footnote 24 the identity of the issuers of its other +short term investments at December 31, 2013, which totaled €162 million. + + 6 +Portugal Telecom’s policy is to invest its cash for short time periods, entering in agreements with +reputable financial institutions and diversifying counterparties.” Portugal Telecom’s footnote +45.1.3 disclosure was misleading and inaccurate for several reasons. + +19. First, it had failed to implement effective diversification as of December 31, 2013, +as Portugal Telecom admitted in its August 25, 2014 supplemental disclosures, stating: “With +respect to the information on our policy on investments in cash and short-term investments, as +presented in general terms in the Report and Consolidated Financial Statements…and in particular +the criterion for investments in diversified financial institutions that are reputable in the market, it +should be mentioned that, given the concentration in deposits and treasury applications in +BES/GES, as of December 31, 2013, the Company was not implementing an effective +diversification.” Notably, 82% of Portugal Telecom’s short-term investments and 85% of its cash +and cash equivalents were invested in/deposited with BES/GES entities at December 31, 2013; +nevertheless, Portugal Telecom failed to disclose the magnitude of its aggregate exposure to +BES/GES entities in either its March 12, 2014 Form 6-K or fiscal year end 2013 Form 20-F.4 + +20. Second, Portugal Telecom’s short-term investments were not invested for short +time periods. PwC reported that although Portugal Telecom’s investments were always papered as +short-term investment (less than 180 days), the investments were successively rolled over. PwC +concluded that such investments exceeded Portugal Telecom’s own 180-day policy for short-term +investments. + +21. Third, the short-term investments were not invested with a “reputable financial +institution” at December 31, 2013. Rather, the funds were invested in debt issued by ESI, a non- +financial holding company of GES and, as noted above, the investments were not rated. + +C. Portugal Telecom’s Insufficient Internal Accounting Controls + +22. Portugal Telecom’s internal accounting controls surrounding its investments were +insufficient at December 31, 2013. Contrary to Portugal Telecom’s stated policy to invest its cash +for short time periods and to enter into agreements with reputable financial institutions and +diversified counterparties, Portugal Telecom invested significant amounts of its cash in GES +financial instruments over a period of 14 years beginning in 2001. PwC identified numerous +control issues that allowed these investment policy violations, including the following: + + In 2003, Portugal Telecom created a monthly dashboard report entitled “Tableaux de +Bord,” which reflected Portugal Telecom’s financial position at certain points in time. +Although these reports were to be approved by Portugal Telecom’s executive +committee, they were not regularly presented and, when presented, failed to include the +correct description of the issuers of short-term investments (e.g., ESI/Rio Forte) until + +4 Although Portugal Telecom disclosed transactions and balances with its “major shareholders,” +which included BES, in its March 12, 2014 Form 6-K and 2013 Form 20-F, it specifically +excluded from this disclosure outstanding balances related to bank deposits, short-term +investments, such as the ESI debt securities, and financings. + 7 +Portugal Telecom’s then CFO presented a revised report to Portugal Telecom’s +executive committee on July 2, 2014. + + In 2004, the executive committee delegated the authority to Portugal Telecom’s CEO +and CFO, among others, to invest surplus treasury amounts by any method that was +legally permitted, with maturities not in excess of 180 days. Although the investments +in GES securities typically were on a short term basis (less than 180 days), the +investments were successively rolled over. As a result, the successive periods during +which money was invested exceeded the established limit of 180 days. + + In 2010, Portugal Telecom implemented procedures and internal control mechanisms to +ensure identification, approval, and disclosure of transactions with qualified +shareholders such as BES and their related entities. Such transactions, if over +€100,000, were to be approved only after a prior favorable opinion of its audit +committee had been obtained. Such transactions were further subject to approval by its +board of directors if the aggregate value exceeded €1,000,000. The procedures were +updated in 2011 to exempt transactions undertaken at market terms, although Portugal +Telecom had no procedures to ascertain whether transactions were at market terms. As +a result, transactions with GES entities were never subjected to review by Portugal +Telecom’s audit committee or approval by its board of directors. + + Portugal Telecom failed to implement controls and procedures to ensure compliance +with its credit risk management policy, which limited its short-term investments to +reputable financial institutions and diversified counterparties. For example, Portugal +Telecom performed no credit risk analysis before investing in the debt of GES entities. +Portugal Telecom also failed to perform any market consultations. + + Many ESI investments were made informally and without evidence concerning who +made the investment decision or who authorized the investment. Moreover, PwC +identified investments in ESI bonds for which term sheets and/or prospectuses were +received only after the investment; for other ESI bonds, supporting documents lacked +relevant information, such as interest rates and maturity dates, or were not signed by the +issuer. + + In May 2013, Portugal Telecom issued notes in the aggregate amount of €1,000 million +at a fixed rate of 4.625% and maturing on May 8, 2020, €500 million of which was +used to subscribe to ESI bonds even though Portugal Telecom’s internal policies +authorized the investment of “surplus treasury amounts” only. + + Portugal Telecom had no controls in place to assess whether short-term investments +were impaired. + +23. In July and August 2014, Portugal Telecom’s audit committee identified many of +these same weaknesses and further concluded that the company had failed to comply with its own +credit risk management policies regarding diversification and counterparties. Specifically with + 8 +respect to counterparties, the audit committee found that short-term investments were improperly +made with non-financial holding companies, whose “good market reputation was not adequately +evidenced.” The audit committee also concluded that Portugal Telecom’s internal controls manual +lacked specific procedures relating to investments in short-term securities. + +Violations + +24. As a result of the conduct described above, Portugal Telecom violated Section 13(a) +of the Exchange Act and Rules 12b-20, 13a-1, and 13a-16 thereunder, which require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission +information, documents, and annual 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. + +25. As a result of the conduct described above, Portugal Telecom violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of their assets. + +26. As a result of the conduct described above, Portugal Telecom violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are +executed in accordance with management’s general or specific authorization; and (ii) transactions +are recorded as necessary to permit preparation of financial statements in conformity generally +accepted accounting principles or any other criteria applicable to such statements, and 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, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Portugal Telecom 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-16 thereunder. + +B. Respondent Portugal Telecom shall, within 10 days of the entry of this Order, pay a +civil money penalty in the amount of $1,250,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +C. Payment must be made in one of the following ways: + 9 + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Portugal Telecom 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 Commission, Los Angeles +Regional Office, 444 South Flower Street, Suite 900, Los Angeles, California 90071. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3800.txt b/raw/aaer/2016/AAER-3800.txt new file mode 100644 index 0000000000000000000000000000000000000000..b4d9d6307fdf85d4e7578e12f44631ba344d4c2a --- /dev/null +++ b/raw/aaer/2016/AAER-3800.txt @@ -0,0 +1,302 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78825 / September 13, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3800 / September 13, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17535 + + +In the Matter of + +Jun Ping Zhang, + +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 Jun Ping Zhang (“Ping” 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, Making Findings, +and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns violations of the anti-bribery, books and records, and internal +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Jun Ping Zhang (“Ping”), a +United States citizen and former Chairman and CEO of Harris Corporation’s (“Harris”) wholly +owned, China-based subsidiary Hunan CareFx Information Technology, LLC (“CareFx China”). +Ping violated the anti-bribery provisions of the FCPA by facilitating an ongoing bribe scheme at +CareFx China whereby illegal gifts were given to Chinese government officials to obtain and retain +business. In so doing, Ping violated, and caused Harris to violate, the books and records provisions +of the FCPA by knowingly allowing and facilitating the entry of false information in CareFx +China’s books and records, thereby circumventing Harris’s system of internal accounting controls. +Respondent + +2. Jun Ping Zhang, age 50, is a United States resident and citizen. Between April +2011 and July 2012, Ping was employed at Harris. For the bulk of this time period, Ping served as +both Harris’s Vice President of Technology and CareFx China’s Chairman and CEO. However, in +April 2012, Harris relieved Ping of his duties as Chairman and CEO of CareFx China, and later +terminated his services at Harris in July 2012. +Relevant Entities + +3. Harris Corporation is a Delaware corporation with its headquarters in Melbourne, +Florida. Harris is an international communications and information technology company that +provides services to both government and commercial markets in more than 125 countries. +Harris’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and is listed on the New York Stock Exchange. +4. CareFx Corporation (“CareFx”) was a wholly-owned subsidiary of Harris that +delivered interoperability workflow solutions for primarily government healthcare providers in +China. Before Harris acquired CareFx in April 2011, CareFx had been a privately-held +corporation based in Scottsdale, Arizona. On December 17, 2011, Harris dissolved CareFx as a +separate business entity. Before the dissolution, Harris consolidated CareFx’s books and records +into its financial statements. CareFx’s revenues accounted for less than 1% of Harris’s gross +revenues. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +5. Hunan CareFx Information Technology, LLC (“CareFx China”) was registered +by CareFx as a Chinese legal entity in April 2008 to develop software in support of CareFx’s +operations in the United States. In late 2009, CareFx China also began to pursue opportunities to +sell its electronic medical records software in China. CareFx China’s customers were primarily +Chinese state-owned hospitals and local Chinese Departments of Health. After the acquisition of +CareFx, Harris operated CareFx China as a wholly-owned subsidiary of CareFx and consolidated +CareFx China’s books and records into its financial statements through CareFx. In September +2012, Harris sold all of CareFx China’s outward facing operations. On June 12, 2015, Harris +terminated all employees in CareFx China and no longer has any active China-based business +operations. +Facts + +6. Harris acquired CareFx in April 2011. At that time, Ping was CareFx’s Executive +Vice President and Chief Technology Officer. He also served as the Chairman and CEO for +CareFx China. After the acquisition, Ping’s title at Harris was Vice President of Technology. +7. From at least April 2011 through April 2012, Ping facilitated a pattern and practice +at CareFx China of giving gifts to Chinese government officials to obtain or retain a business +advantage. Specifically, Ping directly authorized or indirectly allowed between $200,000 and +$1 million in improper gifts to government officials at Chinese state-owned hospitals and regional +Departments of Health. +8. With Ping’s knowledge and under his management, CareFx China sales staff +submitted bogus expense receipts labeled as “entertainment,” “office expenses,” or +“transportation” to CareFx China’s accounting department for cash reimbursement. CareFx +China’s sales staff used the cash generated from these sham expense reimbursements to pay for +gifts to government officials. Ping and the supervisors that he managed authorized the bogus +expense claims, knowing that they were fabricated and that the “reimbursed” funds were used to +pay for gifts to government officials to influence their decisions to purchase CareFx China’s +products and services. +9. Ping knew that these bogus expenses were improperly recorded in CareFx China’s +books and records as legitimate sales expenses or consulting fees and that, as a result, their true +nature would not be disclosed to Harris. After the Harris acquisition, it was Ping’s responsibility to +review CareFx China’s monthly expense summary reports before they were submitted to Harris. +Ping consistently permitted these monthly expense summary reports to be submitted despite +knowing that they contained false information. By doing so, Ping enabled CareFx China to cloak +its illicit gifts to government officials in the guise of legitimate business expenses and, thereby, +hide the practice from Harris. +10. Moreover, Ping did not disclose this bribery scheme to Harris’s attorneys during +the pre-acquisition due diligence process. Ping failed to disclose to Harris any information about +the improper gifts or the use of bogus expense invoices used to pay for them. In addition, Ping +4 + +cautioned employees not to give gifts that were too large and told them not to get caught. Harris +nonetheless discovered the illicit conduct at CareFx within a few months of the acquisition. +11. Although Ping did not need to authorize every payment (sales staff had blanket +approval for smaller gifts), he was aware that CareFx sales staff were giving gifts to government +officials, and he authorized several of them. +12. On March 23, 2011, a CareFx China sales manager sent an email, on which Ping +was copied, to other managers requesting approval for 20-30,000 Yuan (approximately $3,000 to +$4,600) to buy the director of Zhongnan Hospital of Wuhan University (“Zhongnan Hospital”) +replacements for his recently stolen laptop, cell phone, and camera. The sales manager noted that +“if we don’t do this, sooner or later some other company will. This is how the business +environment is in China.” The sales manager further stated that some of the funds would also be +used to cover the vacation travel of other high-level staff at Zhongnan Hospital. Ping responded to +the email that same day with the message “You are doing a great job. This is very exciting. +Thanks.” On April 19, 2011, the sales manager submitted a reimbursement form for 30,000 Yuan, +(approximately $4,600), which included a note stating that Ping and another manager had +authorized the claim and which falsely characterized the expenses as “business meeting receipts.” +This amount was subsequently increased to 36,100 Yuan (approximately $5,600), on July 21, +2011, to include additional funds to cover vacation travel and entertainment expenses for several +Zhongnan Hospital government officials. On August 31, 2011, CareFx China incorrectly recorded +these illicit gifts on its books and records as “office expenses” and “conference expenses.” In +August and December 2011, CareFx China signed contracts with Zhongnan hospital worth +approximately $165,000. +13. On October 18, 2011, Ping received an email from a CareFx China sales manager +regarding a potential upcoming project for the Nansha District Health Bureau (“Nansha District”). +The sales manager had just purchased meals for several of the Nansha District government +officials responsible for awarding the Nansha District project. He was told that the Nansha +District’s Deputy Director “made a promise [to] let [CareFx China] have the project.” On October +21, 2011, the CareFx China sales manager requested approval of approximately $2,300 for three +iPhones because “the Nan’sha project has currently entered its bidding stage” ” and “we will need +strong cooperation and support from [the Nansha District officials].” On January 2, 2012, Ping +responded to an email regarding the sales staff’s plan to use government officials to manipulate the +Nansha Project bidding process by noting the “great significance of Nansha District Project for our +business.” On January 12, 2012, CareFx China won the Nansha District contract, which was +worth $93,000. +14. On November 17, 2011, Ping authorized a sales manager’s request to “overspend +by several thousand yuan this month” to purchase gifts for “leaders in the Health Department” and +“hospital leaders.” +15. On December 25, 2011, Ping received a request from a CareFx China sales member +for approval of approximately $2,600 to pay for gifts, shopping cards, and entertainment for +government officials at the Yuelu District Health Bureau. On December 26, 2011, Ping instructed +5 + +his second in command, CareFx China’s Executive Deputy Manager, to “please solve this +problem.” +16. On December 30, 2011, CareFx China’s sales director requested $6,500 to provide +“bonuses” to government officials at several hospitals and health offices in the Hubei Province. +On December 31, 2011, Ping instructed the sales director to discuss the amounts with Ping’s +second in command. +17. On January 9, 2012, Ping authorized $775 in gifts to the Director and Vice Director +of the Shanghai Shenkang Hospital Development Center, who were “responsible for the +government’s major projects in 2012.” +18. In total, CareFx China employees made approximately $200,000 to $1 million in +improper gifts to Chinese government officials between April 2011 and April 2012. These +payments were incorrectly recorded in CareFx China’s books as legitimate sales expenses and +consulting fees and were subsequently consolidated into Harris’s financial statements. CareFx +China sales staff made these gifts to Chinese government officials who ultimately awarded CareFx +China over $9.6 million in contracts with state-owned entities. +Legal Standards and Violations +19. 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. +20. Section 30A of the Exchange Act sets forth the anti-bribery provisions of the +FCPA. It prohibits an issuer, or any officer, director, employee or agent of such issuer or any +stockholder thereof acting on behalf of such issuer from using the “mails or any means or +instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to +pay, or authorization of the payment” of money to any foreign official for purposes of influencing +any act or decision of such foreign official in order to assist the issuer in obtaining or retaining +business. +21. As a result of the conduct describe above, Ping violated Section 30A of the +Exchange Act. Ping, in his capacity as Vice President of Technology for Harris, and Chairman and +CEO of CareFx China, violated Section 30A when he knowingly facilitated and authorized the +giving of improper gifts to Chinese government officials in an effort to obtain and retain business. +Ping’s corrupt intent is evidenced by his concealment of the bribe scheme from Harris. +22. 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. +6 + +23. As a result of the conduct described above, Harris violated the FCPA’s books and +records provisions by incorporating CareFx China’s false reimbursement claims into Harris’s +books and records. Harris’s books and records violations are evidenced by the mischaracterization +in CareFx China’s general ledger of the illicit payments to government officials as legitimate sales +expenses and consulting fees. +24. Ping caused Harris to violate Section 13(b)(2)(A) of the Exchange Act. Under +Ping’s watch and with Ping’s approval, Harris’s wholly-owned subsidiary, CareFx China, made +improper payments to government officials at Chinese state-owned health-care providers and +improperly recorded these payments as legitimate sales expenditures and consulting fees. +Accordingly, Ping caused Harris’s failure to make and keep accurate books, records, and accounts, +as required by Section 13(b)(2)(A) of the Exchange Act. +25. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly +circumvent or knowingly fail to implement a system of internal accounting controls or knowingly +falsify any book, record or account of an issuer described in Section 13(b)(2) of the Exchange Act. +Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or causing +to be falsified any book, record, or account subject to Exchange Act Section 13(b)(2)(A). +26. As a result of the conduct described above, Ping violated Section 13(b)(5) of the +Exchange Act and Rule 13b2-1 thereunder. Ping knowingly permitted Harris’s books and records +to be falsified by facilitating a scheme to hide illicit gifts to Chinese government officials to be +financed through the submission and approval of fabricated expense reimbursement requests. Ping +also knowingly circumvented Harris’s system of internal controls. As the top manager of CareFx +China, Ping was responsible for maintaining and ensuring compliance with Harris’s internal +accounting controls. Instead, Ping knowingly circumvented Harris’s system of controls by +permitting the submission of expense reports that contained fabricated expense claims. Ping was +Harris’ gatekeeper at CareFx China, but he nonetheless authorized false expense claims that he +knew were going to be used to provide gifts to government officials. Moreover, Ping helped his +subordinates at CareFx China hide the bribe scheme from Harris auditors and employees. +Accordingly, Ping violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. +Findings +27. Based on the foregoing, the Commission finds that Ping violated Sections 30A and +13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and caused violations of Section +13(b)(2)(A). +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Ping’s Offer. + + Accordingly, it is hereby ORDERED that: + +7 + +A. Pursuant to Section 21C of the Exchange Act, Respondent Ping shall cease and +desist from committing or causing any violations and any future violations of Sections 30A, +13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rule 13b2-1. +B. Respondent shall, within thirty (30) days of the entry of this Order, pay a civil +penalty of $46,000 to the Securities and Exchange Commission for transfer to the general fund of +the United States treasury in accordance with Exchange Act Section 21F(g)(3). If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +(1) 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 Ping +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 Ansu Banerjee, Assistant Regional Director, +Los Angeles Regional Office, United States Securities and Exchange Commission, 444 South +Flower Street, Suite 900, Los Angeles, CA 90071. + +8 + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + +By the Commission. + + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3801.txt b/raw/aaer/2016/AAER-3801.txt new file mode 100644 index 0000000000000000000000000000000000000000..eb49cf7092f3d23f2105e0ab1ddf06409626dafe --- /dev/null +++ b/raw/aaer/2016/AAER-3801.txt @@ -0,0 +1,364 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10211 / September 16, 2016 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78864 / September 16, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3801 / September 16, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17546 +In the Matter of +SCOTT M. DITTMAN, CPA, +Respondent. + + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C, 15(b) AND 21C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER AND NOTICE OF +HEARING +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest that public administrative and cease-and-desist proceedings be, and hereby +are, instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections +4C,1 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 Practice2 against Scott M. Dittman (“Respondent”). + +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 + + + + +2 + +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Administrative and Cease-and-Desist Proceedings, Pursuant to Section 8A of the +Securities Act of 1933, Sections 4C, 15(b) and 21C of the Securities Exchange Act of 1934, and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order and Notice of Hearing (“Order”), as set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +Summary +From approximately April 2011 to May 2014 (the “relevant period”), Fusion Pharm, Inc. +(“FSPM”), through its chief executive officer (“CEO”), president and sole director Scott M. +Dittman, and its undisclosed de facto officer and control person William J. Sears, engaged in an +approximately $12.2 million fraudulent scheme in violation of the registration and antifraud +provisions of the federal securities laws. The scheme essentially involved four steps. First, +utilizing backdated convertible notes and preferred FSPM stock, FSPM issued common stock to +Microcap, Bayside and Meadpoint, all entities controlled by Sears. Second, Sears, through these +entities, sold the FSPM stock into the market. Third, Sears transferred over $1 million of the +proceeds from the illegal stock sales back to FSPM, where the money was fraudulently recognized +and reported as revenue. Fourth, FSPM issued press releases and financial reports claiming the + +unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations thereunder. +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may…deny, temporarily or permanently, the privilege of +appearing or practicing before it…to any person who is found…to have willfully +violated, or willfully aided and abetted the violation of any provision of the +Federal securities laws or the rules and regulations thereunder. +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + + + +3 + +false revenues, and failed to disclose Sears’ identity, role, and background in FSPM’s quarterly and +annual reports posted on the OTC Markets Group, Inc.’s website. +Respondent +1. Scott M. Dittman, age 47, is a resident of Boyertown, Pennsylvania. During the +relevant period, Dittman was a founder, FSPM’s CEO, president, and sole director. Dittman +signed and certified FSPM’s unaudited quarterly and annual financial statements posted on the +OTC website. Dittman was licensed as a certified public accountant (“CPA”) in California in +1995. His CPA license was cancelled in April 2002, five years after it expired in 1997. +Other Relevant Entities and Person +2. Fusion Pharm, Inc. (“FSPM”) is a Nevada corporation with its principal offices in +Denver, Colorado. The company is focused on the development, production and sales of the +“patent pending PharmPods cultivation container system,” which are refurbished shipping +containers used primarily to grow cannabis. FSPM has never registered an offering of securities +under the Securities Act or a class of securities under the Exchange Act. Beginning on April 4, +2011, the company’s stock was quoted on OTC Link (previously “Pink Sheets”) operated by OTC +Markets Group, Inc. (“OTC Link”) under the symbol FSPM. Following the Commission’s 10- +business day trading suspension in May 2014, FSPM is currently listed as a Caveat Emptor/Grey +Market OTC stock. + +3. William J. Sears, age 50, is a resident of Thornton, Colorado. During the relevant +period, Sears was a founder, de facto executive officer and undisclosed control person of FSPM. +In 2007, Sears was convicted (via guilty plea) of one count of conspiracy to commit securities +fraud and commercial bribery and one count of securities fraud. United States v. Sears, Case No. +04-cr-556-swk (S.D.N.Y.). + +4. Microcap Management LLC (“Microcap”) is a Nevada limited liability +company, with its primary business address listed as Sears’ home address in Thornton, Colorado. +Sears controls Microcap and is listed as the Manager with the Nevada Secretary of State. + +5. Bayside Realty Holdings LLC (“Bayside”) is a Nevada limited liability company, +with its primary business address listed as the home address of Sears’ mother in New Bern, North +Carolina. During the relevant period, Sears controlled Bayside. + +6. Meadpoint Venture Partners, LLC (“Meadpoint”) is a Nevada limited liability +company that shared a primary business address with FSPM’s prior warehouse in Denver, +Colorado. Meadpoint was purportedly FSPM’s exclusive distributor of PharmPods during the +relevant period. From 2011 through 2013, Sears represented himself as the “Managing Member” +of Meadpoint. Dittman was a shareholder and Internal Revenue Service Form 1099 employee of +Meadpoint. + + + + +4 + +Facts +Background +7. In late 2010, Dittman and Sears took over an existing public company, changing its +name to FSPM in March 2011. Dittman was listed as the CEO of the company, but Sears acted as +an undisclosed executive officer. Among other things, Sears worked at FSPM from its inception, +appeared on non-public company documents as an officer, drew a paycheck, and handled many +day-to-day responsibilities usually reserved for a company officer. Although FSPM was +ostensibly in the business of selling PharmPods, it had almost no revenue to fund its operations. +Instead, from 2011 through 2013, FSPM was funded almost entirely through illegal sales of FSPM +stock. +8. Initially, FSPM was funded through the sale of stock that Sears received in the +name of Microcap, both from FSPM’s predecessor entity and as part of the transition to FSPM. In +order to make Sears’ sales of FSPM stock appear legitimate, and as part of the fraudulent scheme, +Sears and Dittman made it falsely appear that Sears, through Bayside and Meadpoint, had loaned +money to FSPM. Once Sears and Dittman had exhausted these funds, however, Sears then +converted the fake “debt” owed to Bayside and Meadpoint to unrestricted FSPM shares, which +Bayside and Meadpoint then illegally sold into the market. +9. As part of the fraudulent scheme, Sears and Dittman funneled approximately $1.3 +million from the illegal FSPM stock sales back into FSPM. In turn, FSPM falsely claimed the +stock sale proceeds as revenue from sales of PharmPods, thereby increasing FSPM’s stock price +and volume and making the fraud even more profitable. As part of the scheme, Sears and Dittman +hid Sears’ role in FSPM so as to claim falsely that Sears’ entities were not affiliates of FSPM +(which they were), thus facilitating Sears’ illegal sales of unrestricted FSPM stock. They also +failed to disclose FSPM’s purported transactions with Sears’ entities as related party transactions, +which they were based on Sears’ role in FSPM. +Dittman and Sears Funnel Shares Into Microcap, Bayside and Meadpoint +10. In 2009, Microcap received common shares from FSPM’s predecessor company for +stock promotion work. In 2010, Microcap received preferred shares as part of the transfer of the +predecessor company to Sears and Dittman. In 2011, Microcap purchased FSPM common shares +from an individual FSPM shareholder. +11. In June 2012, Sears and Dittman prepared fraudulent non-convertible promissory +notes and credit lines between FSPM and Bayside and between FSPM and Meadpoint. The +Bayside non-convertible note and credit line agreement, with a credit limit of $275,000, was +backdated to May 2, 2011. The Meadpoint non-convertible promissory note and credit line +agreement, with a credit limit of $200,000 was backdated to June 15, 2011. + + + + +5 + +12. In November/December 2012, the Bayside and Meadpoint notes were re-drafted +as fraudulent convertible notes. The notes were changed from non-convertible to convertible in +order to obtain more unrestricted FSPM stock to sell illegally into the market and to investors, +and in turn to fund FSPM. Without changing the notes to convertible notes, FSPM would not +have been able to issue purportedly unrestricted shares to Sears’ entities. The Bayside note, +backdated to May 2, 2011, was a 10% Convertible Promissory Note and Line of Credit +Agreement in the amount of $275,000, with a conversion rate of $0.01/share. The Meadpoint +convertible note, this time backdated to December 8, 2011, was a 10% Convertible Promissory +Note in the amount of $88,000, with a conversion rate of $0.01/share. +Microcap, Bayside and Meadpoint Illegally Sell Shares Into The Market +13. From approximately April 28, 2011 through May 8, 2014, Sears, through his +entities Microcap, Bayside, and Meadpoint, illegally sold over $12.2 million of restricted FSPM +stock. +14. Between approximately April 2011 and December 2012, Microcap sold +approximately 735,000 shares of unregistered FSPM stock. Microcap’s sale of these +unregistered shares was based on false statements to brokers and to FSPM’s stock transfer agent +that Sears had no role at or control of FSPM, and therefore that Microcap was not an affiliate of +FSPM. Almost all of the funds flowing into FSPM’s bank account in 2011 and 2012, either +directly from Microcap or funneled first through Bayside, Meadpoint, or another Sears entity, +are traced back to Microcap’s stock sales. +15. Between approximately February 2013 and April 2013, pursuant to the Bayside +convertible note, Bayside converted debt into 140,000 FSPM common shares and sold them +into the market. In order to facilitate the sales, Sears and Dittman made false statements to +brokers and the transfer agent about Bayside’s purported non-affiliate status. In addition to the +consequences the fraudulent Bayside convertible promissory note had on Bayside’s ability to +receive unrestricted shares, Bayside’s true affiliate status also meant that Bayside needed to +abide by certain volume restrictions, which it failed to do. Bayside sold the remainder of its +note to an investment group for $250,000 and, based on more false statements from Dittman +and Sears, the investors sold shares prior to the expiration of the one-year holding period +required by Securities Act Rule 144 [17 C.F.R. § 230.144]. Bayside’s proceeds from its FSPM +stock sales, as well as the payment from the investors, were ultimately funneled to FSPM using +Meadpoint as an intermediary. FSPM used proceeds from the Bayside sales of stock and debt +to fund its 2013 operations. +16. Between approximately March 2013 and April 2014, pursuant to the Meadpoint +convertible note, Meadpoint converted $42,450 of debt into 4.245 million FSPM common +shares, and then sold into the market approximately 3.2 million of those shares. In order to +facilitate the sales, Sears and Dittman made false statements to brokers and the transfer agent +about Meadpoint’s purported non-affiliate status. In August 2013, Meadpoint also converted + + + + +6 + +$15,000 of fake debt into 1.5 million shares and then sold them to three investors. The investors +received unrestricted shares on the basis of, again, Dittman’s and Sears’ false representations of +Meadpoint’s non-affiliate status. In 2013, Meadpoint’s stock sale proceeds and payments from +the investors funded FSPM operations. In 2014, Meadpoint’s proceeds from its note with +FSPM were $9.9 million. While some of this amount was transferred to FSPM, the majority, +$8.7 million, was seized by criminal authorities in May 2014. +FSPM Falsely Reports Proceeds From Stock Sales As Revenue and Issues +Additional False and Misleading Statements +17. While Dittman and Sears were facilitating the transfer of unrestricted FSPM +shares to Sears through his entities, Sears illegally sold those shares into the market and round- +tripped some of the proceeds back to FSPM. FSPM, through Dittman and Sears, reported false +revenues and made false statements about sales of PharmPods in press releases, which in turn +maintained and/or increased FSPM’s stock price and volume, and allowed Sears to sell his +FSPM stock into the market. The false financial statements and revenue reported by FSPM were +included in: (1) FSPM’s 2011 annual report (including its financial statements and notes to the +financial statements), signed by Dittman and posted on the OTC Markets Group Inc.’s website; +(2) FSPM’s 2012 annual report, signed by Dittman and posted on the OTC website; and (3) +FSPM’s 2013 annual report, signed by Dittman and posted on the OTC website. +18. FSPM also claimed to have sold PharmPods to certain Sears’ entities, including to +Meadpoint and another Sears entity, but failed to disclose these transactions, as well as the +Bayside and Meadpoint notes, as related party transactions. FSPM’s Information and Disclosure +Statement for the period ended September 30, 2011, and its 2011 and 2012 annual reports, all +signed by Dittman and posted on the OTC website, falsely stated there were no related party +transactions. Further, none of FSPM’s other quarterly reports or its 2013 annual report posted on +the OTC website disclosed related party transactions.. + +Violations +19. As a result of the conduct described above, Respondent willfully violated Sections +5(a) and 5(c) of the Securities Act. Section 5(a) of the Securities Act prohibits the direct or indirect +sale of securities through the mail or interstate commerce unless a registration statement is in +effect. Section 5(c) prohibits the direct or indirect offer for sale of securities through the mail or +interstate commerce unless a registration statement has been filed. +20. As a result of the conduct described above, Respondent willfully violated Sections +17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. +Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder prohibit fraudulent conduct in the offer or sale of securities and in connection with the +purchase or sale of securities. + + + + +7 + +21. As a result of the conduct described above, Respondent willfully aided and abetted +and caused FSPM’s violations of Sections 5(a), 5(c) and 17(a) of the Securities Act and Section +10(b) of the Exchange Act and Rule 10b-5 thereunder. +22. Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in pertinent part, that “[t]he Commission may censure a person or +deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to +any person who is found . . . [t]o have willfully violated, or willfully aided and abetted the +violation of, any provision of the Federal securities laws or the rules and regulations +thereunder.” 17 C.F.R. § 201.102(e)(1)(iii). As a result of the conduct described above, +Respondent willfully violated, and willfully aided and abetted the violation of, the +aforementioned provisions of the Securities Act and Exchange Act within the meaning of +Section 4C(a)(3) and Rule 102(e)(1)(iii). +Plea Agreement +23. Respondent has entered into a written agreement to plead guilty to criminal conduct +relating to the findings in the Order. Specifically, in United States v. William Sears and Scott +Matthew Dittman, 16-CR-301-WJM (D.Colo.), Respondent agreed to plead guilty to conspiracy +[18 U.S.C. § 371] to commit violations of Section 5(a) of the Securities Act [15 U.S.C. § 77e(a)], +violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder +[17 C.F.R. § 240.10b-5],wire fraud [18 U.S.C. § 1343], and mail fraud [18 U.S.C. § 1341]. +IV. +Pursuant to this Order, Respondent agrees to additional proceedings in this proceeding to +determine what, if any, disgorgement pursuant to Section 8A(e) of the Securities Act and Section +21C(e) of the Exchange Act and/or civil penalties pursuant to Section 8A(g) of the Securities Act +and Section 21B(a) of the Exchange Act against Respondent are in the public interest. In +connection with such additional proceedings: (a) Respondent agrees that he will be precluded from +arguing that he did not violate the federal securities laws described in the Order; (b) Respondent +agrees that he may not challenge the validity of the Order; (c) solely for the purposes of such +additional proceedings, the findings of the Order shall be accepted as and deemed true by the +hearing officer; and (d) the hearing officer may determine the issues raised in the additional +proceedings on the basis of affidavits, declarations, excerpts of sworn deposition or investigative +testimony, and documentary evidence. 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). + + + + +8 + +V. +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondent’s Offer: +Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C, 15(b) and 21C of +the Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice it is hereby ORDERED, +effective immediately, that: +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder. + +B. Respondent be, and hereby is: +barred from participating in any offering of a penny stock, including: +acting as a promoter, finder, consultant, agent or other person who +engages in activities with a broker, dealer or issuer for purposes of the +issuance or trading in any penny stock, or inducing or attempting to induce +the purchase or sale of any penny stock. +C. Respondent is prohibited from acting as an officer or director of any issuer that +has a class of securities registered pursuant to Section 12 of the Exchange Act or that is +required to file reports pursuant to Section 15(d) of the Exchange Act. + +D. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, that +a public hearing for the purpose of taking evidence on the questions set forth in Section IV +hereof shall be convened at a time and place to be fixed, and before an Administrative Law +Judge to be designated by further order as provided by Rule 110 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.110, following the entry of a final judgment against the last remaining +defendant(s) in United States v. William Sears and Scott Matthew Dittman, 16-CR-301-WJM +(D.Colo.) (the “Related Actions”). +If Dittman fails to appear at a hearing after being duly notified, Dittman 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), +221(f), and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.221(f), +and 201.310. + + + + +9 + +This Order shall be served forthwith upon Dittman personally or by certified mail. +IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, that +the Administrative Law Judge shall issue an initial decision no later than 120 days from the date +of the entry of a final judgment in the Related Actions. +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, except +as witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not +deemed subject to the provisions of Section 553 delaying the effective date of any final +Commission action. +By the Commission. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3802.txt b/raw/aaer/2016/AAER-3802.txt new file mode 100644 index 0000000000000000000000000000000000000000..2be7aff78b8d7180bef9186988fa57c1ae0413cc --- /dev/null +++ b/raw/aaer/2016/AAER-3802.txt @@ -0,0 +1,721 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78872 / September 19, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3802 / September 19, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17552 + + +In the Matter of + +ERNST & YOUNG LLP AND +GREGORY S. BEDNAR, CPA, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C(a)(2)1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii)2 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 wil lfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the rules +and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found . . . to have engaged in unethical or improper professional +conduct. + + +2 +the Commission’s Rules of Practice against Ernst & Young LLP (“EY” or the “Firm”)3 and Gregory +S. Bednar (“Bednar” and, together with EY, the “Respondents”). + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers of +Settlement (each, an “Offer” and, together, 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 finds that: 4 + +A. SUMMARY + + This matter arises from an inappropriate close personal relationship between Bednar, a former +EY partner, and the former chief financial officer of a New York-based EY audit client (“Issuer”) that +caused EY to violate the auditor independence rules in 2012, 2013, and 2014. Other members of EY’s +audit team were aware of Bednar’s relationship with the CFO, and they and members of EY +management failed to act on red flags that should have alerted them to the nature and extent of the +relationship. + +Despite this relationship, EY represented that it was independent in audit reports issued on +the Issuer’s financial statements, which were included or incorporated by reference in public filings +with the Commission. By so doing, EY violated Rule 2-02(b)(1) of Regulation S-X and caused the +Issuer to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Bednar aided and +abetted and caused EY’s violation of Rule 2-02(b)(1) of Regulation S-X and caused the Issuer to +violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. EY’s and Bednar’s conduct +also constituted improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + +3 Contemporaneously with this Order, the Commission is issuing In the Matter of Ernst & Young LLP, Robert J. +Brehl, CPA, Pamela J. Hartford, CPA, and Michael T. Kamienski, CPA, Exchange Act Rel. No. 78873 (September +19, 2016). +4 The findings herein are made pursuant to EY’s and Bednar’s Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +B. RESPONDENTS + +1. EY is a professional services firm headquartered in New York, New York. EY +provides auditing, consulting, and tax services to various entities, including companies with securities +registered with the Commission and traded in U.S. markets. EY served as the Issuer’s auditor from +1996 to August 2015. + +2. Bednar, age 56, resides in Glenview, Illinois. Bednar is an accountant and CPA +licensed in Illinois since September 1994. Bednar was employed by EY from August 1982 until June +2015, when he was asked by EY to leave the firm. Bednar served as EY’s coordinating partner on the +Issuer’s audit team from May 2010 to March 2015. + +C. RELEVANT ISSUER AND INDIVIDUAL + +3. During the relevant period of time, the Issuer’s securities were registered under +Section 12(b) of the Exchange Act and were traded on the New York Stock Exchange. The Issuer +filed annual reports on Form 10-K with the Commission. + +4. The CFO, age 55, is an accountant and CPA licensed in New York since 1987. The +CFO served as the Issuer’s chief financial officer for over two decades, until he retired in 2015. Prior to +working for the Issuer, the CFO was employed as an accountant at an auditing firm. + +D. FACTS + +Background of EY’s Relationship with the Issuer + +5. EY served as the Issuer’s auditor from 1996 until August 2015, when the Issuer +terminated EY. In 2010, the Issuer, including the CFO, expressed dissatisfaction with certain aspects +of EY’s performance. As a result, in 2010, the Issuer informed EY that it was considering changing +audit firms. + +6. In response, EY presented the Issuer with a replacement audit team led by Bednar, +who would serve as coordinating partner. “Coordinating partner” was the term used by EY to +describe the lead partner on this audit engagement. The Issuer’s audit committee decided to continue +to retain EY as its auditor. + +7. The senior EY partner who helped select Bednar to serve as coordinating partner on +the replacement audit team told Bednar at the outset that the Issuer was a “troubled account.” +Accordingly, Bednar understood that his responsibilities as coordinating partner would include +“developing” and “mending” EY’s relationship with the Issuer. + +8. The replacement audit team also included engagement partners who reported to +Bednar. The engagement partners were responsible for day-to-day oversight of the audit, while +Bednar had overall responsibility for the audit and focused on the “relationship piece” with the Issuer. + +4 +Bednar and the engagement partners assumed their new roles on the Issuer’s engagement team in or +around May 2010. + +EY’s Relevant Independence-Related Policies + +9. At all relevant times, EY maintained policies concerning independence; client-related +expense incurrence and reimbursement; travel; and gifts. EY professionals, including Bednar, received +training on these policies. + +10. Among other things, EY’s internal policies in place during the relevant time period +required all activities with clients to have a “valid business purpose requiring an expectation that +meaningful business discussions or activity will take place.” The policies forbade certain EY +employees, including partners like Bednar, from giving gifts or “hospitality” to audit clients, or +receiving gifts or “hospitality” from clients, “that are not commensurate with the normal courtesies of +business and social life.” + +11. Additionally, EY’s independence policies acknowledged that close personal +relationships between engagement team members and audit client employees in an accounting or +financial reporting oversight role could create “independence issues from an appearance perspective.” +EY’s policies also prohibited partners from taking vacations with audit client employees, and warned +that the amount of leisure time spent by a partner with an audit client employee in a financial reporting +oversight role should be limited. + +Bednar’s Relationship with the CFO and the CFO’s Family + +12. Bednar repeatedly violated the above policies throughout 2012, 2013, and 2014 by +developing and maintaining a close personal relationship with the CFO and members of the CFO’s +family that was inappropriate for an independent auditor. Bednar spent extensive leisure time, +including frequent overnight, out-of-town trips, with the CFO and his family. In all, Bednar and the +CFO took at least seven out-of-town trips together during the relevant period, all of which were social +in nature and did not have a valid business purpose, as that phrase was defined in EY’s independence +and hospitality and gifts policies. In addition to these trips, Bednar and the CFO attended sporting +events and socialized near the Issuer’s headquarters in the greater New York City area to an excessive +degree. Bednar also gifted tickets to sporting events and other things of value to the CFO. + +13. Bednar, sometimes accompanied by his wife, stayed overnight as a guest at the CFO’s +primary residence in New York and his vacation home in South Carolina on numerous occasions. +Likewise, on one occasion, the CFO stayed overnight at Bednar’s apartment in Chicago, Illinois, and +on one other occasion, the CFO and his son stayed overnight in a guest apartment in Bednar’s +apartment building. + +14. These frequent social events, gifts, and overnight, out-of-town trips took place during +each of the 2012, 2013, and 2014 audit and professional engagement periods and, in the aggregate, +violated EY policy. + + +5 +15. For example, in January 2012, Bednar gifted tickets to two successive professional +football games to the CFO for he and his family to attend. Neither Bednar nor any other EY +employee attended these games with the CFO and his family. + +16. The following week, Bednar and his wife took a trip to Green Bay, Wisconsin with the +CFO and the CFO’s son to attend a professional football playoff game. Bednar purchased the tickets +for the group, and they stayed in the same hotel near Green Bay. + +17. Two months later, in March 2012, Bednar, who was in South Carolina for a separate +golf outing, visited the CFO at the CFO’s brother-in-law’s vacation home in Hilton Head. Bednar +stayed overnight in that vacation home, where the CFO was also staying. + +18. In October 2012, the CFO stayed overnight at Bednar’s apartment while on a business +trip to Chicago. Bednar and the CFO then planned a joint overnight trip to Nashville, Tennessee the +following month to, among other things, play golf and attend a professional football game. While the +CFO ultimately cancelled the trip, Bednar and his wife travelled to Nashville and attended the football +game with Bednar’s brother and the CFO’s son, both of whom lived in Nashville. + +19. In April 2013, Bednar, the CFO, and members of their respective families again +traveled to Nashville to celebrate Bednar’s birthday and attend a professional hockey game together. +Later that same month, Bednar and his wife, along with the CFO and his son, traveled to Augusta, +Georgia to attend the Masters golf tournament. Another EY partner also attended this trip. The +Bednars, the other EY partner, the CFO, and the CFO’s son stayed in the same hotel during this trip. + +20. In October 2013, the CFO and his son traveled to Chicago for the purpose of visiting +Bednar and his wife, and attending a professional football game and a golf outing with them. The +CFO and his son stayed overnight in the guest apartment in Bednar’s building during this trip. + +21. In April 2014, Bednar and his wife traveled to South Carolina for the purpose of +spending leisure time and attending a golf tournament with the CFO and his family over Easter +weekend, staying three nights as guests at the CFO’s vacation home. After the trip, Bednar thanked +the CFO and his family for “treating us to such a wonderful time”; the CFO responded, “I can see +many more of these ahead in the coming years . . . we appreciate how generous you are with us as +well.” + +22. In December 2014, Bednar, the CFO, and their respective wives flew to Nashville to +attend a professional hockey game with the CFO’s son, among others. In an email to the CFO and +members of the CFO’s family after the trip, Bednar described the trip as a “Great 24 Hour +Extravaganza,” writing “We had a blast (as usual) being with all of you.” + +23. In or around February 2015, Bednar began planning a second overnight trip to the +Masters golf tournament in April 2015 with the CFO, the CFO’s son, and another EY partner, among +others. Bednar planned to treat the trip in part as a retirement party for the CFO, and intended to +spend approximately $20,000 of his own money to rent three houses in Augusta, Georgia for the trip. +Bednar and his wife expected to spend five nights in Augusta, while other attendees were expected to + +6 +spend three nights. The CFO and the other EY partner did not attend this trip, after EY received a +regulatory inquiry in March 2015 regarding Bednar’s relationship with the CFO. + +24. In addition to these repeated out-of-town trips, Bednar and the CFO attended +sporting events and socialized near the Issuer’s headquarters in the greater New York City area to an +excessive degree. On a number of occasions, Bednar flew to the greater New York City area for the +purpose of attending a sporting event with the CFO and then left without visiting the Issuer’s +headquarters or otherwise performing any audit-related work. On at least two other occasions, Bednar +traveled to the greater New York City area for the purpose of having dinner at the CFO’s home with +the CFO, the CFO’s family, the CFO’s neighbors, and other members of the audit engagement team, +and then left without visiting the Issuer’s headquarters or otherwise performing any audit-related work. + +25. On at least three other occasions, Bednar gifted sports tickets to the CFO, the CFO’s +family, or friends of the CFO’s son for use when Bednar was not present. Bednar also gifted +hundreds of dollars’ worth of sports memorabilia to the CFO. + +26. Bednar’s frequent entertainment of the CFO and his family caused Bednar to incur +significant entertainment, travel, and lodging expenses. In total, Bednar incurred approximately +$109,000 in entertainment-related expenses—meals, sports tickets, and related travel and lodging—in +connection with the Issuer’s 2012, 2013, and 2014 audits. In 2012, he spent approximately $29,545; in +2013, he spent approximately $52,119; and in 2014, he spent approximately $27,333. This level of +entertainment-related spending was not “commensurate with the normal courtesies of business and +social life.” + +27. Bednar obtained most of the sports tickets described above from an EY employee +responsible for procuring tickets for client entertainment. In a few other instances, Bednar purchased +the tickets himself and then sought reimbursement from EY. Bednar entered the other entertainment- +related expenses described above into EY’s Global Time and Expense system for reimbursement. + +28. Bednar charged the entertainment-related expenses described in paragraph 26 above, +with the exception of sports tickets obtained through the EY ticket administrator, to a billable time +code associated with the Issuer, even though many of these expenses personally benefitted himself and +the CFO (and, in some cases, their respective family members). The majority of these entertainment- +related expenses were ultimately billed to the Issuer as audit expenses. Bednar continued to charge +entertainment-related expenses back to the Issuer after EY’s September 2014 Hospitality and Gifts +Global Policy made clear that “reception and entertainment expenses should be charged to non- +billable charge codes, not billable codes.” + +29. Bednar’s relationship with the CFO and the CFO’s family was marked not only by +significant entertainment spending, but also by a close personal friendship. During the relevant period, +Bednar and the CFO exchanged hundreds of personal texts, emails, and voicemails that did not +include meaningful business-related discussions. Bednar and the CFO frequently referred to each +other in emails as a “friend.” The CFO also shared personal information, including sensitive health +information and other information not typically shared with a solely professional colleague, with +Bednar. In 2013, the CFO and his wife invited Bednar to spend Thanksgiving at their home, but +Bednar decided to visit his father instead. + +7 + +EY Failed to Act on Red Flags Regarding Bednar’s Relationship with the CFO + +30. EY partners other than Bednar, including EY partners senior to Bednar, were made +aware of certain facts related to Bednar’s entertainment expenses and his relationship with the CFO +during the relevant time period. + +31. For example, in October 2012, two senior EY partners—one the head of Bednar’s +practice group and Bednar’s immediate manager (“Senior Partner A”), and the other a senior partner +with national management responsibilities (“Senior Partner B”)—learned that Bednar’s expense +spending was “by far the highest in the practice,” after Bednar sought their help in obtaining +reimbursement for certain spousal travel unrelated to the Issuer. Senior Partner B asked Senior +Partner A to “get a better understanding of [Bednar’s] spending . . . and the market impact it’s having.” + +32. Thereafter, Senior Partner A sent Bednar an email with the subject line “Controllable +expenses” that attached a spreadsheet titled “Bednar Q1 FY13.” The spreadsheet reflected total +expenses, across all of Bednar’s audit engagements, of $80,359; $31,852 of these expenses were for +“Entertainment” associated with several clients, including the Issuer. The spreadsheet stated, “The +top Spender in all of FSO ASU [Assurance] – total spend is double the next highest individual.” +Senior Partner A then spoke to Bednar about reducing his expense spending. Bednar claimed that the +large volume of expenses was due in part to the fact that he was catching up on submitting older +expenses. Neither Senior Partner A nor Senior Partner B inquired into whether these levels of +expenditures could suggest a violation of EY’s policies or the existence of an inappropriate personal +relationship with any of Bednar’s audit clients. + +33. In addition, one of the engagement partners on the audit team was aware of at least +four overnight, out-of-town trips that Bednar and the CFO took together, some of which included +members of the CFO’s family. This engagement partner attended one of these trips. + +34. The same engagement partner received information regarding Bednar’s entertainment +spending in connection with the Issuer’s audits. Specifically, in September 2014, a senior Issuer +employee who worked for the CFO asked EY for more detail on the expenses it was billing to the +Issuer. The senior manager on the engagement team sent the Issuer a four-line expense summary +table showing the total amount owed divided into three sub-categories: transportation, lodging, and +meals. The Issuer responded that the table was too summarized and asked for a replacement showing +the expenses incurred by each member of the engagement team. + +35. Bednar, the engagement partner, and the senior manager then reviewed a spreadsheet +showing all of the expenses charged by the engagement team to the 2014 audit code. The spreadsheet +contained four tabs, including a summary tab that broke out the expenses incurred by each +engagement team member into 17 different categories, including “entertainment” and “lodging.” The +summary tab showed that Bednar had already charged more than $18,000 in expenses coded as +“entertainment” to the 2014 audit code, although some of these expenses had in fact been incurred +during the prior audit period. Neither the engagement partner nor the senior manager inquired as to +whether Bednar’s level of entertainment-related spending complied with EY’s independence policy or +alerted others at EY. + +8 + +36. After reviewing this spreadsheet, the engagement team created a new spreadsheet to +provide to the Issuer. As requested, the new spreadsheet broke out the expenses incurred by each +engagement team member across the three categories previously provided: transportation, meals, and +lodging. It also included a fourth category called “Summit,” which referred to an offsite finance +meeting between EY and the Issuer. Expenses classified as “entertainment” expenses in the internal +EY spreadsheet were classified as “meals” in the spreadsheet given to the Issuer. The senior manager +then sent the new spreadsheet to the Issuer. + +37. The Issuer responded with five questions about the expenses, including the following: +“Greg [Bednar] has $32k in expenses, but only $2,400 is the Summit. Seems really high, given he has +not been in [the Issuer’s headquarters] too often over the last few months. What is in here?” The +senior manager forwarded the Issuer’s email to Bednar and the engagement partner, saying, “I’ll work +on the responses but just wanted to share.” The senior manager, however, never responded to the +Issuer, and neither Bednar nor the engagement partner followed up. + +38. In February 2015, the engagement partner and members of EY’s management were +again alerted to Bednar’s excessive client entertainment spending. On February 7, 2015, Bednar wrote +an email to the invitees of the planned April 2015 trip to attend the Masters golf tournament. Among +the recipients was the engagement partner who had reviewed the spreadsheet listing the engagement +team’s (including Bednar’s) expenses five months earlier. After explaining that he was going to rent +three houses for all of the invitees to stay in, Bednar said that he would “pick up the tickets for the +Wednesday round under the guise of this being a ‘business’ meeting.” + +39. On February 12, 2015, Bednar wrote an email to Senior Partner A and another senior +EY partner with regional management responsibilities (“Senior Partner C”) to inform them about the +planned April 2015 trip to the Masters. Bednar explained that he had invited 13 people, including the +CFO, the CFO’s wife, the CFO’s son, the engagement partner, the engagement partner’s spouse, and +other clients; that he had rented three houses for the trip; and that he had decided to turn it into a +client event in addition to celebrating the retirement of the CFO. Bednar asked if EY would help pay +for the tickets, but that he didn’t “want to create an issue if you think it would raise eyebrows.” + +40. Senior Partner C responded by saying that EY would not be able to pay for the tickets, +but thanked Bednar for his “continued focus on building long lasting client relationships.” He then +apologized for not being able to help, writing “it sounds like a great event.” Neither Senior Partner A +nor Senior Partner C questioned Bednar about the level of his expense spending or his relationship +with the CFO, nor did they take any other steps to ensure that Bednar was complying with EY’s +independence policies. + +41. Between 2012 and 2015, EY also had access to certain facts about Bednar’s +entertainment of, and relationship with, the CFO as a result of Bednar’s entertainment expense +submissions to the Firm’s time and expense system. Although some of Bednar’s expense submissions +contained certain incorrect information, these expense submissions, when taken together, constituted +red flags that Bednar was violating EY’s independence and gift and hospitality policies. EY did not, +however, review Bednar’s or other partners’ aggregate entertainment expenses to ensure compliance +with its independence policies during the relevant period. Similarly, while EY generated certain + +9 +expense summaries by region, it did not maintain any systems that would alert the Firm when a +partner’s entertainment expenses reached aberrational levels or were improperly charged to a billable +client account. + +EY’s Independence Procedures Did Not Specifically Inquire +About Close Personal Relationships + +42. During the relevant period, EY maintained or followed policies and procedures +regarding auditor independence. As noted above, EY maintained internal policies regarding auditor +independence and it trained and tested its audit professionals on those policies. EY required audit +engagement teams for public company clients, including the Issuer, to follow certain annual audit +and quarterly review procedures to assess EY’s independence from those audit clients. Generally, +those procedures addressed possible familial, employment, and financial relationships between the +Issuer and EY that are expressly prohibited by the Commission’s auditor independence rules. They +also required each audit engagement team member to certify that he was independent of the audit +client and that he had read, understood, and was in compliance with EY’s policies on independence. + +43. In addition, and outside of procedures that were specific to individual audit clients, +EY required all audit professionals to again certify on an annual basis, and audit professionals at the +level of Manager and above on a quarterly basis, that they read, understood, and were in compliance +with EY’s internal policies on independence. + +44. Although EY’s independence policies recognized that a non-familial close personal +relationship between an engagement team member and a client employee in an accounting or +financial reporting oversight role could present an independence problem, in the context of +assessing its independence from the Issuer, EY never specifically asked members of the engagement +team for the Issuer, or employees who served in accounting or financial reporting oversight roles at +the Issuer, whether they were involved in such a relationship. The individual certifications regarding +independence that engagement team members signed, both those that were specific to the Issuer +and those that were generally applicable, expressly asked about possible employment relationships +between the engagement team member and the Issuer, but they did not similarly ask about possible +close personal relationships between that team member and any employees at the Issuer who were +in accounting or financial reporting oversight roles. + +45. EY’s policies on independence also provided that the lead audit partner on an audit +engagement team bears ultimate responsibility for independence matters related to that engagement +and should consult with EY’s U.S. Independence group regarding threats to independence. Bednar +conducted no such consultations with EY’s U.S. Independence Group regarding his relationship +with the CFO. In addition, in each of years 2012, 2013, and 2014, Bednar certified that he +understood the Firm’s independence policies, had complied with those policies with respect to the +Issuer, and was independent from the Issuer. + +46. Bednar also caused EY to sign the 2012 and 2013 audit reports and the Public +Company Accounting Oversight Board (“PCAOB”) Rule 3526 letters to the Issuer’s audit committee +in 2012 and 2013 that incorrectly certified that EY was not aware of any matters that could bear on its +independence. + +10 + +EY Also Violated the Commission’s Auditor Independence Rules by Failing to Obtain the +Necessary Pre-Approvals to Perform Certain Non-Audit Services for the Issuer + +47. Prior to 2012, EY was engaged by a private company unaffiliated with the Issuer to +perform certain permissible non-audit services. In March 2012, the Issuer acquired the private +company. EY continued to perform these non-audit services for the formerly private company, which +by then had become a subsidiary of the Issuer, in 2012 and 2013. + +48. Under Rule 2-01(c)(7) of Regulation S-X and PCAOB Rule 3525, EY was required to +seek approval from the Issuer’s audit committee to continue performing the permissible non-audit +services. EY did not, however, seek the Issuer’s approval in a timely manner. Furthermore, when EY +did seek the Issuer’s approval for 2012, it also incorrectly sought (and obtained) approval for a multi- +year engagement that included 2013 when, under applicable PCAOB standards, EY should have +returned to the audit committee to seek a separate pre-approval for the 2013 engagement. EY did not +obtain the necessary separate approval for the 2013 engagement until January 2014. + +E. LEGAL ANALYSIS +Basic Principles of Auditor Independence + +49. As the Commission has long recognized, “[i]ndependent auditors have an important +public trust. . . . It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, and +skilled professional, and that investors, therefore, can rely on them.” Revision of the Commission’s Auditor +Independence Requirements, Exchange Act Rel. No. 43602, 2000 WL 1726933, at *2 (Nov. 21, 2000) +(Adopting Release). Accordingly, Rule 2-02(b)(1) of Regulation S-X requires each auditor’s report on +a public issuer’s financial statements to state “whether the audit was made in accordance with generally +accepted auditing standards” (“GAAS”), including auditing standards set forth in PCAOB rules and +Commission regulations.5 GAAS, in turn, requires auditors to be independent from their clients in +both fact and appearance. PCAOB Rule 3520; PCAOB Auditing Standards, Independence, +AU § 220.03. Independence in fact and appearance are “equally important under the securities laws.” +In the Matter of Ernst & Young LLP, Exchange Act Rel. No. 46821, 2004 WL 824099, at *30 (Apr. 16, +2004); see also United States v. Arthur Young & Co., 465 U.S. 805, 819 n.15 (1984) (“It is therefore not +enough that financial statements be accurate; the public must also perceive them as being accurate.”) + +50. The circumstances in which an auditor will—and will not—be deemed independent +are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive list of specific +relationships that render an accountant non-independent. Rule 2-01(b) provides the “general + +5 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule +2-02(b)(1) to GAAS means the standards of the PCAOB and the applicable Commission regulations, both of +which require an auditor to be independent of its client. See Commission Guidance Regarding the Public Company +Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1, Exchange Act Rel. No. 49708, +2004 WL 1439831, at *2 (May 14, 2004); see also PCAOB Rule 3520 (“A registered public accounting firm and +its associated persons must be independent of the firm’s audit client throughout the audit and profess ional +engagement period.”); PCAOB Auditing Standards, Independence, AU § 220.03. + +11 +standard” for auditor independence, which all auditors must meet even if their conduct does not fall +within one of the specific prohibitions in Rule 2-01(c). Under the general standard, + +[t]he 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) (emphasis added). This standard applies with equal force to individual +accountants and the audit firms in which they practice. See 17 C.F.R. § 210.2-01(f)(1). + +Violations + +51. As a result of the conduct described above, Bednar lacked independence from the +Issuer under Rule 2-01(b)’s general standard for the 2012, 2013, and 2014 audit and professional +engagement periods. A reasonable investor with knowledge of all relevant facts and circumstances +concerning Bednar’s personal relationship with the CFO would conclude that Bednar was not capable +of exercising objective and impartial judgment with respect to the audits of the Issuer. + +52. As a result of the conduct described above, EY lacked independence from the Issuer +for the 2012, 2013, and 2014 audit periods. As the Commission noted in the Adopting Release for the +revisions to Rules 2-01 and 2-02, the “[t]he definition of ‘accountant’ includes the accounting firm in +which the auditor practices. The definition makes clear that an individual accountant’s lack of +independence may be attributed to the firm.” Revision, Exchange Act Rel. No. 43602, 2000 WL +1726933, at *86. + +53. As a result, EY violated Rule 2-02(b)(1) of Regulation S-X by falsely certifying that its +reports for the 2012, 2013, and 2014 audit periods were conducted in accordance with PCAOB +standards, when in fact the Firm lacked independence during each of those audit and professional +engagement periods. + +54. Bednar aided and abetted and caused EY’s violations of Rule 2-02(b)(1). + +55. Bednar and EY also caused the Issuer to violate Section 13(a) of the Exchange Act +and Rule 13a-1 thereunder in 2012 and 2013. Section 13(a) and Rule 13a-1 require public issuers to +file annual reports with the Commission that have been audited by an independent accountant. +Bednar and EY caused the Issuer’s violation of Section 13(a) and Rule 13a-1 because they each knew +or should have known that Bednar’s relationship with the CFO deprived the Issuer of an independent +auditor. + +56. Rule 102(e)(1)(iv) and Section 4C(b)(2) of the Exchange Act define negligent +“improper professional conduct” to include: “(i) [a] single instance of highly unreasonable conduct +that results in a violation of applicable professional standards” in circumstances in which the + +12 +“accountant,” in the case of Rule 102(e), or “registered public accounting firm or associated person,” +in the case of Section 4C(b)(2), “knows, or should know, that heightened scrutiny is warranted”; and +“(ii) [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.” 17 +C.F.R. § 201.102(3)(1)(iv); 15 U.S.C. § 78d-3(b)(2). + +57. The Commission has made clear that auditor independence is always an area requiring +heightened scrutiny. See Adopting Release for Rule 102(e), Rel. Nos. 33-7593, 34-40567, 1998 WL +729201, at *8 (Oct. 19, 1998) (“Because of the importance of an accountant’s independence to the +integrity of the financial reporting system, the Commission has concluded that circumstances that raise +questions about an accountant’s independence always merit heightened scrutiny. Therefore, if an +accountant acts highly unreasonably with respect to an independence issue, that accountant has +engaged in ‘improper professional conduct.’”) Likewise, the Commission has found negligent conduct +where an auditor, when it knew or should have known that independence was implicated, failed to +gather all the salient, relevant facts pertinent to the independence determination. Matter of KPMG Peat +Marwick LLP, Rel. No. 34-43862, 54 S.E.C. 1135, 1182-83 (Jan. 19, 2001), reconsideration denied, Rel. +Nos. 34-44050 and AAER-1374 (Mar. 8, 2001), petition for review denied, 289 F.3d 109 (D.C. Cir. 2002). + +58. As a result of the conduct described above, EY and Bednar engaged in improper +professional conduct under both prongs of the definition set forth in Rule 102(e)(1)(iv)(B) and Section +4C(b)(2) of the Exchange Act. + +F. FINDINGS + +59. Based on the foregoing, the Commission finds that (a) EY violated Rule 2-02(b)(1) of +Regulation S-X; (b) Bednar aided and abetted and caused EY’s violations of Rule 2-02(b)(1) of +Regulation S-X; (c) Bednar and EY caused violations of Section 13(a) of the Exchange Act and Rule +13a-1 thereunder by the Issuer; and (d) Bednar and EY 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. + +EY’s Remedial Efforts + +60. In determining to accept EY’s Offer, the Commission considered remedial acts +promptly undertaken by EY. EY has improved its policies, procedures, training, controls, and +reporting around client entertainment and related expenses. Specifically, EY has enhanced its policies +and procedures to include additional guidance concerning expenses and entertainment; issued new +guidance that reinforced the potential independence implications of client entertainment activities and +how to analyze client entertainment to determine whether it raises independence concerns; and +introduced additional mandatory training for all employees concerning expenses and hospitality. In +addition, EY revised its annual audit and quarterly review independence procedures to require that EY +audit engagement team members inquire whether management of an audit client or audit engagement +team members are aware of, among other things, any close relationships between an audit engagement +team member or any individuals employed by or associated with the audit client; and make inquiries +concerning frequent entertainment of audit client employees or their family members; and vacations +taken by EY employees and audit client employees or their family members. EY also developed a + +13 +system to help monitor and analyze expense information, including the frequency and amount of +entertainment expenses. Finally, EY is developing an incremental program to monitor and periodically +review the information it obtains through these revised policies and procedures in order to identify +and address potentially problematic activity. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed +to in the Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + + A. Respondent EY shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b) of Regulation S-X, Section 13(a) of the Exchange Act, and Rule +13a-1 thereunder. + + B. Respondent Bednar shall cease and desist from committing or causing any violations +and any future violations of Rule 2-02(b) of Regulation S-X, Section 13(a) of the Exchange Act, and +Rule 13a-1 thereunder. + +C. Respondent EY is censured. + +D. Respondent Bednar is denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. After three years from the date of this order, Bednar 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 Bednar’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) Bednar, 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; + + +14 +(b) Bednar, 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 Bednar’s or the +firm’s quality control system that would indicate that Bednar will not +receive appropriate supervision; + +(c) Bednar 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) Bednar acknowledges his responsibility, as long as Bednar appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. + +F. The Commission will consider an application by Bednar 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 Bednar’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + + G. Respondent EY shall, within 10 days of the entry of this Order, pay disgorgement of +$3,562,400, together with prejudgment interest thereon of $212,600, and a civil money penalty of +$1,200,000, for a total of $4,975,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Section 21F(g)(3) of the Exchange Act. If timely +payment of disgorgement and prejudgment interest is not made, additional interest shall accrue +pursuant to SEC Rule of Practice 600. If timely payment of a civil money penalty is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + + H. Respondent Bednar shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $45,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Section 21F(g)(3) of the Exchange Act. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +I. 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 + + +15 +(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 EY’s or +Bednar’s name as the applicable Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, +Senior Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, +200 Vesey Street, Suite 400, New York, NY 10281-1022. + +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 either 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, each Respondent 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 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. + + +16 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent Bednar, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Bednar 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 Bednar of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3803.txt b/raw/aaer/2016/AAER-3803.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c127af2775ba4b1f3976dd92d9e05e9b1668d26 --- /dev/null +++ b/raw/aaer/2016/AAER-3803.txt @@ -0,0 +1,647 @@ + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78873 / September 19, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3803 / September 19, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17553 + + +In the Matter of + +ERNST & YOUNG LLP, +ROBERT J. BREHL, CPA, +PAMELA J. HARTFORD, CPA, AND +MICHAEL T. KAMIENSKI, 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 and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 4C(a)(2) and (3)1 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 + +1 Sections 4C(a)(2) and (3) provide, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(2) . . . to have engaged in unethical or improper professional conduct; 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 Rules 102(e)(1)(ii) and (iii) provide, in pertinent part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . (ii) … to have engaged in +unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided +2 + +Ernst & Young LLP (“EY”),3 Robert J. Brehl (“Brehl”), Pamela J. Hartford (“Hartford”) and +Michael T. Kamienski (“Kamienski”) (together, the “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (each, an “Offer” and, together, 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 +Hartford and Brehl, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“the Order”), as set +forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: 4 + +A. SUMMARY + + This matter arises from a close personal relationship between a former EY partner and the +former chief accounting officer of an EY audit client (the “Issuer”) that caused EY to violate the +auditor independence rules. Between March 2012 and June 2014, Pamela Hartford, then an EY +partner, and Robert Brehl, then the Chief Accounting Officer of the Issuer, maintained a close +personal and romantic relationship while Hartford was a partner—and later the coordinating +partner—on the EY engagement team that performed audit and review services for the Issuer. + + From approximately early 2013 through June of 2014, Michael Kamienski, the coordinating +partner on the engagement team for the Issuer in 2012 and 2013, was aware of facts suggesting a +possible romantic relationship between Hartford and Brehl. Kamienski should have identified those +facts as red flags but did not. He failed to perform a reasonable inquiry regarding the extent of the +relationship between Brehl and Hartford or to raise concerns internally to EY’s U.S. Independence +group. + +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 Contemporaneously with this Order, the Commission is issuing In the Matter of Ernst & Young LLP and +Gregory S. Bednar, CPA, Exchange Act Rel. No. 78872 (September 19, 2016). + +4 The findings herein are made in connection with Respondents’ Offers and are not binding on any other +person or entity in this or any other proceeding. + +3 + + + During the period that Hartford and Brehl maintained their romantic relationship, EY +represented that it was independent in audit reports issued on the Issuer’s financial statements, +which were included or incorporated by reference in public filings with the Commission. As a +consequence, EY violated Rule 2-02(b)(1) of Regulation S-X and caused the Issuer to violate +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Hartford caused EY’s violation of +Rule 2-02(b)(1) and caused the Issuer to violate Section 13(a) of the Exchange Act and Rule 13a-1 +thereunder. EY’s, Hartford’s and Kamienski’s conduct also constituted 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. Brehl caused and willfully5 aided and abetted the Issuer’s +violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Brehl’s conduct aiding +and abetting the violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +constituted willful aiding and abetting of a violation of the Federal securities laws 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. + +B. RESPONDENTS + + Ernst & Young LLP is a professional services firm headquartered in New York, New +York. EY provides auditing, consulting, and tax services to various entities, including companies +with securities registered with the Commission and traded in U.S. markets. EY served as the +Issuer’s auditor during all times relevant to this proceeding. + + Robert J. Brehl, age 54 and a resident of Kentucky, served as the Chief Accounting +Officer of the Issuer from January 2006 through July 2014, when his employment was terminated. +Brehl is a certified public accountant licensed in the state of Kentucky. + + Pamela J. Hartford, age 41 and a resident of Illinois, is a certified public accountant +licensed in the state of Illinois. During the time period relevant to this proceeding, Hartford +initially served as the engagement partner and later as the coordinating partner on the EY +engagement team that provided audit and review services to the Issuer. Her employment was +terminated on July 7, 2014. + + Michael T. Kamienski, age 41 and a resident of Illinois, is a certified public accountant +licensed in the state of Illinois. From 2009 through 2013, he served as the coordinating partner on +the EY engagement team that provided audit and review services to the Issuer. Kamienski also +served in leadership roles at EY including as EY’s Global Real Estate, Hospitality & Construction +Assurance Leader, beginning in December 2013, and, beginning in July 2014, as EY’s Central +Region Assurance Real Estate Market Segment Leader. Kamienski left the firm on April 18, 2016 +after EY requested his resignation. + + +5 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 + + + +C. THE ISSUER + The Issuer’s securities are registered with the Commission under Section 12(b) of the +Exchange Act, and its common shares are listed on the New York Stock Exchange. The Issuer +filed annual reports on Form 10-K with the Commission. + +D. FACTS + + Hartford’s Role on the EY Engagement Team + +1. From at least 2004 through June 2014, EY provided audit and review services to +the Issuer. From 2009 through the conclusion of the Issuer’s 2013 audit, Kamienski served as the +coordinating partner on the EY engagement team that provided those services (the “Engagement +Team”). “Coordinating partner” is the term used by EY to describe the lead partner on an audit +engagement. + +2. In November 2010, Hartford joined the Engagement Team as a senior manager. +After EY promoted her to partner in July 2011, Hartford became the engagement partner on the +Engagement Team, reporting to Kamienski. In that capacity she was the second highest ranking +member of the Engagement Team and was responsible for overseeing the Engagement Team’s +day-to-day audit and review services for the Issuer, including preparing, reviewing and signing off +on audit workpapers, coordinating resources within EY, and ensuring the completion of the audit +as planned. + +3. Hartford assumed the position of coordinating partner on the Engagement Team at +the end of February 2014 and held that position until EY terminated her employment on July 7, +2014. As the coordinating partner, Hartford held ultimate responsibility for the Engagement +Team’s provision of audit and review services to the Issuer and for independence issues connected +to the engagement. + +Hartford’s and Brehl’s Relationship + +4. From March 2012 through June 2014, while Hartford served as the engagement +partner and then coordinating partner on the Engagement Team, Hartford and Brehl maintained a +romantic relationship. Their relationship was marked by a high level of personal intimacy, +affection and friendship, near daily communications about personal and romantic matters (as well +as work-related matters), and the occasional exchange of gifts of minimal value on holidays such +as Valentine’s Day and birthdays. Hartford and Brehl lived in different cities, but they saw each +other in person when performing work duties in their hometowns, at industry conferences, and at +entertainment events sponsored by either the Issuer or EY. + +5. Hartford and Brehl tried to keep their relationship a secret from their employers and +colleagues in large part because they were concerned that their employers would deem it +5 + +inappropriate and each contemplated the possibility of EY removing Hartford from the +Engagement Team. Despite their efforts, several employees within the Issuer’s accounting and +treasury departments, including lower level employees and Vice Presidents A, B and C, observed +interactions between Brehl and Hartford that raised concerns in their minds about a possible +inappropriate relationship between them. + +6. Despite the nature and extent of their relationship, Hartford signed off on most of +the independence-related workpapers from EY’s 2012 and 2013 audits of the Issuer that in large +part formed the basis for EY’s conclusion that it was independent of the Issuer during those years. +In addition, in February 2013 and February 2014, Hartford participated in meetings of the Issuer’s +Audit Committee at which EY represented that it was independent of the Issuer. Brehl participated +in those same Audit Committee meetings and also signed management representation letters to EY +in February 2013 and February 2014 in which Brehl stated that management, as of the date of the +letters, “…… has no actual knowledge of facts or circumstances that it knows would prevent Ernst +& Young, LLP from qualifying as independent of the Company for purposes of Rule 2-01 of +Regulation S-X.” + +Hartford’s Selection as Coordinating Partner + +7. At the conclusion of the Issuer’s 2013 audit, Kamienski, having served as the +coordinating partner for five consecutive years, was required by the Commission’s auditor +independence rules to rotate off the Engagement Team. The new coordinating partner would begin +service at the start of the Issuer’s 2014 audit year. Accordingly, in the fourth quarter of 2013, EY +compiled a short list of suitable replacements for Kamienski and presented that list to the Issuer. +Hartford was among the partners on the list. + +8. The Issuer’s CEO appointed Brehl to a management team. Brehl and the three +other members of the management team each separately interviewed Hartford and two other EY +partners. Before anyone on the management team interviewed any of the candidates, Brehl +informed Hartford, but not the other candidates, about some of the questions that could be posed to +her, and he advised her on persuasive responses. Brehl did this to advantage Hartford. Hartford +was selected as the new coordinating partner, with the approval of the Issuer’s Audit Committee, +based in large part on her qualifications, skills and experience, performance on the Engagement +Team over the prior three years, her references, and Brehl’s support. + + Kamienski Failed to Address Red Flags + +9. During the period when he served as the coordinating partner on the Engagement +Team, Kamienski was aware of certain facts that should have caused him to conduct further +inquiry regarding a possible romantic relationship between Brehl and Hartford. Beginning in at +least early 2013 and continuing through June 2014, Kamienski periodically told colleagues that +Brehl was interested in a romantic relationship with Hartford and that he thought she obtained +responsibilities on the Engagement Team for that reason. + +6 + +10. Kamienski made these comments to Hartford, a few members of the Engagement +Team, and even employees at another EY audit client. Hartford responded to Kamienski’s +comments by denying that Brehl maintained a romantic interest in her or by walking away. +Despite her denials, Kamienski continued to episodically repeat these sorts of comments, including +in January 2014 when he told a member of the Engagement Team that he thought Brehl’s romantic +interest in Hartford was the reason she had been selected as the coordinating partner on the +Engagement Team. + +11. On February 11, 2014, Vice Presidents A and B informally met with Kamienski +and another EY partner at a restaurant after work. During that conversation, Vice Presidents A and +B expressed concern that Brehl and Hartford were engaged in an inappropriate relationship. In +response, Kamienski and the other EY partner described their observations of other potentially +inappropriate interactions between Brehl and Hartford. Without inquiring further, Kamienski +authorized the release of EY’s Report of Independent Registered Public Accounting Firm which, +on February 18, 2014, the Issuer filed along with its 2013 Form 10-K with the Commission. + +12. Despite Kamienski’s observations and comments, and the comments of Vice +Presidents A and B, Kamienski never inquired of Hartford about the extent of her relationship with +Brehl or provided her with guidance. Nor did he raise any concerns about Brehl’s and Hartford’s +relationship with EY’s U.S. Independence group. Kamienski’s failure in this regard violated EY’s +independence policies. Those policies provide that coordinating partners bear ultimate +responsibility for independence issues on their engagements and in that regard they must identify +threats to EY’s independence, and upon such identification, consult with EY’s U.S. Independence +group. Kamienski did none of these things. + + EY’s Independence Procedures Did Not Specifically Inquire About Close + Personal Relationships + +13. During the relevant period, EY maintained or followed the following policies and +procedures regarding auditor independence. EY required audit engagement teams for public +company clients, including the Issuer, to follow certain annual audit and quarterly review +procedures to assess EY’s independence from those audit clients. Those procedures addressed +possible familial, employment, and financial relationships between the Issuer and EY that are +expressly prohibited by the Commission’s auditor independence rules. EY both trained and +tested its audit professionals on those policies. They required each audit engagement team +member to certify that he was independent of the audit client and that he had read, understood, +and was in compliance with EY’s policies on independence. +14. In addition, and outside of procedures that were specific to individual audit +clients, EY required audit professionals to again certify, on an annual and quarterly basis, that +they read, understood, and were in compliance with EY’s internal policies on independence. +Audit professionals were also required to certify annually that they complied with the Global +Code of Conduct, which noted that professionals “avoid relationships that impair—or may +appear to impair—our objectivity and independence.” In 2012, 2013, and the first quarter of +7 + +2014, Hartford repeatedly certified (in quarterly and annual certifications), that she was +independent from the Issuer and in compliance with EY’s policies on independence. + +15. EY’s internal policies on independence provided, among other things, that +“[i]ndependence issues from an appearance perspective may be created when [an audit +professional] has a close relationship with an individual, other than an immediate or close family +member, who is in an accounting role or a financial reporting oversight role at an audit client.” +The policies further provided that audit professionals should assess the significance of any such +relationships and were strongly encouraged to discuss them with EY’s U.S. Independence group. +16. Although EY’s independence policies recognized that a non-familial close +personal relationship between an engagement team member and a client employee in an +accounting or financial reporting oversight role could present an independence problem, in the +context of assessing its independence from the Issuer, EY performed no specific procedures to +identify whether members of the Engagement Team, or employees who served in accounting or +financial reporting oversight roles at the Issuer, were involved in such a relationship. While the +independence certifications that Engagement Team members signed specifically asked about +possible employment relationships that could impair EY’s independence, they did not +specifically ask about possible close personal relationships between that Engagement Team +member and any employees at the Issuer who were in accounting or financial reporting oversight +roles. +17. As noted, EY’s policies on independence provide that the coordinating partner on +an audit engagement team bears ultimate responsibility for independence matters related to that +engagement and should consult with EY’s U.S. Independence group regarding threats to +independence. Neither Hartford nor Kamienski conducted any such consultation with EY’s U.S. +Independence group regarding her personal relationship with Brehl, or the possibility of her +having a personal relationship with Brehl. + +18. Despite the fact that Kamienski and another EY partner were aware of red flags +regarding a possible relationship between Brehl and Hartford, EY represented that it was +independent of the Issuer in its audit reports for the Issuer’s 2012 and 2013 financial statements. +Those audit reports were, in turn, included or incorporated by reference in the Issuer’s annual +reports on Form 10-K filed with the Commission throughout the relevant period. In connection +with the Issuer’s 2012 and 2013 audits, EY confirmed in writing to the Audit Committee of the +Issuer, as required by PCAOB Rule 3526, that it was independent of the Issuer. + +EY Learns of Hartford’s and Brehl’s Relationship + +19. On June 26, 2014, Vice President A made an internal whistleblower complaint to +the Issuer regarding a possible inappropriate relationship between Brehl and Hartford. The next +day, the Issuer instituted an internal investigation, which revealed the romantic relationship +between Hartford and Brehl. On June 30, 2014, the Issuer informed EY about its findings. + +8 + +20. EY promptly removed Hartford from the Engagement Team and instituted its own +internal investigation. On July 3, 2014, EY determined that because of the romantic relationship +between Hartford and Brehl it had not been independent of the Issuer. As a consequence, EY +withdrew its audit reports on the Issuer’s 2012 and 2013 financial statements and its 2012 and 2013 +reports on the effectiveness of the Issuer’s internal control over financial reporting and terminated +Hartford’s employment. Additionally, EY informed the Issuer that EY’s quarterly review +procedures with respect to the Issuer’s financial statements for the quarter ending March 31, 2014 +should no longer be relied upon. After EY withdrew its audit reports, the Issuer hired another +accounting firm to re-audit the 2012 and 2013 financial statements. No restatement was made. + +E. LEGAL ANALYSIS + + Basic Principles of Auditor Independence + +21. As the Commission has long recognized, “[i]ndependent auditors have an important +public trust. . . . It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, and +skilled professional, and that investors, therefore, can rely on them.” Revision of the Commission’s +Auditor Independence Requirements, Exchange Act Rel. No. 43,602, 2000 WL 1726933, at *2 +(Nov. 21, 2000) (“Adopting Release”). Accordingly, Rule 2-02(b)(1) of Regulation S-X requires +each auditor’s report on a public issuer’s financial statements to state “whether the audit was made +in accordance with generally accepted auditing standards” (“GAAS”), including auditing standards +set forth in PCAOB rules and Commission regulations.6 GAAS in turn requires auditors to be +independent from their clients in both fact and appearance. PCAOB Rule 3520; PCAOB Auditing +Standards, Independence, AU § 220.03. Independence in fact and appearance are “equally +important under the securities laws.” In the Matter of Ernst & Young LLP, Exchange Act Rel. No. +46,821, 2004 WL 824099, at *30 (Apr. 16, 2004); see also United States v. Arthur Young & Co., +465 U.S. 805, 819 n.15 (1984) (“It is therefore not enough that financial statements be accurate; the +public must also perceive them as being accurate.”) + +22. Circumstances in which an auditor will—and will not—be deemed independent are +set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive list of specific +relationships that render an accountant non-independent. Rule 2-01(b) provides the “general +standard” for auditor independence, which all auditors must meet even if their conduct does not fall +within one of the specific prohibitions in Rule 2-01(c). Under the general standard, + +[t]he Commission will not recognize an accountant as independent, with +respect to an audit client, if the accountant is not, or a reasonable investor with + +6 The Commission has stated that for audit reports issued on or after May 24, 2004, the reference in Rule 2 - +02(b)(1) to GAAS means the standards of the PCAOB and the applicable Comm ission regulations, both of which +require an auditor to be independent of its client. See, Commission Guidance Regarding the Public Company +Accounting Oversight Board’s Auditing and Related Professional Practice Standard No. 1 , Exchange Act Rel. No. +49,708, 2004 WL 1439831, at *2 (May 14, 2004); see also, PCAOB Rule 3520 (“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.”); PCAOB Auditing Standards, Independence, AU § 220.03. +9 + +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) (emphasis added). This standard applies with equal force to both +individual accountants and the audit firms in which they practice. See 17 C.F.R. § 210.2-01(f)(1). + +VIOLATIONS + + 23. As a result of the conduct described above, Hartford lacked independence from the +Issuer under Rule 2-01(b)’s general standard for the 2012 and 2013 financial statement audits and +the first quarter 2014 financial statement review. A reasonable investor with knowledge of all +relevant facts and circumstances concerning Hartford’s personal relationship with Brehl would +conclude that Hartford was not capable of exercising objective and impartial judgment with respect +to the audits of the Issuer. + + 24. As a result of the conduct described above, EY lacked independence from the +Issuer for the 2012 and 2013 financial statement audits and the first quarter 2014 review. As the +Commission noted in the Adopting Release for the revisions to Rules 2-01 and 2-02, “[t]he +definition of ‘accountant’ includes the accounting firm in which the auditor practices. The +definition makes clear that an individual accountant’s lack of independence may be attributed to +the firm.’” Adopting Release, at *86. + + 25. As a result, EY violated Rule 2-02(b)(1) of Regulation S-X by falsely certifying +that its reports for the 2012 and 2013 financial statement audits were conducted in accordance with +PCAOB standards, when in fact the firm lacked independence during each of those audit and +professional engagement periods. + + 26. Hartford caused EY’s violations of Rule 2-02(b)(1). + + 27. Hartford and EY also caused the Issuer to violate Section 13(a) of the Exchange +Act and Rule 13a-1 thereunder in 2012 and 2013. Section 13(a) and Rule 13a-1 require public +issuers to file annual reports with the Commission that have been audited by an independent +accountant. Hartford and EY caused the Issuer’s violations of Section 13(a) and Rule 13a-1 +because they each knew or should have known that Hartford’s relationship with Brehl deprived the +Issuer of an independent auditor. + + 28. Brehl caused and willfully aided and abetted the Issuer’s violation of Section 13(a) +and Rule 13a-1 thereunder in 2012 and 2013. + +10 + + 29. Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice, and Sections +4C(a)(2) and (3) of the Exchange Act, permit the Commission to censure a person or deny a person +the privilege of appearing or practicing before it after finding that person engaged in “improper +professional conduct” or “willfully violated, or willfully aided and abetted the violation of any +provision of the Federal securities laws or the rules and regulations thereunder.” 17 C.F.R. +201.102(3)(1)(ii) and (iii); 15 U.S.C. § 78d-3(b)(2) and (3). + + 30. Rule 102(e)(1)(iv) of the Commission’s Rules of Practice and Section 4C(b)(2) of +the Exchange Act both define negligent “improper professional conduct” to include: “(i) [a] single +instance of highly unreasonable conduct that results in a violation of applicable professional +standards” in circumstances in which the “accountant,” in the case of Rule 102(e), or “registered +public accounting firm or associated person,” in the case of Section 4C(b)(2), “knows, or should +know, that heightened scrutiny is warranted;” and (ii) [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.” 17 C.F.R. 201.102(3)(1)(iv); 15 U.S.C. § 78d- +3(b)(2). + +31. The Commission has made clear that auditor independence is always an +area requiring heightened scrutiny. See Amendment to Rule 102(e), Commission’s Rules +of Practice, Securities Act Rel. No.7593, 1998 WL 729201, at *8 (Oct. 19, 1998) +(“Because of the importance of an accountant’s independence to the integrity of the +financial reporting system, the Commission has concluded that circumstances that raise +questions about an accountant’s independence always merit heightened scrutiny. +Therefore, if an accountant acts highly unreasonably with respect to an independence +issue, that accountant has engaged in ‘improper professional conduct.’”). + +32. As a result of the conduct described above, EY, Hartford and Kamienski +engaged in improper professional conduct. + +33. As a result of the conduct described above, Brehl willfully aided and +abetted the Issuer’s violation of Section 13(a) and Rule 13a-1 thereunder for purposes of +Rule 102(e)(1)(iii). + + +F. FINDINGS + +Based on the foregoing, the Commission finds that (a) EY violated Rule 2-02(b)(1) of +Regulation S-X; (b) Hartford caused EY’s violation of Rule 2-02(b)(1) of Regulation S-X; (c) EY +and Hartford caused the Issuer to violate Section 13(a) of the Exchange Act and Rule 13a-1; (d) +Brehl caused and willfully aided and abetted the Issuer’s violations of Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder; (e) EY, Hartford and Kamienski engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice; and (f) Brehl’s willful aiding and abetting of the Issuer’s +violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder constituted violations +11 + +of the Federal securities laws and regulations within the meaning of Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(iii) of the Commission’s Rules of Practice. + +EY’s Remedial Efforts + + In determining to accept EY’s Offer, the Commission considered remedial acts promptly +undertaken by EY. EY has improved its annual audit and quarterly review independence +policies and procedures, training, controls, and reporting regarding close personal relationships +between EY professionals and audit client employees and the impact of such relationships on +EY’s independence. Generally, those procedures now require that EY audit engagement team +members inquire whether management of an audit client or engagement team members are aware +of any close relationships between any member of the audit engagement team and any +individuals employed by or associated with the audit client. They also require audit team +members to disclose any such relationships and, as appropriate, to certify annually and quarterly +that they are not participating in or aware of any such relationships. In addition, EY revised its +annual and quarterly independence certifications to require EY audit professionals to certify that +they have consulted with an EY independence leader in circumstances where they have a close +personal relationship with an audit client employee in an accounting or financial reporting +oversight role. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent EY 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. Respondent Hartford 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 thereunder. + + C. Respondent Brehl shall cease and desist from committing or causing any violations +and any future violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + + D. Respondent EY is hereby censured. + + E. Respondents Hartford, Kamienski and Brehl are denied the privilege of appearing +or practicing before the Commission as accountants. + +12 + + F. After 3 years from the date of this Order for Hartford and Kamienski, and after +1 year from the date of this Order for Brehl, Respondents Hartford, Kamienski, and Brehl may +separately request that the Commission consider each of their reinstatements 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 or her practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which he or she works or in some other acceptable manner, as long as +he or she practices before the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he or she is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +or she is associated, has been inspected by the Board and that +inspection did not identify any criticisms of or potential defects in +the respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his or her responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + + G. The Commission will consider an application by Hartford, Kamienski, or Brehl to +resume appearing or practicing before the Commission provided that his or her state CPA license +is current and he or 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, +13 + +the Commission will consider an application on its other merits. The Commission’s review may +include consideration of, in addition to the matters referenced above, any other matters relating +to Respondent’s character, integrity, professional conduct, or qualifications to appear or practice +before the Commission. + + H. Respondent EY shall, within 10 days of issuance of this Order, pay disgorgement of +$3,168,500 in audit fees, prejudgment interest of $198,151, and a civil money penalty in the +amount of $1,000,000, for a total of $4,366,651 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Section 21F(g)(3) of the +Exchange Act. 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 monetary penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + I. Respondents Hartford and Brehl shall, within 10 days of the entry of this +Order, each 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 Section 21F(g)(3) of the Exchange Act. If timely payment is not made, additional interest +shall accrue pursuant to 31 U.S.C. § 3717. + + J. 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 as +appropriate either EY, Hartford, or Brehl 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 +Jennifer S. Leete, Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 100 F St., N.E., Washington, DC 20549. + +14 + + 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 penalties, Respondents agree that in any Related Investor Action, EY, +Hartford, and Brehl 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 +Hartford and Brehl, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Hartford or Brehl 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 Hartford or Brehl of the Federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3804.txt b/raw/aaer/2016/AAER-3804.txt new file mode 100644 index 0000000000000000000000000000000000000000..7773784c56ac59a0671a747c39526c9b13d369ff --- /dev/null +++ b/raw/aaer/2016/AAER-3804.txt @@ -0,0 +1,344 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78896 / September 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3804 / September 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17561 + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER AND CIVIL +PENALTIES + + + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Park National Corporation (“PRK,” +“Respondent” or the “Company”). + +II. + +In anticipation of the institution of these proceedings, PRK 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 PRK and the subject matter of these proceedings, which +are admitted, PRK consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making + +In the Matter of + +PARK NATIONAL +CORPORATION, + +Respondent. +2 + + +Findings, and Imposing a Cease-and-Desist Order and Civil Penalties (“Order”), as set forth +below. + +III. + +On the basis of this Order and PRK’s Offer, the Commission finds1 that: + +Summary + +This matter involves PRK’s improper accounting for its Allowance for Loan Losses +(“ALLL”) relating to certain impaired loans—the largest of which were construction real estate +land and development loans—at its Vision Bank (“Vision”) subsidiary in 2010 and 2011. During +2010 and the first three quarters of 2011, PRK understated its reported ALLL by improperly +incorporating into its impairment analyses of problem loans certain cash flows anticipated from +guarantors. The anticipated cash flows were incorporated into the impairment calculations even +though PRK was in active litigation with most of the guarantors and did not expect to collect +amounts due based on the contractually scheduled terms. In addition, PRK’s ALLL was also +understated as a result of PRK’s use of improper collateral valuations provided by an outside +contractor. The outside contractor, who was not an appraiser, calculated values that were in most +instances materially higher than those obtained from professional appraisers. PRK did not know +what factors or methodology the contractor used to arrive at the valuations and there was no +documentation to support the valuations. PRK’s use of the anticipated guarantor cash flows from +litigation and the unsubstantiated collateral valuations was not in accordance with generally +accepted accounting principles (“GAAP”). On February 28, 2012, PRK filed restatements to +correct the reported ALLL for fiscal year 2010 and the first three quarters of 2011. The +restatements reflected an increase of more than $22 million to PRK’s provision for loan losses and +ALLL and a 25% decrease in income before taxes for fiscal year 2010, with additional +adjustments to the relevant 2011quarters. + +Accordingly, PRK violated the reporting, books and records and internal accounting +controls provisions of the Exchange Act. + +Respondent and Related Entity + +1. Park National Corporation (NYSE Amex LLC symbol “PRK” or the “Company”) is a +bank holding company. As of March 9, 2016, its market capitalization was $1.35 billion. During the +relevant period, PRK primarily operated through two wholly-owned subsidiaries. The recording of +ALLL at PRK’s Vision subsidiary formed the basis of the violations cited in this Order. + +2. Vision Bank was a PRK subsidiary, and a Florida state-chartered bank with its main +office in Panama City, Florida. Vision was a large construction real estate land and development +(“L&D”) lender that experienced unprecedented growth in its troubled loan portfolio during the recent + +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 + + +banking financial crisis. PRK completed a sale of substantially all of Vision’s performing assets on +February 16, 2012. Subsequently, PRK moved Vision’s troubled assets to a non-bank subsidiary. + +Facts + +A. Accounting for the Impairment of Specifically Identified Loans + + 3. Banks identify certain loans to be assessed for individual loan impairment. Often, +these are large loans with heightened risk profiles. A loan is impaired when, “based on current +information and events, it is probable that a creditor will be unable to collect all amounts due +according to the contractual terms of the loan agreement.” Accounting Standards Codification +(“ASC”) 310-10-35-16. When a loan is impaired, the ALLL is increased through a provision for +loan losses that is charged to earnings. GAAP further provides that “a creditor shall measure +impairment based on the present value of expected future cash flows discounted at the loan’s +effective interest rate, except that as a practical expedient, a creditor may measure impairment +based on a loan’s observable market price, or the fair value of the collateral if the loan is a +collateral-dependent loan.” ASC 310-10-35-22. “If a creditor bases its measure of loan +impairment on a present value calculation, the estimates of expected future cash flows shall be the +creditor’s best estimate based on reasonable and supportable assumptions and projections”. ASC +310-10-35-26. Pursuant to ASC 310-10-35-22, PRK used a present value approach, therefore was +not availing itself of the practical expedient that allows the creditor to measure loan impairment +based on the fair value of collateral. + + 4. In performing this calculation PRK looked to the value of the underlying collateral +and to expected future cash flows from guarantors. To assess the “fair value” of the collateral, +PRK was required to assess “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- +10-35-2. The market approach to determining fair value uses prices and other relevant +information generated by market transactions involving identical or comparable assets. ASC 820- +10-55-3A. In commercial real estate, recent appraisals performed by an independent and certified +real estate appraiser are widely recognized as persuasive evidence (absent actual sale) of fair +value. PRK added the anticipated guarantor cash receipts to improper collateral valuations to +arrive at the total expected cash flows to be utilized in the present value calculations. +B. Background to Rapid Growth in PRK’s Impaired Loans +5. Prior to PRK’s March 9, 2007 acquisition of Vision’s Florida and Alabama +branches, all of PRK’s banking operations were in Ohio and surrounding regions. Historically, the +Ohio banking operations had produced very low loan losses. However, PRK’s 2007 acquisition of +Vision introduced a large number of L&D loans to the Company’s loan portfolio. These loans +were riskier than the type of loans that were predominant in PRK’s Ohio -based portfolio, and +deteriorated significantly by 2009, partly in response to the banking and financial crisis in the U.S. +For the period ended March 31, 2007 —the period in which PRK acquired Vision —PRK reported +an ALLL of $79.8 million. By the end of 2007, PRK reported an ALLL of $87.1 million, of +which $20.1 million was attribut ed to Vision loans. PRK’s ALLL continued to climb in 2008 to +$100 million and in 2009 to $117 million, as the problem loans at Vision continued to deteriorate. +4 + + +C. PRK Use of Anticipated Guarantor Cash Flows in Impairment Calculations +6. On April 28, 2009, PRK retained the services of an outside contractor (“Outside +Contractor”) to evaluate Vision’s distressed properties collateralizing past due loans and to +execute a plan of action to recover value on the properties, including through litigation with +guarantors. During the next several years, Outside Contractor functioned as a special assets +department for Vision’s troubled loan portfolio, including assisting PRK in realizing value from +the distressed properties and the guarantors. Information collected and developed by Outside +Contractor regarding guarantor assets and liabilities and collateral valuations was created by +Outside Contractor to support decisions related to litigation and collection efforts, but was not +intended by Outside Contractor for use in impairment calculations. +7. However, by the end of 2009, PRK had begun to limit impairments on several +problem Vision L&D loans by including cash flows PRK thought it could collect from the loan +guarantors through litigation. PRK referred to this use of anticipated cash flows from guarantors +as “guarantor support.” By year end 2010, PRK’s use of guarantor support in impairment +calculations for Vision problem loans had grown significantly. Whereas PRK had relied on close +to $7 million in guarantor support to limit impairments at year end 2009, the number grew to over +$21.5 million by year end 2010. +8. PRK misapplied GAAP by including cash flows from future possible litigation +settlements relating to the guarantee agreements that were subject to litigation. Any expected cash +flows associated with litigation should not have been included in the impairment measurement for +the loan. Regardless, PRK’s assumptions that it would prevail in litigation and that collections +would be forthcoming within two years were not reasonable or supportable at the time given a +variety of factors. Some of the guarantors were actively defending their claims including by filing +cross-suits and drawing the litigation out with various tactics. In many cases, the lawsuits were +only recently filed and the litigants were still in discovery, and in at least one instance, the planned +law suit had not yet been filed. Further, PRK did not consistently have attorney letters or other +reasonable basis on which to support the assumption of litigation success. Because of these +uncertainties associated with the litigation, guarantor support did not warrant reduction to the +provision for loan losses. +9. Furthermore, even if a positive judgment for PRK were reached, its ability to +collect the funds from the guarantor was not reasonable or supportable. The dollar amount of the +anticipated cash flows was set, in part, in reliance on outdated personal financial statements +(“PFS”) of the guarantors that were often two or more years old. Because the PFS were outdated, +and guarantors were no longer cooperating with PRK, there was no way to validate reported +liquidity in the PFS. For similar reasons, it was impossible to gauge the full extent of guarantors’ +liabilities. Further, attempts to cross-check or validate guarantors’ self-reported property +valuations and encumbrances using available public information was not consistently reliable. At +the time of its February 2012 restatement, PRK had made recoveries of less than $10 million on +six of the 22 guarantor support loans (representing less than half of the over $22 million in +guarantor support it used in impairment calculations at the end of 2010). +D. PRK begins to Use Outside Contractor Valuations in Impairment Calculations +5 + + +10. In addition, during 2009, PRK also began to substitute Outside Contractor +valuations of the property collateral associated with the problem loans for the valuations indicated +by current and previous appraisals. PRK began this practice because it disagreed with the +valuations arrived at by the professional appraisals. PRK, however, did not know how Outside +Contractor determined collateral valuations or what factors or methodology it used. Outside +Contractor valuations were provided to PRK orally, without supporting documentation. In fact, +PRK was aware that there were not comparables to support Outside Contractor’s collateral +valuations. In many instances the orally provided valuations were higher than the valuations from +professional appraisers on record. Not surprisingly, the collateral valuations provided orally by +Outside Contractor turned out in most instances to be materially larger than the actual collateral +values. +11. PRK’s use of Outside Contractor’s unsupported and undocumented collateral +valuations was contrary to GAAP and PRK’s disclosed fair value practice, and was inconsistent +with PRK’s existing internal policies. PRK was required to determine the fair value of the +underlying collateral in its impairment analysis. Consistent with GAAP, PRK disclosed in its +2010 annual report that it followed a policy that required it “to maximize the use of observable +inputs and minimize the use of unobservable inputs when measuring fair value.” The disclosure +further defined fair value as “the price that would be received to sell an asset or paid to transfer a +liability between market participants at the balance sheet date,” expressing a preference firstly for +pricing derived from active and observable markets and secondly from observable market data for +similar assets in the case of markets that are not active. Because PRK did not know how the +Outside Contractor arrived at its valuations and because PRK was aware that Outside Contractor’s +valuations was often unsupported by available comparables, PRK had no reasonable basis to +conclude that Outside Contractor’s valuations reflected the pricing that would be determined by +orderly transactions between market participants. In addition, while PRK’s internal policies +related to loan origination required that “[a]ll loans greater than $250,000 secured by real estate in +whole or in part must be appraised by an appraiser acceptable to the corporation and be +appropriately certified under current federal and state approved requirements,” when it came to +PRK’s use of Outside Contractor’s unsupported and undocumented collateral valuations, PRK +lacked corresponding internal policy. +12. At the 2010 year end audit of PRK, PRK’s outside auditor requested documentation +for Outside Contractor valuations used by PRK in impairment calculations. PRK did not have the +requested documentation and Outside Contractor ultimately proved incapable of producing +documentation adequate to support the orally provided collateral valuations. As a result, PRK’s +outside auditor proposed an uncorrected audit adjustment to the Company, and identified a +significant deficiency in the Company’s internal control over financial reporting related to the +measurement of the impairment of loans and the establishment of the carrying amount of other +real estate owned. Over the next several months, PRK underwent a process of obtaining updated +professional appraisals to replace the collateral valuations provided orally by PRK’s Outside +Contractor. The updated appraisals ultimately were $8.1 million less than the valuations provided +by Outside Contractor, and caused PRK’s outside auditor to revise the previously identified +significant deficiency at 2010 year end to a material weakness. The effect of using the inflated +collateral value was to reduce the amount of impairment of the problem loans and ultimately to +reduce any required provision to ALLL in the relevant period and to reduce the ALLL in +6 + + +prospective periods. +E. Guarantor Support Questioned +13. In May 2011,Vision’s primary bank regulator questioned guarantor support. These +questions prompted Vision to re -examine its reliance on guarantor support to reduce the +impairment associated with certain of its loans in accordance with ASC 310. By the end of 2010, +PRK’s carrying value related to guarantor su pport was close to $22 million and involved at least +22 L&D loans—the $22 million represented a third of the nearly $65 million in carrying value of +the 22 Vision L&D loans. +F. PRK’s Restatement + +14. On February 12, 2012 PRK restated its financial statements for the year ended +2010, and the quarters ended March 31, June 30, and September 30, 2011. The restatements +reflected $22.2 million more impairment than originally reported for the fiscal year ended +December 31, 2010 with corresponding decreases in net income before taxes of $24.8 million +($99.5 million vs. $74.7 million) representing a 25% decrease. Restatements for the first three +quarters of 2011 reflected corresponding increases in ALLL of 17%, 9 % and 7%, respectively for +each period. + +Violations + + 15. As a result of the conduct described above, PRK violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which require every issuer of +securities registered pursuant to Section 12 of the Exchange Act to file with the Commission +accurate periodic reports, including annual reports on Form 10-K and quarterly reports on Form +10-Q, and mandate that the required reports must contain any further material information +necessary to make the required statements made in the reports not misleading. + +16. As a result of the conduct described above, PRK 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. + +17. As a result of the conduct described above, PRK violated Section 13(b)(2)(B) of +the Exchange Act, which requires issuers of securities registered pursuant to Section 12 of the +Exchange Act to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit preparation of financial +statements in accordance with generally accepted accounting principles. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer. + +7 + + +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + +A. PRK cease and desist from committing or causing any violations and any future +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1 and 13a-13 thereunder. + +B. PRK shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $500,000 (Five Hundred Thousand Dollars) 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) PRK may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) PRK 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) PRK may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ- +341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +C. Payments by check or money order must be accompanied by a cover letter +identifying Park National Corporation as a Respondent in these proceedings, and the file number +of these proceedings; a copy of the cover letter and check or money order must be sent to Scott +Friestad, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5010. + +8 + + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, PRK 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 PRK’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +PRK 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 PRK by or on behalf of one or more investors based on substantially the +same facts as alleged in the Order instituted by the Commission in this proceeding. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3805.txt b/raw/aaer/2016/AAER-3805.txt new file mode 100644 index 0000000000000000000000000000000000000000..f39250f3bfd28c143afa576c03dca9dc8f3b4418 --- /dev/null +++ b/raw/aaer/2016/AAER-3805.txt @@ -0,0 +1,396 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78897 / September 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3805 / September 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17562 + + +In the Matter of + +ROBERT A. WAEGELEIN, +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 Robert A. Waegelein (“Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer of +Settlement (an “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 finds that: 1 + +A. SUMMARY + + This matter arises from a close personal relationship between Respondent, the former chief +financial officer of a New York-based public issuer (“Issuer”), and a former partner of the public +accounting firm retained to provide an independent audit of the Issuer’s financial statements +(respectively, the “Audit Partner” and the “Audit Firm”). Section 13(a) of the Exchange Act and Rule +13a-1 thereunder require public companies like the Issuer to file annual reports with the Commission +that have been audited by an independent accountant. The close personal relationship between +Respondent and the Audit Partner caused the Audit Firm to lack independence during the 2012, 2013, +and 2014 audit and professional engagement periods. Nonetheless, Respondent continued to certify +Issuer’s annual reports and allowed them to be publicly filed. By so doing, Respondent caused the +Issuer to violate Section 13(a) and Rule 13a-1 thereunder. + +B. RESPONDENT + +1. Respondent, age 55, is an accountant and CPA licensed in New York since 1987. +Respondent served as the Issuer’s chief financial officer for over two decades, until he retired in 2015. +Prior to working for the Issuer, Respondent was employed as an accountant at an auditing firm. + +C. RELEVANT ISSUER AND INDIVIDUAL + +2. During the relevant period, the Issuer’s securities were registered under Section 12(b) +of the Exchange Act and were traded on the New York Stock Exchange. The Issuer filed annual +reports on Form 10-K with the Commission. + +3. Audit Firm is a professional services firm headquartered in New York, New York. +The Audit Firm provides auditing, consulting, and tax services to various entities, including companies +with securities registered with the Commission and traded in U.S. markets. The Audit Firm served as +the Issuer’s auditor from 1995 to August 2015. + +4. Audit Partner, age 56, is an accountant and CPA licensed since September 1994. The +Audit Partner served as the Audit Firm’s coordinating partner on the Issuer’s audit team from May +2010 to March 2015. + + +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 +D. FACTS + +Background of the Audit Firm’s Relationship with the Issuer + +5. The Audit Firm served as the Issuer’s auditor from 1995 until August 2015, when the +Issuer terminated the Audit Firm. Between 1995 and 2010, the Issuer, including Respondent, +expressed dissatisfaction with certain aspects of the Audit Firm’s performance. As a result, in 2010, +the Issuer informed the Audit Firm that it was considering changing audit firms. + +6. In response, the Audit Firm presented the Issuer with a replacement audit team led by +the Audit Partner, who would serve as coordinating partner. “Coordinating partner” was the term +used by the Audit Firm to describe the lead partner on this audit engagement. The Issuer’s audit +committee decided to continue to retain the Audit Firm as its auditor. + +7. Based on internal discussions at the Audit Firm, the Audit Partner understood that the +Issuer was a “troubled account” and that his responsibilities as coordinating partner would include +“developing” and “mending” the Audit Firm’s relationship with the Issuer. The Audit Partner, along +with several other engagement partners assigned to the Issuer’s audit, assumed their roles on the +Issuer’s engagement team in or around May 2010. Respondent, as the chief financial officer (“CFO”) +of the Issuer, had regular communications with the Audit Firm engagement team about significant +accounting issues and other issues relevant to the Issuer’s audit. + +The Audit Partner’s Relationship with Respondent and Respondent’s Family + +8. Soon after the Audit Partner joined the Issuer’s engagement team, he began +entertaining Respondent. By 2012, the Audit Partner and the Respondent had developed a close +personal relationship inappropriate for an independent auditor and a CFO of a public issuer. This +close personal relationship continued through the 2012, 2013, and 2014 audit and professional +engagement periods. + +9. During this period, the Audit Partner spent extensive leisure time, including frequent +out-of-town and overnight trips, with Respondent and his family. In all, the Audit Partner and +Respondent took at least seven out-of-town trips together during the relevant period, all of which were +social in nature and did not have a valid business purpose. In addition to these trips, the Audit Partner +and Respondent frequently attended sporting events and socialized near the Issuer’s headquarters in +the greater New York City area. The Audit Partner also gifted tickets to sporting events and other +things of value to Respondent. + +10. The Audit Partner, sometimes accompanied by his wife, stayed overnight as a guest at +Respondent’s primary residence in New York and his vacation home in South Carolina on several +occasions during the relevant period. Likewise, Respondent stayed overnight at the Audit Partner’s +apartment in Chicago, Illinois, and on at least one other occasion, Respondent and his son stayed +overnight in a guest apartment in the Audit Partner’s apartment building. + +11. These social events, gifts, out-of-town trips, and overnight visits took place during +each of the 2012, 2013, and 2014 audit and professional engagement periods. + +4 + +12. For example, in January 2012, the Audit Partner gifted tickets to two successive regular +season professional football games to Respondent for Respondent and his family to attend. Neither +the Audit Partner nor any other the Audit Firm employee attended these games with Respondent and +his family. + +13. The following week, the Audit Partner and his wife took a trip to Green Bay, +Wisconsin with Respondent and Respondent’s son to attend a professional football playoff game. The +Audit Partner purchased the tickets for the group, and they stayed overnight at the same hotel near +Green Bay. + +14. Two months later, in March 2012, the Audit Partner, who was in South Carolina for a +separate golf outing, visited Respondent at Respondent’s brother-in-law’s vacation home in Hilton +Head. The Audit Partner stayed overnight in that vacation home, where Respondent was also staying. + +15. In October 2012, Respondent stayed overnight at the Audit Partner’s apartment while +on a business trip to Chicago. The Audit Partner and Respondent then planned a joint overnight trip +to Nashville, Tennessee the following month to, among other things, play golf and attend a +professional football game. While Respondent ultimately cancelled the trip, the Audit Partner and his +wife travelled to Nashville and attended the football game with the Audit Partner’s brother and +Respondent’s son, both of whom lived in Nashville. + +16. In April 2013, the Audit Partner, Respondent, and members of their respective +families again traveled to Nashville to celebrate the Audit Partner’s birthday and attend a professional +hockey game together. Upon learning that the Respondent and his son were attending a golf +tournament in Augusta, Georgia later that same month, the Audit Partner and his wife traveled to +Augusta, Georgia to attend the Masters golf tournament. Another Audit Firm partner also attended +this trip. The Audit Partner and his wife, the other Audit Firm partner, Respondent, and Respondent’s +son stayed in the same hotel during this trip. + +17. In October 2013, Respondent and his son traveled to Chicago for the purpose of +visiting the Audit Partner and his wife, and attending a professional football game and a golf outing +with them. Respondent and his son stayed overnight in the guest apartment in the Audit Partner’s +building during this trip. + +18. In April 2014, the Audit Partner and his wife traveled to South Carolina for the +purpose of spending leisure time and attending a golf tournament with Respondent and his family +over Easter weekend, staying three nights as guests at Respondent’s vacation home. After the trip, the +Audit Partner thanked Respondent and his family for “treating us to such a wonderful time”; +Respondent responded, “I can see many more of these ahead in the coming years . . . we appreciate +how generous you are with us as well.” + +19. In December 2014, the Audit Partner, Respondent, and their respective wives flew to +Nashville to attend a professional hockey game with Respondent’s son, among others. In an email to +Respondent and members of Respondent’s family after the trip, the Audit Partner described the trip as +a “Great 24 Hour Extravaganza,” writing “We had a blast (as usual) being with all of you.” + +5 + +20. In or around February 2015, the Audit Partner began planning a second overnight trip +to the Masters golf tournament in April 2015 with Respondent, Respondent’s son, and another Audit +Firm partner, among others. The Audit Partner planned to treat the trip in part as a retirement party +for Respondent. Respondent and the other Audit Firm partner did not attend this trip, after the Audit +Firm received a regulatory inquiry in March 2015 regarding the Audit Partner’s relationship with +Respondent. + +21. In addition to these repeated out-of-town trips, the Audit Partner and Respondent +frequently attended sporting events and socialized near the Issuer’s headquarters in the greater New +York City area. On a number of occasions, the Audit Partner flew to the greater New York City area +for the purpose of attending a sporting event with Respondent and then left without visiting the +Issuer’s headquarters or otherwise performing any audit-related work. On at least two other +occasions, the Audit Partner traveled to the greater New York City area for the purpose of having +dinner at Respondent’s home with Respondent, Respondent’s family, Respondent’s neighbors, and +other members of the audit engagement team, and then left without visiting the Issuer’s headquarters +or otherwise performing any audit-related work. + +22. On at least three other occasions, the Audit Partner gifted sports tickets to +Respondent, Respondent’s family, or friends of Respondent’s son for use when the Audit Partner was +not present. The Audit Partner also gifted hundreds of dollars’ worth of sports memorabilia to +Respondent over the five-year engagement. + +23. The Audit Partner’s entertainment of Respondent and his family caused the Audit +Partner to incur significant entertainment, travel, and lodging expenses. In total, the Audit Partner +incurred approximately $109,000 in entertainment-related expenses—meals, sports tickets, and related +travel and lodging—in connection with the Issuer’s 2012, 2013, and 2014 audits. In 2012, he spent +approximately $29,545; in 2013, he spent approximately $52,119; and in 2014, he spent approximately +$27,333. + +24. The Respondent’s relationship with the Audit Partner was marked not only by +significant entertainment spending, but also by a close personal friendship. During the relevant period, +the Audit Partner and Respondent exchanged hundreds of personal texts, emails, and voicemails that +did not include meaningful business-related discussions. The Audit Partner and Respondent +frequently referred to each other in emails as a “friend.” Respondent also shared sensitive personal +information not typically shared with a solely professional colleague with the Audit Partner. In 2013, +Respondent and his wife invited the Audit Partner to spend Thanksgiving at their home, but the Audit +Partner decided to visit his father instead. + +25. In the aggregate, the frequent entertainment and social events shared by Respondent +and the Audit Partner violated certain of the Audit Firm’s policies with respect to independence and +client entertainment. Respondent was aware, based upon his background in public accounting, that +the Commission’s Regulation S-X requires auditors of public companies to maintain their +independence from audit clients, and avoid conflicts of interest that could taint an audit. + + +6 +The Respondent’s Representations Concerning the Audit Firm’s Independence + +26. Despite Respondent’s understanding of the independence requirements of Regulation +S-X and his knowledge of his close personal friendship with the Audit Partner, Respondent signed +management representation letters to the Audit Firm stating that “We are not aware of any reason that +[the Audit Firm] would not be considered to be independent” in connection with the 2012 and 2013 +audits. + +27. In connection with the 2014 audit, Respondent signed a similar management +representation letter stating “We are not aware of any reason that [the Audit Firm] would not be +considered to be independent for purposes of the Company’s audit, including our consideration of the +matters communicated to the Audit Committee on March 12, 2015 and March 27, 2015 by [the Audit +Firm].” The “matters communicated to the Audit Committee on March 12, 2015 and March 27, 2015 +by [the Audit Firm]” included a presentation by the Audit Firm to the Issuer’s audit committee +concerning the Audit Firm’s preliminary evaluation of the close personal relationship between +Respondent and the Audit Partner, and certain remedial steps undertaken by the Audit Firm in +connection with the Issuer’s audit in response to that relationship. + +28. In each of 2012, 2013, and 2014, the Audit Firm provided to the Issuer audit reports +representing that the Audit Firm was independent of the Issuer. These audit reports were included or +incorporated by reference in the annual reports filed by the Issuer on Form 10-K. Although +Respondent should have realized that his close personal relationship with the Audit Partner impaired +the Audit Firm’s independence and rendered the Audit Firm’s audit reports inaccurate, Respondent +certified the Issuer’s annual reports in each of 2012, 2013, and 2014. + +E. LEGAL ANALYSIS +Basic Principles of Auditor Independence + +29. As the Commission has long recognized, “[i]ndependent auditors have an important +public trust. . . . It is the auditor’s opinion that furnishes investors with critical assurance that the +financial statements have been subjected to a rigorous examination by an objective, impartial, and +skilled professional, and that investors, therefore, can rely on them.” Revision of the Commission’s Auditor +Independence Requirements, Exchange Act Rel. No. 43602, 2000 WL 1726933, at *2 (Nov. 21, 2000) +(Adopting Release). + +30. To be considered “independent” for purposes of the federal securities laws, a public +accountant must be independent in both fact and appearance. See In the Matter of Ernst & Young LLP, +Exchange Act Rel. No. 46821, 2004 WL 824099, at *30 (Apr. 16, 2004) (independence in fact and +appearance are “equally important under the securities laws”); see also United States v. Arthur Young & +Co., 465 U.S. 805, 819 n.15 (1984) (“It is therefore not enough that financial statements be accurate; +the public must also perceive them as being accurate.”) + +31. The circumstances in which an auditor will—and will not—be deemed independent +are set forth in Rule 2-01 of Regulation S-X. Rule 2-01(c) provides a non-exclusive list of specific +relationships that render an accountant non-independent. Rule 2-01(b) provides the “general + +7 +standard” for auditor independence, which all auditors must meet even if their conduct does not fall +within one of the specific prohibitions in Rule 2-01(c). Under the general standard, + +[t]he 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) (emphasis added). This standard applies with equal force to individual +accountants and the audit firms in which they practice. See 17 C.F.R. § 210.2-01(f)(1). + +32. A reasonable investor with knowledge of all relevant facts and circumstances +concerning Respondent’s personal relationship with the Audit Partner would conclude that the Audit +Partner was not capable of exercising objective and impartial judgment with respect to the audits of +the Issuer. Accordingly, the Audit Partner and the Audit Firm lacked independence during 2012, +2013, and 2014.2 + +33. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require public issuers to +file with the Commission annual reports certified by an independent public accountant. Because the +Issuer’s annual reports for 2012, 2013, and 2014 were not audited by a public accountant who was +independent within the meaning set forth in Rule 2-01 of Regulation S-X, the Issuer violated Section +13(a) of the Exchange Act and Rule 13a-1 thereunder in each of those years. + +Violations + +34. As a result of the conduct described above, Respondent caused the Issuer to violate +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder during each of 2012, 2013, and 2014. + +F. FINDINGS + +35. Based on the foregoing, the Commission finds that Respondent caused violations of +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder by the Issuer. + + +2 As the Commission noted in the Adopting Release for the revisions to Rules 2-01 and 2-02, “[t]he definition of +‘accountant’ includes the accounting firm in which the auditor practices. The definition makes clear that an +individual accountant’s lack of independence may be attributed to the firm.” Revision, Exchange Act Rel. No. +43602, 2000 WL 1726933, at *86. + +8 +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 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Section 13(a) of the Exchange Act +and Rule 13a-1 thereunder. + + B. Respondent shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amount of $25,000 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Section 21F(g)(3) of the Exchange Act. If timely payment is +not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +C. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(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 +Waegelein’s name as the applicable Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, +Senior Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, +200 Vesey Street, Suite 400, New York, NY 10281-1022. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he shall +not argue that Respondent is entitled to, nor shall Respondent 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 + +9 +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 \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3806.txt b/raw/aaer/2016/AAER-3806.txt new file mode 100644 index 0000000000000000000000000000000000000000..6ef8735f38faf604b433d7b01d22b14554b3e87f --- /dev/null +++ b/raw/aaer/2016/AAER-3806.txt @@ -0,0 +1,1191 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10221 / September 27, 2016 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78944 / September 27, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3806 / September 27, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17582 + + +In the Matter of + +WEATHERFORD +INTERNATIONAL PLC, +F/K/A WEATHERFORD +INTERNATIONAL LTD., +JAMES HUDGINS, CPA, +AND DARRYL KITAY, CPA, + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER (“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 Weatherford International plc, formerly known as Weatherford International Ltd. +(“Weatherford”), James Hudgins, CPA (“Hudgins”), and Darryl Kitay, CPA (“Kitay”) +(collectively “Respondents”); and that public administrative proceedings be, and hereby are, +instituted pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice against Hudgins and Kitay. + + + + + + + 2 +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) that the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which 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. Between 2007 and 2012, Weatherford, a large multinational provider of oil and +natural gas equipment and services, issued false financial statements that inflated its earnings by +over $900 million in violation of U.S. Generally Accepted Accounting Principles (“GAAP”). +Weatherford issued materially false and misleading statements about its net income, earnings per +share (“EPS”), effective tax rate (“ETR”), and other key financial information. Weatherford did +not have sufficient internal accounting controls to identify and properly account for its +accounting of income taxes throughout the relevant period. + +2. As a result, Weatherford was forced to restate its financial statements on three +separate occasions over eighteen months. The first restatement was made public on March 1, 2011 +when Weatherford announced that it would restate its financial results for 2007-2010 and that a +material weakness existed in its internal control over financial reporting (“ICFR”) for the +accounting of income taxes. That restatement, filed on March 8, 2011, reduced previously +reported net income by approximately $500 million (the “First Restatement”). $461 million of +the First Restatement resulted from a four-year income tax accounting fraud orchestrated by +James Hudgins, the Vice President of Tax and later an officer of Weatherford, and Darryl Kitay, +the tax manager and later senior tax manager who reported to Hudgins. Hudgins and Kitay made +numerous post-closing adjustments or “plugs” to fill gaps to meet ETRs that Weatherford +previously disclosed to analysts and the public. This deceptive intercompany tax accounting +improperly inflated Weatherford’s earnings and materially understated its ETR and tax expense. + +3. The fraud created the misperception that the tax structure Weatherford designed +to reduce its tax expense and ETR was far more successful than it actually was. From 2007 to +2010, Weatherford regularly touted its favorable ETR to analysts and investors as one of its key +competitive advantages, which it attributed to a superior international tax avoidance structure +that Hudgins constructed at the urging of senior management. The purportedly lower ETR rates +Weatherford reported throughout this period proved illusory, as the First Restatement made + +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 +clear. After announcing the First Restatement, Weatherford’s stock price declined nearly 11% in +one trading day ($2.38 per share), closing at $21.14 per share on March 2, 2011. The decline +eliminated over $1.7 billion from Weatherford’s market capitalization. + +4. Weatherford announced additional restatements in February 2012 and July 2012 +(the “Second Restatement” and “Third Restatement,” respectively). After the First Restatement, +Weatherford attempted to remediate its material weakness in internal control over income tax +accounting. Throughout its remediation efforts in 2011, Weatherford filed its Forms 10-Q on a +timely basis and falsely reassured investors that it was performing additional reconciliations and +post-closing procedures to ensure that its financial statements were fairly presented in conformity +with GAAP. However, Weatherford, through Hudgins and Kitay, failed to review, assess and +quantify known income tax accounting issues that had a high risk of causing additional material +misstatement as early as July 2011. When Weatherford filed its Second Restatement on March 15, +2012, Weatherford reported a $256 million drop in net income from 2007-2011 as a result of +additional errors in its income tax accounting and its material weakness in internal control over +income tax accounting remained. At least $84 million of that drop in net income resulted from an +income tax accounting GAAP violation Respondents knew about, but failed to assess and quantify, +before Weatherford filed its third quarter financial statements. + +5. Four months after filing the Second Restatement, Weatherford announced that it +was withdrawing reliance on all previous financial statements because it had discovered additional +income tax errors that reduced prior period net income by $107 million. By the time Weatherford +issued its Third Restatement on December 17, 2012, Weatherford had reduced net income from +prior periods by an additional $186 million, largely driven by books and records and internal +accounting controls issues identified and corrected during Weatherford’s remediation efforts in +2012. + +6. As a result of the fraudulent income tax accounting, Weatherford accrued millions +in improper benefits by using artificially inflated common stock to acquire numerous companies. +Weatherford also raised over $5 billion from nine bond offerings during the relevant period. +Hudgins used the artificially low ETRs and perceived successful tax avoidance strategies as, in +part, a basis to justify becoming a long-desired officer of Weatherford in 2009, and to secure a +large bonus in 2010. + +7. As a result of the conduct described herein, Weatherford violated the antifraud +provisions of Exchange Act Section 10(b) and Rule 10b-5 thereunder, and Securities Act Section +17(a), the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, +and 13a-13 thereunder, the books and records provisions of Exchange Act Section 13(b)(2)(A), and +the internal accounting control provisions of Section 13(b)(2)(B). + +8. As a result of the conduct described herein, Hudgins and Kitay violated the +antifraud provisions of Securities Exchange Act Sections 10(b) and Rule 10b-5 thereunder, and +Securities Act Section 17(a) and caused Weatherford to violate Securities Act Section 17(a) and +Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 10b-5, 12b-20, 13a-1, +13a-11, and 13a-13 thereunder. Hudgins and Kitay also violated Exchange Act Section 13(b)(5) + 4 +and Exchange Act Rule 13b2-1 promulgated thereunder, and Hudgins violated Exchange Act Rule +13b2-2. In addition, both individuals violated the federal securities laws or rules and regulations +thereunder pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. + +RESPONDENTS + + 9. Weatherford International plc f/k/a Weatherford International Ltd. is a +multinational Irish public limited company based in Switzerland, with U.S. offices in Houston, +Texas. Weatherford’s shares are registered with the Commission pursuant to Exchange Act +Section 12(b) and are listed on the NYSE under the symbol “WFT.” Weatherford files periodic +reports, including Forms 10-K and 10-Q, with the Commission pursuant to Exchange Act Section +13(a) and related rules thereunder. + +10. In November 2013, the Commission charged Weatherford with: (a) violating the +Foreign Corrupt Practices Act by authorizing bribes and improper travel and entertainment for +foreign officials in the Middle East and Africa to win business; (b) falsifying its books and +records to conceal these illicit payments and illegal transactions with countries subject to U.S. +sanctions; and (c) failing to establish an effective system of internal accounting controls. +Weatherford agreed to pay $252.6 million to settle the Commission’s charges and related actions +by four other agencies. As part of that settlement, Weatherford agreed to retain an independent +compliance monitor for 18 months and to self-report to the SEC for an additional 18 months. + + 11. James M. Hudgins, age 62, resides in Texas. He served as Weatherford’s +Director of Tax from January 1999 until mid-2000, when he became Vice President of Tax, and +as an Officer from February 2009 until his resignation on March 31, 2012. Hudgins was licensed +as a CPA by the State of Texas from 1988 until 2012. + + 12. Darryl S. Kitay, age 56, resides in Texas. He served as Weatherford’s Tax +Manager and Senior Manager from April 2004 until 2011, then as Weatherford’s Tax Director +through January 2013. Kitay reported to Hudgins from April 2004 until March 2012. Kitay was +licensed as a CPA by the State of Texas in 1992 and expired in 2004. Weatherford relieved +Kitay of all supervisory responsibilities associated with Weatherford’s income tax accounting in +May 2012, after the filing of the Second Restatement. Weatherford terminated Kitay’s +employment in July 2013. + +RELEVANT ENTITY + + 13. Ernst & Young LLP (“Ernst & Young”) is a professional services limited liability +partnership, headquartered in New York City, with offices located throughout the United States. It +is a member firm of Ernst & Young Global Limited and provides auditing, consulting, and tax +services to a variety of companies, including companies whose securities are registered with the +Commission and trade in the U.S. markets. Ernst & Young was Weatherford’s external auditor +from 2001 to March 2013. On March 7, 2013, Weatherford’s audit committee decided not to re- +appoint Ernst & Young. + + 5 +FACTS + +Background + + 14. From its inception through merger of two predecessor companies in 1998, +Weatherford employed an aggressive strategy to become a top-tier multinational provider of oil +and natural gas equipment and services. One part of that strategy was based on exponential +revenue growth fueled by hundreds of acquisitions designed to expand Weatherford’s +multinational footprint. During the decade before the First Restatement, Weatherford’s revenue +increased from $1.8 billion to $10.2 billion. Emails among Weatherford’s senior management +reflected that Weatherford took pride in being an entrepreneurial high-growth organization that +placed a premium on more growth and better earnings. This growth came, often, at the expense of +ensuring good governance and compliance. During the relevant period, Weatherford failed to +ensure that its internal controls over income tax accounting kept up with its growth. + + 15. Another key component of that strategy was to develop a superior international +tax avoidance structure that reduced Weatherford’s ETR and tax expense (and increased EPS and +cash flow) while providing a competitive advantage over U.S.-based peer companies. In 2002, +Weatherford changed its place of incorporation from the U.S. to Bermuda, a 0% tax jurisdiction, +through a process known as inversion.2 + + 16. Weatherford further refined its international tax structure from 2003 through 2006 +by implementing a series of hybrid instruments to facilitate the movement of revenue from +higher tax rate jurisdictions (i.e., Canada and United States) to lower tax rate jurisdictions (i.e., +Hungary and Luxembourg). Hybrid instruments are often used in international tax planning to +achieve deductions in one, typically high tax rate, jurisdiction and shift income to another, typically +low tax rate, jurisdiction. Hybrid instruments are structured to incorporate features of both debt +and equity, such that the instrument typically qualifies as debt in one jurisdiction and equity in +another. Payments on debt may be deducted in computing taxable income while the yields are +accrued but not necessarily paid, and, therefore, not calculated as taxable income. + + 17. Taken together, these tax avoidance strategies were designed largely to reduce +Weatherford’s tax expense and ETR, while increasing EPS and cash flow. As a result, these +international tax avoidance strategies reduced Weatherford’s ETR from 36.3% in 2001 to 25.9% +by the end of 2006. + + 18. As the then-Vice President of Tax, Hudgins was the architect of Weatherford’s +tax structure, tax planning, and was responsible for executing tax strategies designed to reduce +Weatherford’s ETR and tax expense. Hudgins was also responsible for ensuring that + +2 In 2009, Weatherford took steps to preserve the tax avoidance structure it created by changing its place of +incorporation from Bermuda to Switzerland through a series of share exchange transactions commonly referred to as +redomestication. In 2014, Weatherford changed its place of incorporation from Switzerland to Ireland when, +through merger agreement, Weatherford International plc, an Ireland-based public limited company, became the +new public holding company/parent of Weatherford’s group of companies. + + 6 +Weatherford’s consolidated income tax accounts were properly maintained and that the +consolidated tax provisions, underlying expenses, and related financial disclosures were +accurately and fairly presented in all material respects in accordance with GAAP. Kitay, who +reported to Hudgins, was responsible for preparing and reviewing Weatherford’s consolidated +income tax accounts and underlying expenses that were reported in Weatherford’s financial +statements. + + 19. From 2002 through October 2006, Hudgins reported to a Chief Financial Officer +(“CFO”) who was a CPA with significant accounting experience. In October 2006, after the +departure of that CFO, the Vice President of Finance was appointed CFO. The new CFO was +trained as an attorney and had considerable mergers and acquisition experience. However, the +new CFO was not a CPA and had limited accounting knowledge and experience. + + 20. To compensate for the CFO’s limited accounting knowledge and experience, +Weatherford created the new position of Chief Accounting Officer (“CAO”) to supervise and +take responsibility of Weatherford’s accounting. Under this new arrangement, Weatherford’s tax +department was considered more like a “finance” function focused on tax strategy and planning, +not tax accounting. Thus, beginning in October 2006, Hudgins and Weatherford’s tax +department no longer reported directly to Weatherford’s accounting department or to senior +management with sufficient knowledge or experience to assess whether Weatherford’s income +tax accounting was being fairly and accurately presented in accordance with GAAP. As a result, +the tax department had virtually no accounting oversight. + + 21. Achieving and sustaining a lower ETR was very important to Weatherford’s +profitability strategy during the relevant period. Weatherford senior management and Hudgins +understood that Weatherford’s tax structure and resulting ETR added significant value and was +material to analysts and investors alike. Wall Street analysts closely followed Weatherford’s +ETR and its effect on earnings. Each percentage point in Weatherford’s ETR translated into +$0.02 to $0.03 in EPS. Weatherford’s senior management knew its tax department was +perpetually understaffed and overworked during the years leading up to the First Restatement. +Hudgins led a tax staff that was roughly the same size as when he was hired, Hudgins pressed his +employees to work long hours to make Weatherford’s tax structure extremely competitive. +Weatherford and Hudgins quickly gained a reputation with the company’s external auditor as a +challenging and demanding client known for taking aggressive accounting positions, particularly +in the area of income tax accounting. + + 22. Although Weatherford reduced its ETR by nearly 10% from 2001 to the end of +2006, its CFO remarked that Weatherford’s ETR remained somewhat above that of other +inverted peer companies in his response to an analyst’s question during the year end earnings call +on January 30, 2007. Soon thereafter, Weatherford started reporting ETR results that created a +false perception that its international tax structure was outperforming similarly-situated +competitors by a significant margin. For example, in 2008 and 2009, fueled by its deceptive +income tax accounting practices, Weatherford reported pre-restatement ETRs of 17.1% and +6.5%. + + 7 +$461 Million Tax Accounting Fraud Leads to First Restatement + +23. In connection with fiscal years 2007 through 2010, Hudgins and Kitay engaged in +fraudulent practices relating to income tax accounting that violated GAAP and made +Weatherford’s financial statements materially false and misleading. During each of those years, +Weatherford repeatedly and publicly disclosed ETR estimates and recorded tax expense that +Hudgins and Kitay knew, or were reckless in not knowing, were fabricated. Each year, Hudgins +and Kitay made or authorized unsupported post-closing adjustments to accounting data that +intentionally lowered Weatherford’s actual ETR and tax expense. To do so, they reversed +accounting data that had been correctly input into Weatherford’s consolidated tax provision from +the company’s accounting system, and did not notify Weatherford’s accounting department why +they had made such adjustments. They performed no work to support the adjustments, which +were merely a “plug” to arrive at the lower estimated ETR and tax expense amounts. Without +disclosing how they arrived at their numbers, Hudgins and Kitay provided these amounts for +inclusion in Weatherford’s consolidated financial statements, which senior management shared +with analysts and investors repeatedly during earnings calls and public financial statements. This +conduct went undetected for over four fiscal years. +24. Throughout 2007-2010, Hudgins and Kitay made these manual post-closing +adjustments within a line item on the consolidated tax provision labeled intercompany “dividend +exclusion.”3 These dividend exclusion adjustments, which ranged from $286 million to $439 +million per year, involved different Weatherford entities within Weatherford’s corporate +elimination account, which was known as the “Eliminations region.” These adjustments were +then tax effected at 35%, which falsely lowered Weatherford’s year-end provision for income +taxes by $100 million to $154 million each year. These dividend exclusion adjustments also +overstated net income, understated ETR and tax expense, and ultimately created a $461 million +phantom income tax receivable. +25. These adjustments were made to allow Weatherford’s reported ETR and earnings +results to better align with analysts’ expectations and Weatherford’s previously-announced +projected results. Hudgins and Kitay did not tell anyone outside of Weatherford’s tax +department the true reason they made these adjustments. Kitay identified the existence of the +adjustments to Ernst & Young each year, but, when questioned about them, Kitay made +misleading and inconsistent responses to the auditors and failed to disclose the true reason for the +adjustments. Kitay sometimes asked Hudgins to review his responses before providing them to +Ernst & Young. +26. The errors were finally discovered in February 2011. By that time, the phantom +income tax receivable had increased to such dramatically disproportionate heights, over $460 +million, that it defied even the unsupported explanations of Hudgins and Kitay. Shortly +thereafter, Weatherford released the First Restatement in March 2011. + + +3 Dividend exclusion represents the amount of intercompany dividends that a corporation must exclude from +its taxable income. + 8 +First Restatement - Dividend Exclusion Plug Adjustments +Fiscal Year 2007 +27. In December 2006, Weatherford, through Hudgins, initially forecasted an ETR of +29% for fiscal year 2007. However, emails among senior management reflected that the +company was under pressure to meet Wall Street expectations and to offset shortfalls in its +quarterly earnings targets by lowering its ETR. By the time Weatherford announced its second +quarter earnings results on July 23, 2007, the company informed analysts that ETR would “run +between of 20 and 21% on average for the entire year.” Weatherford reported similar ETR +results in its financial statements and earnings releases for the third quarter of 2007, creating the +perception that its tax avoidance strategies were finally beginning to outperform those of its +competitors and yield long-term value to investors. +28. Throughout the first three quarters of 2007, Weatherford recorded ETR and tax +expense pursuant to FIN 18, “Accounting for Income Taxes in Interim Periods.” FIN 18 +prescribes an estimated annualized ETR approach for computing the tax provisions for the first +three quarters of the year, which is based on a company’s best estimate of current year ordinary +income. GAAP, however, does not allow companies to use FIN 18 to calculate their year-end tax +provisions. +29. To comply with GAAP, Weatherford was required to record ETR and tax expense +at year end pursuant to FAS 109, “Accounting for Income Taxes.” 4 FAS 109 establishes standards +on how companies should account for and report the effects of income taxes, including the +calculation of the year-end consolidated tax provision. The tax data for every Weatherford entity +was compiled in the field and in Houston. Tax department personnel in Houston under Hudgins +and Kitay’s supervision reviewed that information, after which the tax provisions for legal entities +were finalized and then combined on a region-by-region basis. The region-based tax provisions +were then consolidated to arrive at a single tax provision from which current and deferred assets +and liabilities, associated tax expense (or benefit), and ETR were calculated and recorded. +30. Shortly before Weatherford was scheduled to release its year-end financial results +for 2007, however, Hudgins and Kitay discovered the year-end ETR and tax expense that had +been calculated pursuant to FAS 109 far exceeded the ETR estimates and tax expense +disseminated publicly to analysts and investors during the first three quarters of 2007 based on +their ETR estimates. Faced with what they considered to be an immovable deadline for reporting +earnings, Hudgins and Kitay falsified the year-end consolidated tax provision by making an +unsubstantiated manual $439.7 million post-closing “plug” adjustment to two different +Weatherford Luxembourg entities within Weatherford’s Eliminations region. To do so, they +intentionally reversed accounting data that had been correctly input to Weatherford’s +consolidated tax provision via the company’s accounting system. + +4 Effective for interim and annual periods ending after September 15, 2009, FASB codified authoritative +accounting literature in the Accounting Standards Codification. As such, FIN 18 and FAS 109 were superseded by +ASC Topic 740. The substantive provisions of the codified guidance are consistent with the superseded standards. + 9 +31. The resulting plug adjustment, which Hudgins and Kitay then improperly applied +a 35% tax rate to, allowed Weatherford to reduce its tax expense by $153.9 million for the year +and to lower its ETR in line with previous ETR estimates publicly disclosed during quarterly +calls with analysts. +32. Hudgins and Kitay took no steps to determine the necessity and accuracy of the +plug adjustment, either before or after it was made. They performed no work at any time to +determine whether plugging the gap was appropriate under GAAP and made no attempt to +substantiate the difference between the their publicly disclosed ETR estimates and tax expenses +with the FAS 109 actual results that they were witnessing. Both Hudgins and Kitay knew, or +were reckless in not knowing, that they should have reviewed and substantiated the actual tax +numbers after the close process, but they never did. Hudgins and Kitay made no attempt to alert +Weatherford’s accounting department, internal auditor, or senior management of the significant +issues related to its FAS 109 actual ETR results. Nor did they notify the company’s external +auditor of any discrepancy. And Weatherford, for its part, never questioned or reviewed the +methods Hudgins and Kitay used to move Weatherford’s ETR downward from 29% to 20% over +the span of one year. + 33. The 20% ETR Weatherford announced to analysts and investors during its year- +end conference call allowed Weatherford to ultimately meet Wall Street’s earnings expectations. +In an internal email expressing disappointment with operational results, Weatherford’s CEO +stated: +In spite of our ability to meet Wall Street’s 2007 earnings expectations, the reality +is that our operations delivered $130 million less than the EBIT target set. . . . a +lower than expected tax rate (20% vs. 29%) allow[ed] us to make our Wall Street +numbers for the year. +34. During 2007 and throughout the relevant period, Hudgins signed representation +letters relied upon by Weatherford senior management and Ernst & Young indicating, without +exception, that the internal controls over financial reporting for the accounting of income taxes +were effective and that the income tax accounting was completed in accordance with GAAP. +These statements were false. +Fiscal Year 2008 +35. In 2008, Weatherford initially forecasted ETR at 22-23% for the year. During the +second and third quarters of 2008, however, Weatherford touted lower ETR estimates of 17-18% +in quarterly filings and calls with analysts. Those estimates were based on interim tax provisions +prepared and reviewed by Hudgins and Kitay. In its pre-restatement Form 10-K for the period +ending December 31, 2008, Weatherford reported an ETR of 17.1% for the year. +36. In 2008, Weatherford implemented a new automated software program, modified +to Weatherford’s needs and specifications, to prepare its year-end tax provisions, replacing +Microsoft Excel spreadsheets. The tax software was a significant upgrade because it +automatically populated – or “mapped” – financial accounting data into Weatherford’s tax +provisions. For example, the tax software was designed to ensure that all intercompany dividend + 10 +income and related dividend exclusion amounts would be automatically “mapped” and +eliminated in consolidation without attributing any tax benefit to Weatherford. Manual +intervention of the mapping process required an override of the system. +37. Weatherford’s tax personnel from the field collected and input detailed tax- +specific information into the tax software near and at year-end. After Weatherford filed its Form +10-Q for the period ending September 30, 2008, Weatherford prepared a “pretend” hard close of +Weatherford’s tax accounts and tax provisions based on tax information collected from the field +using recently filed third quarter numbers. The purpose of the pretend hard close was to ensure +that Weatherford’s tax accounting controls were in place for the end of the year.” Essentially, +the pretend hard close was a “dry run” of all the steps Weatherford would later perform to +finalize its consolidated tax provision at year-end. Accordingly, the pretend hard close process +would provide information regarding the effectiveness of Weatherford’s ICFR for the accounting +of income taxes, but the results themselves would not be incorporated into Weatherford’s +financial statements. +38. In December 2008, as part of the pretend hard close process, Kitay ran the tax +software to calculate Weatherford’s consolidated tax provision on at least two occasions using +data from Weatherford’s third quarter. Kitay noticed, and informed Hudgins, that Weatherford’s +actual ETR closely aligned with its originally forecasted ETR of 22-23% and not the lower +quarterly 17-18% ETR estimates and tax expense reported in quarterly financial statements and +conference calls with analysts. Despite the fact that Hudgins and Kitay had advance notice that +there was another gap, during the process that was supposed to permit time to fix control issues +and errors before year end, neither Hudgins nor Kitay made any effort to address or analyze the +sizeable gap or inform others outside of the tax department of the gap that was occurring in the +second consecutive year. Instead, during a pretend hard close process that was explicitly +designed to identify and correct potential tax accounting errors before year-end, Hudgins and +Kitay directed others to manually override the tax software to generate results aligned with +previously disclosed ETRs and tax expense. +39. In January 2009, in preparation for year-end closing, Kitay again ran the tax +software to calculate Weatherford’s tax provision for year-end 2008. As a result, Hudgins and +Kitay discovered the year-end actual ETR and tax expense they calculated pursuant to FAS 109 +far exceeded the ETR estimates and tax expense the company had disseminated publicly to +analysts and investors during the first three quarters of 2008. Faced with yet another opportunity +to disclose and analyze the large gap between the actual ETR they calculated pursuant to FAS +109 and the lower ETR estimates they reported earlier in the year, Hudgins and Kitay opted to +perpetuate the fraud. Specifically, Hudgins and Kitay again “plugged the gap” and falsified the +year-end consolidated tax provision by making an unsubstantiated manual post-closing +adjustment of $303.7 million. The improper adjustment was made to different Luxembourg +entities within Weatherford’s Eliminations region than those used in 2007. The 2008 plug +adjustment, which was improperly tax effected at 35%, allowed Weatherford to reduce its tax +expense by $106.3 million and lower its ETR in line with previous estimates publicly disclosed +during quarterly calls with analysts. Although Ernst & Young repeatedly questioned this +adjustment during its year-end audit and proposed reclassifying the adjustment to a Bermuda + 11 +entity within the Eliminations region, neither Hudgins nor Kitay informed Ernst & Young of the +true reason for the adjustment. +40. Neither Hudgins nor Kitay notified anyone outside of the tax department that they +overrode the tax software program to finalize the ETR and resulting tax expense for fiscal year +2008. Nor did they disclose any concerns that errors existed within Weatherford’s corporate +accounting that could compromise the actual ETR results and the integrity of the newly installed, +multi-million dollar tax accounting program. In fact, the only review Hudgins performed in +2008 was to ask Kitay if the adjustment “was the same treatment as last year.” Further, +Weatherford senior management did not ask Hudgins how the ETR had moved from 22% to the +final disclosed rate of 17.1%, which beat analysts’ expectations once again. +41. During 2008, Hudgins actively lobbied for officer status and the higher +compensation it brought. Hudgins justified becoming an officer, in part, by pointing to the ETR +he was able to obtain for Weatherford. For example, in November 2008, Hudgins allegedly sent +an email to Weatherford’s CEO, which included the following: +“I’m very upset that I’m not an officer yet. I achieved a 17% rate this year, and all of +you treat me like sh[**].” +Weatherford promoted Hudgins to officer shortly after Weatherford released earnings for fiscal +year 2008, which reflected a pre-restatement ETR of 17.1%. +Fiscal Years 2009-2010 +42. In 2009 and 2010, Weatherford continued to report ETR estimates and tax +expense in quarterly financial statements and conference calls with analysts that conflicted with +the significantly higher actual ETR results Hudgins and Kitay were calculating at year end under +FAS 109. During both the pretend hard close process and at year-end for these years, Hudgins +and Kitay once again observed large gaps between the actual ETR and year-end tax expense they +calculated using the tax software and the lower estimated ETR and resulting tax expenses that +they reported to analysts and investors. Hudgins and Kitay never disclosed these large gaps to +anyone at Weatherford outside the tax department. +43. Faced with four additional opportunities to disclose and analyze these gaps during +the pretend hard close and year-end process in 2009 and 2010, Hudgins and Kitay chose each +time to make unsupported adjustments to Weatherford’s consolidated tax provision that +artificially lowered the company’s ETR. They made unsubstantiated manual post-closing plug +adjustments of $290.4 million and $286.6 million during year end 2009 and 2010, respectively, +by overriding accounting data that had been automatically and correctly input into Weatherford’s +consolidated tax provision. These plug adjustments, which were made in 2009 and 2010 using a +Bermuda entity within Weatherford’s Eliminations region, improperly lowered Weatherford’s +tax expense by $101.6 million and $100.3 million during 2009, and 2010, respectively. +44. Each year, Hudgins and Kitay used different entities that masked the post-closing +adjustments that plugged gaps to allow Weatherford to lower its ETR and appear to have a +successful and competitive tax structure. For three of the four fiscal years, the dividend +exclusion plug adjustments involved different entities within Weatherford’s Eliminations region. + 12 +For example, the dividend exclusion plug adjustments made within Weatherford’s Eliminations +region in 2009 and 2010 involved the same Bermuda entity, but the plug adjustments made in +2007 and 2008 were associated with three different Luxembourg entities. Hudgins and Kitay +aggravated the magnitude of the fraud by inappropriately tax-effecting these adjustments by +attributing a 35% tax rate to calculate the “tax benefit” purportedly associated with either 0%- +tax-rate (Bermuda) or low-single-tax-rate (Luxembourg) jurisdictions, as follows: +WFT Luxembourg SARL 195,430,220$ +WFT Financing (Luxembourg) SARL 244,298,216$ +Total Unsupported Adjustment $439,728,436 +Tax Rate Improperly Applied 35% +2007 Plugged Tax Benefit 153,904,953$ +WFT Luxembourg SARL 195,429,960$ +WFT Investment (Luxembourg) SARL 108,245,404$ +Total Unsupported Adjustment $303,675,364 +Tax Rate Improperly Applied 35% +2008 Plugged Tax Benefit 106,286,377$ +Total Unsupported Adj. - WFT Bermuda Ltd. 290,407,796$ +Tax Rate Improperly Applied 35% +2009 Plugged Tax Benefit 101,642,729$ +Total Unsupported Adj. - WFT Bermuda Ltd. 286,632,936$ +Tax Rate Improperly Applied 35% +2010 Plugged Tax Benefit 100,321,528$ +Unsupported Manual Entries - Fiscal Year 2007 +Unsupported Manual Entries - Fiscal Year 2008 +Unsupported Manual Entries - Fiscal Year 2009 +Unsupported Manual Entries - Fiscal Year 2010 + +First Restatement - Phantom Income Tax Receivable +45. The inappropriate plug adjustments and the resulting improper tax benefits +recorded from 2007 through 2010 created a $461 million debit balance to Weatherford’s current +income tax payable, which Respondents reclassified as an income tax receivable for reporting +purposes. “Current income tax payable” is a balance sheet liability account with a credit balance +comprised of taxes to be paid within a year. While income tax receivables with debit balances +may arise for short periods, such as when a company is due a tax refund, the multi-year large + 13 +debit balance Weatherford experienced should have raised red flags long before the First +Restatement. +46. Weatherford’s $461 million receivable balance was not the product of an +abnormally large anticipated refund, the prospect for which Respondents had no reasonable +expectation. Instead, this phantom income tax receivable occurred because the current income +tax payable accounts annually recorded from the consolidated tax provision were understated by +the amount of each year’s fraudulent tax benefit. Essentially, the consolidated tax provision and +the resulting balance sheet understatement did not reflect the tax amounts Weatherford actually +paid to various jurisdictions. Over time, this disparity created a huge debit balance anomaly +within Weatherford’s current income tax payable account that was as high as $155 million in +2009, grew to $279 million at June 30, 2010, and to $441 million at December 31, 2010. The +effect of the phantom income tax receivable is shown below:5 + + 47. Hudgins and Kitay knew, or were reckless in not knowing, that the dividend +exclusion plug adjustments were causing the corresponding phantom income tax receivable. +Kitay reviewed the balance sheet tax accounts by region on at least an annual basis, and by early +2009, was aware of the rising income tax debit balance. + + 48. Hudgins and Kitay made misleading statements about the true reasons for the +growing tax debit balance, claiming falsely that they had made either sizeable prepayments or +overpayments to foreign tax jurisdictions that they would be working to recover. For example, +during the fourth quarter of 2009, Weatherford reclassified the large debit balance within the +Current Income Tax Payable account to a Prepaid Other account. In response to Ernst & Young +inquiries about the large “Prepaid Other” debit balance, Kitay responded “we do not believe it +would be appropriate to classify these balances as receivables until such time as a claim for + +5 The year-end 2010 current income tax balance of $441,553,629 included the $461 million phantom +receivable and a $20 million credit balance to “U.S. Income Tax Payable.” + + 14 +refund has been filed.” By 2010, Hudgins was aware of the phantom receivable and told others +at Weatherford that he was working to recover all overpaid amounts, although he knew there +were no such overpaid amounts. + + 49. Hudgins and Kitay knew that Weatherford was not entitled to, nor had any +expectation of, receiving tax refunds for the receivable amount. Neither they nor Weatherford +corporate accounting personnel responsible for monitoring the balance sheet made any attempt to +reconcile Weatherford’s rising income tax receivable balance at any time before February 2011. + +First Restatement – Discovery of Material Weakness and Material Misstatement + +50. While performing its audit of Weatherford’s 2010 pretend hard close consolidated +tax provision, Ernst & Young uncovered certain income tax accounting errors that increased +Weatherford’s overall tax liability for fiscal year 2010, including a spreadsheet computational error +related to a Slovakia-based subsidiary that increased Weatherford’s tax expense and tax liability by +$13.4 million. Hudgins knew the impact these errors would have on Weatherford’s ETR and tax +expense targets. Hudgins instructed the tax department to work around the clock to hunt for +additional credits to reduce the tax liability and offset the unexpected Slovakia tax charge. + +51. On January 20, 2011, Hudgins informed an Ernst & Young tax partner that he +found “Pepto Bismol” to offset the unexpected Slovakia tax charge. On January 21, 2011, Kitay +sent Ernst & Young an email with a list of newly recorded offsetting tax benefits, which Ernst & +Young understood to be Hudgins’ “Pepto Bismol.” Among the items, most of which were later +determined to be unsupportable, the list included a tax benefit for $14.4 million in Russia +intercompany expenses (i.e., management fees, royalties, interest, mark-up and service fees). At +the time Hudgins informed Ernst & Young that he recorded the Russian tax benefit, he did not +have the appropriate signed documentation in place to take the tax benefit. Emails exchanged +between Hudgins and Kitay during this period make clear that Hudgins knew a portion ($8.2 +million) of Russian intercompany expenses were not deductible. Ultimately, Ernst & Young +determined that Weatherford did not have appropriate supporting documentation to record the tax +benefit associated with the Russian intercompany expenses and rejected Hudgins’ representations +to the contrary. + +52. In performing its audit of Weatherford’s 2010 pretend hard close, Ernst & Young +and Weatherford identified a number of additional income tax accounting errors that increased +Weatherford’s tax expense by tens of millions of dollars, including: (1) failure to timely accrue +foreign flat taxes; (2) uncertain tax position accruals that were not reflected in Weatherford’s +consolidated tax provisions; (3) entries to prematurely reverse liabilities related to uncertain tax +positions (some of which were improperly classified as current taxes payable); and (4) +understatements of income tax expense related to deferred tax liability. + +53. On or about February 15, 2011, after consideration of the errors and issues +discovered and after consultation with Ernst & Young, Weatherford’s internal audit group +concluded that there was a material weakness in internal control surrounding accounting for +income taxes due to: inadequate staffing and technical expertise; ineffective review and approval + 15 +practices; inadequate processes to effectively reconcile income tax accounts; and inadequate +controls over the preparation of Weatherford’s quarterly tax provision. + +54. After the identification of the material weakness, Ernst & Young expanded the +audit procedures for all income tax accounts, including a reconciliation of Weatherford’s current +taxes payable (and receivable) accounts. On or about February 20, 2011 a review of +Weatherford’s income tax receivable balance uncovered the phantom $461 million receivable in +the Eliminations Region account, which, in turn, led to the First Restatement. At no time prior to +this process, did Hudgins or Kitay inform anyone of the true reason they made the post-closing +adjustments. + +55. On March 1, 2011, Weatherford filed a Form 8-K with the Commission, in which it +made public for the first time that it would be restating its financial results for 2007-2010 and +that a material weakness existed in its ICFR for the accounting of income taxes. Weatherford’s +stock price dropped nearly 11% to $21.14 on the news. + +56. On March 8, 2011, Weatherford filed its First Restatement, in which it restated its +previously reported financial results for the years ended December 31, 2007, 2008 and 2009, and +the first three quarters of 2010. According to Weatherford, the First Restatement was necessary +to correct “errors in [the Company’s] accounting for income taxes.” The First Restatement +reduced Weatherford’s previously reported net income by $500 million, $461 million of which +related to the dividend exclusion plug adjustment, which the First Restatement called “an error in +determining the tax consequences of intercompany amounts over multiple years.” The following +table depicts the impact the Restatement had on Weatherford’s reported net income for the +periods covered by the First Restatement: + +Year Ended +Reported Net +Income +(in millions) +Restated Net +Income +(in millions) +% Change +2007 1,070.6$ 940.6$ 13.8% +2008 1,393.2$ 1,246.5$ 11.3% +2009 253.8$ 170.1$ 42.6% +Q1 - Q3 2010 78.3$ (21.6)$ 462.0% + + +Second and Third Restatements + +57. Immediately after filing its First Restatement, Weatherford initiated a large-scale +effort led by Hudgins to remediate its material weakness in ICFR for its accounting of income +taxes. Thus, Weatherford put Hudgins in charge of the tax accounting remediation process and +permitted Kitay to be an active participant. Throughout 2011, Weatherford continued to timely +report earnings and file its financial statements. In doing so, Weatherford provided repeated +assurances to the public that it performed “additional reconciliations and other post-closing +procedures” to ensure its financial statements were true, accurate, and in compliance with +GAAP. Hudgins, for his part, executed signed representation letters to Weatherford’s then-CFO + 16 +and Ernst & Young that falsely claimed his belief that Weatherford’s consolidated tax provisions +and underlying expenses were “fairly presented in all material respects in accordance with +GAAP” and that he was neither aware of any material transactions that had not been properly +recorded in the consolidated income tax accounts nor any deviations from GAAP that would +cause material misstatements in Weatherford’s financial statements. +58. Before the end of the second quarter in 2011, Weatherford identified dozens of +issues related to its internal control for the accounting of income taxes that required thorough +review and remediation. Weatherford and Hudgins, however, performed little, if any, testing to +determine whether, and to what extent, these failures could cause additional material +misstatements in Weatherford’s financial statements. Instead, Weatherford, through Hudgins, +developed a time line for remediation that, in relevant part, pushed out until the fourth quarter of +2011 the review, assessment, and quantification of major issues that had a high risk of causing +material misstatement in previously filed Weatherford financial statements dating back to 2007, +if not earlier. For example, prior to 2012, Weatherford accounted for withholding taxes on +certain intercompany transactions (i.e., interest, management fees, royalties, and rent) on a cash +basis. This is contrary to GAAP, which requires accrual basis accounting treatment. +Weatherford, through Hudgins, did not hide the cash basis accounting treatment from Ernst & +Young before the First Restatement, but claimed, without support, that the difference in +treatment was immaterial to Weatherford’s financials. They were wrong. The Second +Restatement included an $84 million reduction to Weatherford’s previously reported net income +to correct for Weatherford’s failure to accrue for these withholding taxes prior to 2012. +59. The failure to consider accrual basis accounting treatment for these withholding +taxes reflected a breakdown of internal controls for accounting of income taxes, particularly in a +company like Weatherford that was experiencing long-term exponential growth on a multi- +national scale. Before Weatherford filed its Form 10-Q for the period ending September 30, +2011, Weatherford and Hudgins, knew, or were reckless in not knowing, that their failure to +accrue for withholding taxes on intercompany transactions (i.e., interest, management fees, +royalties, and rent) was a deviation from GAAP that would cause Weatherford’s financial +statements to be materially misstated. By July 2011, and perhaps sooner, Weatherford and +Hudgins recognized that the failure to accrue for withholding taxes on intercompany transactions +was erroneous. They also knew Weatherford was conducting training worldwide to remediate +the behavior. Despite this knowledge, they made no effort to quantify the difference between +cash and accrual accounting before Weatherford issued its Form 10-Q for the quarter ended +September 30, 2011. Instead, they scheduled that work to be performed during the fourth quarter +of 2011. +60. On February 21, 2012, Weatherford announced it had not remediated its material +weakness in its internal controls for accounting of income taxes and had identified additional +errors which required a second restatement, which it filed on March 15, 2012 (the “Second +Restatement”). Weatherford’s stock price dropped nearly 14% from $17.79 to $15.36 on the +February 21, 2012 news of the Second Restatement, resulting in a market capitalization loss of +over $1.8 billion. The Second Restatement restated Weatherford financial results from 2007 +through 2011, reducing net income by an additional $256 million as a result of additional errors +in Weatherford’s income tax accounting, $84 million of which was driven by the failure to + 17 +accrue for intercompany withholding taxes. The remaining errors represented the culmination of +a year-long, then-still incomplete, remediation effort led by Hudgins that revealed a complete +breakdown of internal accounting controls and a wholesale failure to make and keep books and +records that accurately and fairly reflected Weatherford’s tax transactions. The effort revealed +hundreds of erroneous income tax accounting entries covering multiple tax topics, including: (i) +uncertain tax positions; (ii) deferred tax assets and liabilities; and (iii) valuation allowances. On +March 23, 2012, Weatherford announced the voluntary resignation of Hudgins and its CFO. +After the filing of the Second Restatement, Weatherford relieved Kitay of all supervisory +responsibilities associated with Weatherford’s income tax accounting. +61. Four months later, on July 24, 2012, Weatherford announced that it would restate +certain prior years’ financial statements, including $92 million in prior period tax expenses and +further adjustments of up to $15 million. The Third Restatement was caused, in part, by a +material tax accounting error that a Weatherford employee initially identified in an email dated +March 8, 2012, shortly before the filing of Weatherford’s Second Restatement.6 The email, +however, went unanswered for over a month. As a result, Weatherford failed to establish a +timely reserve for this liability, which resulted from Weatherford’s improper allocation of +regional costs among its Latin American entities for tax purposes. Weatherford later claimed +this error “fell through the cracks” and was the result of an internal control failure that allowed +the issue to remain unaddressed until after the Second Restatement was filed, and shortly after +Weatherford issued $1.3 billion in Senior Notes on April 4, 2012. Weatherford’s stock dropped +another 8.8% from $12.80 to $11.67 as a result of the July 24, 2012 announcement. +62. On July 24, 2012, after restating and re-restating its financial statements from +2007 forward, Weatherford again announced that it was withdrawing reliance on previously-filed +financial statements and that it would stop issuing financial statements until it had completed +additional procedures and reviews of its accounting for income taxes. Pursuant to the July 24, +2012 announcement, Weatherford conducted reconciliations of tax-basis balance sheets for each +legal entity that was part of its consolidated financial statements. Upon conclusion of this +exercise, Weatherford issued the Third Restatement on December 17, 2012 in a Form 10-K/A for +the fiscal year ending on December 31, 2011. The Third Restatement reduced net income by an +additional $186 million, largely driven by Weatherford’s then-continuing effort to remediate its +material weakness over its internal controls for accounting of income taxes. On February 25, +2014, Weatherford reported that it had successfully remediated its material weakness in internal +controls for accounting of income taxes when it filed its Form 10-K for the year ended December +31, 2013. +VIOLATIONS + +63. Securities Act Section 17(a)(1), Exchange Act Section 10(b) and Rule 10b-5 +thereunder prohibit fraudulent conduct in the offer or sale of securities and in connection with +the purchase or sale of securities. + +6 Weatherford’s July 24, 2012 filing also included a material weakness finding related to a long -term +construction contract accounted for erroneously under the percentage-of-completion method of accounting. This +material weakness was reported as remediated as of December 31, 2012 when Weatherford issued its Form 10-K on +March 4, 2013. + 18 + +64. 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. + +65. 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. + +66. 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 other reports as the Commission may +require. + +67. 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. + +68. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +69. 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. + +70. 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). + +71. Rule 13b2-1 under the Exchange Act prohibits any person from directly or +indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange +Act Section 13(b)(2)(A). Rule 13b2-2(a) under the Exchange Act provides that no director or +officer of an issuer shall, 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, +directly or indirectly: (1) make or cause to be made a materially false or misleading statement to +an accountant; or (2) 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. + + + + 19 +Findings + +72. As a result of the conduct described above, Weatherford violated Securities Act +Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules +10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +73. As a result of the conduct described above, Hudgins: (i) willfully violated +Securities Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5(a) and +(c), 13b2-1 and 13b2-2 promulgated thereunder; (ii) caused Weatherford’s violations of +Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and (B) and Rules +10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder; and (iii) willfully violated the +federal securities laws or rules and regulations thereunder pursuant to Section 4C of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +74. As a result of the conduct described above, Kitay: (i) willfully violated Securities +Act Section 17(a), Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5(a) and (c), 13b2-1 +promulgated thereunder; (ii) caused Weatherford’s violations of Securities Act Section 17(a), +Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and (B) and Rules 10b-5, 12b-20, 13a-1, 13a- +11, and 13a-13 promulgated thereunder; and (iii) willfully violated the federal securities laws or +rules and regulations thereunder pursuant to Section 4C of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +COOPERATION AND REMEDIAL ACTIONS + + In determining to accept Weatherford’s Offer, the Commission considered remedial acts +undertaken by Weatherford and cooperation it afforded the Commission staff. Weatherford +retained outside counsel to conduct an investigation after the First and Second Restatements and its +Audit Committee retained separate outside counsel to conduct an independent investigation +pursuant to Section 10A of the Exchange Act. The results of those investigations were shared with +Commission staff. Over a period of several years, Weatherford expended significant resources to +remediate the material weakness in its internal controls for accounting of income taxes. +Weatherford employed third-party consultants to develop enhanced controls to overhaul its tax +accounting process and accounting functions. It created several new positions within its tax +department to prevent the recurrence of similar income tax accounting issues. Weatherford +replaced Hudgins and its CFO with more experienced accounting professionals and modified its +reporting lines to ensure appropriate review of the consolidated tax provision and all accounting for +income taxes. + +UNDERTAKINGS + + Weatherford shall comply with the following undertakings: + +1. Report to the Commission staff during a two-year term, as set forth herein, +Weatherford’s compliance with Commission regulations and GAAP regarding its +accounting for income taxes, financial reporting, and the status of any remediation, + 20 +implementation, auditing and testing of its internal accounting controls and +compliance measures. During this two-year period, should Weatherford discover +credible evidence, not already reported to the Commission staff, that significant +deficiencies in the design or operation of its accounting for income taxes exist, +Weatherford shall report such significant deficiencies to the Commission staff and +state that it cannot certify compliance. During this two-year period, Weatherford +shall: (1) conduct an initial review and submit an initial report, and (2) conduct and +prepare follow-up reviews and reports, as described below: + +a. Weatherford shall submit to the Commission staff a written report within 150 +calendar days of the entry of this Order setting forth a complete description of its +internal accounting controls, policies, and procedures over its accounting for +income taxes, including the consolidated tax provision, quarterly tax provision, +elimination accounting, effective tax rate, financial reporting of income taxes, and +internal audit of the tax and accounting departments (the “Initial Report”). The +Initial Report should also include Weatherford’s remediation efforts to date, +including a description of the controls, policies, and procedures in place, and any +proposals to make improvements, that are reasonably designed to improve the +internal accounting controls, policies and procedures of Weatherford for ensuring +compliance with Commission regulations and GAAP, and the parameters of the +subsequent reviews. The Initial Report shall be transmitted to Tracy Price, +Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, NE, Washington, DC 20549-5631. Weatherford may +extend the time period for issuance of the Initial Report with prior written +approval of the Commission staff. + +b. Weatherford shall undertake at least two follow-up reviews, for fiscal years 2016 +and 2017, incorporating any comments provided by the Commission staff on the +previous report, to further test, monitor and assess whether its internal accounting +controls, policies and procedures over its accounting for income taxes are +reasonably designed to: (1) provide reasonable assurance of compliance with +Commission regulations and GAAP; and (2) detect and prevent material +weaknesses or significant deficiencies in the design or operation of its accounting +for income taxes. Weatherford shall submit to the Commission staff follow-up +reports summarizing the 2016 and 2017 reviews (the “Follow-up Reports”). + +i. The first Follow-up Report shall be completed by no later than 180 days after +the Initial Report. The second Follow-up Report shall be completed by no later +than 380 days after the completion of the Initial Report. Weatherford may +extend the time period for issuance of the Follow-up Reports with prior written +approval of the Commission staff. + +ii. The Initial and Follow-up Reports submitted by Weatherford will likely include +proprietary, financial, confidential, and competitive business information. Public +disclosure of the reports could discourage cooperation, impede pending or + 21 +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. + +c. 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 Weatherford agrees to provide such evidence. +The certification and supporting materials shall be submitted to Tracy Price, +Assistant Director, Division of Enforcement, with a copy to the Office of the Chief +Counsel of the Enforcement Division, no later than 30 days from the date of the +completion of the undertakings. + +d. Within two-years of the entry of this Order, should Weatherford discover credible +evidence, not already reported to the Commission staff, that its internal control over +financial reporting in areas unrelated to accounting for income taxes is not free +from material weakness, Weatherford shall provide a detailed report of any material +weakness to the Commission staff. + +2. Weatherford shall preserve and retain all documentation regarding all certifications and +reports for seven (7) years and will make it available to the Commission staff upon +request. + +3. In determining whether to accept Weatherford’s Offer, the Commission has considered +these undertakings. Weatherford agrees that if the Division of Enforcement believes +that Weatherford has not satisfied these undertakings, it may petition the Commission +to reopen the matter to determine whether additional sanctions are appropriate. For +good cause shown, the Commission staff may in its sole discretion extend any of the +procedural dates relating to the undertakings. + +4. Weatherford (including its officers, directors, and employees, and third-party +consultants within Weatherford’s control) shall cooperate fully with the Commission +with respect to this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a party +and subject to compliance with applicable law. Weatherford agrees that such +cooperation shall include, but is not limited to: + +a. Production of Information: at the Commission’s request, upon reasonable notice, +and without subpoena, Weatherford (including its officers, directors, and +employees, and third-party consultants within Weatherford’s control) shall +truthfully and completely disclose all information requested by the Commission + 22 +staff in connection with the Commission’s investigation, litigation or other related +proceedings, except with respect to information related to clients other than +Weatherford, which information shall be produced in response to subpoena or other +appropriate legal process; + +b. Production of Documents: at the Commission’s request, upon reasonable notice, +and without subpoena, Weatherford (including its officers, directors, and +employees, and third-party consultants within Weatherford’s control) shall provide +any document, record or other tangible evidence requested by the Commission staff +in connection with the Commission’s investigation, litigation or other related +proceedings, except with respect to documents related to clients other than +Weatherford, which information shall be produced in response to subpoena or other +appropriate legal process; and + +c. Production of Cooperative Personnel: at the Commission’s request, upon +reasonable notice, and without subpoena, Weatherford (including its officers, +directors, and employees, and third-party consultants within Weatherford’s control) +shall secure the attendance and truthful statements, deposition, or testimony of any +Weatherford officer, director, or employee or third-party consultant within +Weatherford’s control, excluding any person who is a party to any related litigated +judicial or administrative proceeding, at any meeting, interview, testimony, +deposition, trial, or other legal proceeding. +The foregoing obligations are subject to Weatherford’s reservation of rights: + +(i) to claim that documents or information requested is subject to attorney- +client privilege or attorney-work-product protection; and +(ii) to seek entry of a confidentiality order as to: sensitive business documents +or information; sensitive personnel documents or information; or +confidential information pertaining to clients other than Weatherford. + +d. Service and Personal Jurisdiction Consents: Weatherford further agrees that, with +respect to this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a +party, it will: (i) accept service by email, mail or facsimile transmission of notices, +requests, or subpoenas issued by the Commission for documents or testimony at +depositions, hearings, or trials, or in connection with any related investigation by +the Commission staff (“Commission Service”); (ii) appoint Weatherford’s +undersigned attorney as agent to receive Commission Service; (iii) with respect to +Commission Service, waive the territorial limits upon service contained in Rule 45 +for the Federal Rules of Civil Procedure and any applicable local rules, provided +that the party requesting the testimony reimburses Weatherford’s travel, lodging, +and subsistence expenses at the then-prevailing U.S. Government per diem rates; +and (iv) consent to personal jurisdiction over Weatherford in any United States +District Court for purposes of enforcing any Commission Service. + + 23 +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, Sections 4C and 21C of the +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED, +effective immediately, that: + +A. Weatherford cease and desist from committing or causing any violations and any +future violations of Securities Act Section 17(a), Exchange Act Sections 10(b), +13(a), 13(b)(2)(A) and13(b)(2) (B), and Rules 10b-5, 12b-20, 13a-1, 13a-11, and +13a-13 promulgated thereunder. + +B. Hudgins cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5), and Rules 10b-5, 12b-20, 13a-1, 13a-11, +13a-13, 13b2-1, and 13b2-2 promulgated thereunder. + +C. Hudgins is denied the privilege of appearing and practicing before the Commission +as an accountant. + +D. Hudgins be, and hereby is, prohibited for five (5) years from the date of this Order +from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act and is required to file reports +pursuant to Section 15(d) of the Exchange Act. + +E. After five (5) years from the date of this Order, Hudgins 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 Hudgins’ 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) Hudgins, 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) Hudgins, or the registered public accounting firm with which +he is associated, has been inspected by the Board and that inspection did not + 24 +identify any criticisms of or potential defects in Hudgins’, or the firm’s quality +control system that would indicate that Hudgins will not receive appropriate +supervision; (c) Hudgins 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) Hudgins acknowledges his +responsibility, as long as Hudgins appears or practices before the Commission as +an independent accountant, to comply with all requirements of the Commission +and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards + +F. The Commission will consider an application by Hudgins 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 Hudgins’ character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + +G. Kitay cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5), and Rules 10b-5, 12b-20, 13a-1, 13a-11, +13a-13, and 13b2-1 promulgated thereunder. + +H. Kitay is denied the privilege of appearing and practicing before the Commission as +an accountant. + +I. After five (5) years from the date of this Order, Kitay 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 Kitay’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) Kitay, 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) Kitay, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify + 25 +any criticisms of or potential defects in Kitay’s, or the firm’s quality control +system that would indicate that Kitay will not receive appropriate supervision; (c) +Kitay 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) Kitay acknowledges his responsibility, +as long as Kitay 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 + +J. The Commission will consider an application by Kitay 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 Kitay’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + +K. Weatherford shall pay a civil money penalty in the amount of $140,000,000 to the +Securities and Exchange Commission. Payment and post-Order interest pursuant to +SEC Rule of Practice 600 shall be made in the following installments: one +installment of $50,000,000 million due within twenty-one (21) days of the date of +the entry of this Order, and then three installments of $30,000,000 due within 120, +240, and 360 days of the entry of this Order. If any payment is not made by the date +the payment is required by this Order, the entire outstanding balance of civil +penalties, plus any additional interest accrued pursuant to SEC Rule of Practice 600 +or 31 U.S.C. Section 3717, shall be due and payable immediately, without further +application. + +L. Hudgins shall, within twenty-one (21) days of the entry of this Order, pay +disgorgement of $169,728, prejudgment interest of $39,339, and a civil money +penalty in the amount of $125,000, for a total of $334,067 to the Securities and +Exchange Commission. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 or 31 U.S.C. Section 3717. + +M. Kitay shall pay a civil money penalty in the amount of $30,000 to the Securities and +Exchange Commission. Payment and post-Order interest pursuant to SEC Rule of +Practice 600 shall be made in the following installments: one installment of $10,000 +due within twenty-one (21) days of the date of the entry of this Order; one +installment of $10,000 due within 180 days of the date of the entry of this Order; and +one installment of $10,000 due within 360 days of the date of the entry of this Order. +If any payment is not made by the date the payment is required by this Order, the +entire outstanding balance of civil penalties, plus any additional interest accrued + 26 +pursuant to SEC Rule of Practice 600 or 31 U.S.C. Section 3717, shall be due and +payable immediately, without further application. + +N. 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 + +O. Payments by check or money order must be accompanied by a cover letter +identifying Weatherford International plc, James Hudgins, or Darryl Kitay 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 simultaneously sent to +Tracy L. Price, Esq., Assistant Director, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549-5631. + +P. 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 civil money +penalties referenced in Paragraphs 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, Weatherford, Hudgins, and Kitay 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 Weatherford’s, Hudgins’, and Kitay’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action +grants such a Penalty Offset, Weatherford, Hudgins, and Kitay 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 Weatherford, + 27 +Hudgins, and/or Kitay 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. + +Q. Respondents Hudgins and Kitay stipulate 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 Hudgins and Kitay, and +further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents Hudgins and Kitay 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 Hudgins +and Kitay 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). + +R. Respondent Weatherford shall comply with the undertakings enumerated in Section +III. above. + + + By the Commission. + + + + Brent J Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3807.txt b/raw/aaer/2016/AAER-3807.txt new file mode 100644 index 0000000000000000000000000000000000000000..a3928f6b15057957364955319a9359f973973237 --- /dev/null +++ b/raw/aaer/2016/AAER-3807.txt @@ -0,0 +1,686 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10222 / September 27, 2016 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78947 / September 27, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3807 / September 27, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17583 + + + +In the Matter of + +ORRSTOWN FINANCIAL +SERVICES, INC., +THOMAS R. QUINN, +BRADLEY S. EVERLY, CPA, +JEFFREY W. EMBLY and +DOUGLAS P. BARTON, CPA, +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 CEASE-AND-DESIST ORDERS + + +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 Orrstown +Financial Services, Inc. (“Orrstown”), Thomas R. Quinn (“Quinn”), Bradley S. Everly, CPA +(“Everly”), Jeffrey W. Embly (“Embly”) and Douglas P. Barton, CPA (“Barton”) (collectively, +“Respondents”), and that public administrative proceedings be, and hereby are, instituted against +Everly pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice. +2 + + +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings +and Imposing Remedial Sanctions and Cease-and-Desist Orders (“Order”), as set forth below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +SUMMARY +1. Orrstown Financial Services, Inc., is a publicly traded bank holding company +whose principal business activity consists of owning and supervising its wholly owned +subsidiary, Orrstown Bank (collectively, “Orrstown” or the “Bank”). Orrstown provides banking +and bank related services, which include, among other things, commercial lending. As of +December 31, 2010, approximately 75% of the Bank’s $964 million loan portfolio consisted of +commercial loans. +2. In 2010, as Orrstown’s primary lending markets were experiencing a significant +decline in real estate values, Orrstown incorrectly accounted for its commercial loans by not +disclosing as much as approximately $69.5 million in loans as “impaired” in accordance with +U.S. generally accepted accounting principles (“GAAP”). +3. GAAP states that a loan is “impaired” when, based on current information and +events, it is probable that a creditor will be unable to collect all amounts due according to the +contractual terms of the loan agreement. For purposes of its periodic reporting requirements, a +company is required by GAAP to evaluate whether or not a loan is impaired and disclose the +total amount of impaired loans. Once a loan is determined to be impaired, GAAP requires a +company to estimate the uncollectible portion of the loan and record that amount as impairment +loss in its financial statements. +4. Here, Orrstown did not comply with GAAP’s impaired loan disclosure +requirements due to certain Respondents’ negligence and Orrstown’s lack of sufficient internal +accounting controls. This failure resulted in material misstatements in Orrstown’s impaired loan + + +1 The findings herein are made pursuant to Respondents’ Offers and are not binding on any other person or +entity in this or any other proceeding. +3 + + +disclosures in its quarterly filings for the periods ended June 30, 2010 through September 30, +2011, and its annual filings for the years ended December 31, 2010 and 2011 (the “Relevant +Period”). +5. Additionally, Orrstown (i) did not calculate loan losses in accordance with GAAP +in connection with the filing of its Form 10-Q for the period ended June 30, 2011, (ii) incorrectly +implemented a newly issued GAAP accounting pronouncement in connection with the filing of +its Form 10-Q for the period ended June 30, 2011 in a manner that was not consistent with the +new standard, and (iii) incorrectly applied GAAP when calculating fair value for certain +collateral in connection with its impairment analyses for its Form 10-Q for the periods ended +June 30, 2010 and September 30, 2010. +6. As a result of the conduct described herein, Orrstown violated Sections 17(a)(2) +and 17(a)(3) of the Securities Act, the reporting provisions of Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, and 13a-13 thereunder, the books and records provisions of Section +13(b)(2)(A) of the Exchange Act, and the internal accounting control provisions of Section +13(b)(2)(B) of the Exchange Act. +7. As a result of the conduct described herein, Respondents Thomas R. Quinn, Jr., +Orrstown’s Chief Executive Officer, Bradley S. Everly, Orrstown’s former Chief Financial +Officer, and Jeffrey W. Embly, Orrstown’s former Chief Credit Officer, violated Securities Act +Sections 17(a)(2) and 17(a)(3) and Exchange Act Rule 13b2-1, and caused Respondent Orrstown +to violate Exchange Act Sections 13(a), 13(b)(2)(A) and (B), and Rules 12b-20, 13a-1, and 13a- +13 thereunder. Respondents Quinn and Everly also violated Exchange Act Rule 13a-14. +Respondent Douglas P. Barton, Orrstown’s Chief Accounting Officer, violated Exchange Act +Rule 13b2-1 and caused Orrstown to violate Exchange Act Sections 13(a), 13(b)(2)(A) and (B), +and Rules 12b-20 and 13a-13 thereunder. +RESPONDENTS +8. Orrstown Financial Services, Inc. is a Pennsylvania corporation headquartered +in Shippensburg, Pennsylvania. Orrstown Financial Services, Inc. is the holding company of +Orrstown Bank, a Pennsylvania chartered bank with $1.3 billion in total assets as of June 30, +2016. Orrstown’s common stock is registered with the Commission pursuant to Section 12(g) of +the Exchange Act and quoted under the symbol “ORRF” on the NASDAQ Stock Market. +9. Thomas R. Quinn, Jr., age 57, is a resident of Carlisle, Pennsylvania. Since May +2009, he has served as President and Chief Executive Officer (“CEO”) of Orrstown Financial +Services, Inc., and Orrstown Bank. +10. Bradley S. Everly, age 65, is a resident of Chambersburg, Pennsylvania. He was +Executive Vice President and Chief Financial Officer (“CFO”) of the Bank from 1997 until his +resignation on May 14, 2012. Everly is a Certified Public Accountant (“CPA”), licensed in +Maryland. His license is currently inactive and he is retired. +4 + + +11. Jeffrey W. Embly, age 46, is a resident of Chambersburg, Pennsylvania. He was +the Bank’s Executive Vice President and Chief Credit/Risk Officer from September 2009 +through May 2011. From May 2011 through August 2012, Embly served as Orrstown’s Senior +Executive Vice President and Chief Operating Officer, and from August 2012 through October +2012 he served as Orrstown’s Executive Vice President of Operations and Technology. Embly +resigned from Orrstown in October 2012. He no longer works in the banking industry. +12. Douglas P. Barton, age 51, is a resident of Brownstown, Pennsylvania. Since +joining the Bank on September 27, 2010, he has served as its Senior Vice President and Chief +Accounting Officer (“CAO”). He is a CPA licensed in Pennsylvania. +OTHER RELEVANT PERSONS +13. Lending Relationship A consisted of a husband and wife, their adult sons, and +the husband’s brother. All were customers of the Bank individually and through various entities +they controlled. Lending Relationship A were real estate investors and developers primarily in +the Hagerstown, Maryland market. They are no longer customers of the Bank. +14. Lending Relationship B consisted of a father and son who were customers of the +Bank individually and through various entities they controlled. They were real estate investors +and developers primarily in the Hagerstown, Maryland market. They are no longer customers of +the Bank. +15. Lending Relationship C consisted of an individual customer of the Bank and +various entities he controlled. Lending Relationship C engaged in real estate investment and +development primarily in the Hagerstown, Maryland market. They are no longer customers of +the Bank. +ACCOUNTING STANDARDS +16. The relevant accounting standards governing Orrstown’s identification, +assessment and measurement of impaired loans are set forth in Accounting Standards +Codification (“ASC”) Subtopic 310-10-35, Receivables – Subsequent Measurement. The +relevant accounting standards providing guidance on disclosure of loans that are individually +deemed to be impaired are set forth in ASC 310-10-50 Receivables – Disclosure. +17. ASC 310-10-50-15 requires that an entity disclose, as of the date of each +statement of financial position presented, its recorded investment in impaired loans. +18. ASC 310-10-35-14 requires that a creditor apply its normal loan review +procedures in identifying loans to be evaluated for collectability and includes certain criteria that +are useful in identifying loans for evaluation. +19. ASC 310-10-35-16 requires a creditor to identify a loan as impaired if, based on +current information and events, it is probable that a creditor will be unable to collect all amounts +due according to the contractual terms of the loan agreement. +5 + + +20. ASC 310-10-35-22 requires a creditor to measure an impaired loan’s impairment +based on the present value of expected future cash flows discounted at the loan’s effective +interest rate, except that as a practical expedient, a creditor may measure impairment based on a +loan’s observable market price, or the fair value of the collateral if the loan is a collateral- +dependent loan. +21. Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination +of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”), codified as ASC +310-40, Troubled Debt Restructurings by Creditors, clarified existing troubled debt restructuring +(“TDR”) guidance by providing guidelines for determining when a restructuring constitutes a +concession and when a debtor is experiencing financial difficulties. A restructuring of a debt +constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial +difficulties grants a concession to the debtor that it would not otherwise consider. ASU 2011-02 +was issued in April 2011 and was effective for the first interim or annual reporting period +beginning on or after June 15, 2011 and should have been applied retroactively to the beginning +of the annual period of adoption (i.e., restructurings occurring on or after the beginning of the +fiscal year of adoption). +FACTS +Orrstown’s Loan Review Process +22. During the Relevant Period, Orrstown’s loan review process was governed by its +loan policy. The loan review was performed by a Loan Review Officer who was supervised by +Embly and Orrstown’s Credit Administration Committee. The Credit Administration Committee +consisted of non-employee directors, though Quinn, Everly and Embly regularly attended +meetings as non-voting members. +23. Orrstown’s loan policy required the Loan Review Officer to conduct a risk review +of forty-five percent to sixty percent of the Bank’s total outstanding loan portfolio annually. +Based on this review of relevant loan files, the Loan Review Officer assigned a risk rating to +each relationship in accordance with a predetermined risk rating system that ranged from “1 – +Excellent” to “8 – Loss.” Loans rated “6 – Substandard,” “7 – Doubtful,” and “8 – Loss” were +considered “classified” loans and represented the subset of the loan portfolio where risk of +uncollectability was greatest. As a matter of practice all commercial relationships with a +committed loan balance over $750,000 were risk rated each year. +24. During the Relevant Period, the loan policy further required that, on a quarterly +basis, the Loan Review Officer review Orrstown’s allowance for loan and lease losses (“ALLL”) +to ensure that the Bank was adequately reserved for projected loan and lease losses. In +connection with this review, the Loan Review Officer evaluated only “Substandard” loans to +determine if they were impaired and whether a provision for loan loss was required to be +recorded in the financial statements. +25. As discussed in greater detail below, Orrstown did not timely incorporate material +adverse information regarding certain borrowers’ financial difficulties into the risk rating +6 + + +component of its loan review process and instead relied largely on stale data. As a result, loans +were incorrectly risk rated. Moreover, the processes and controls in place to ensure the accuracy +of risk ratings set by the Loan Review Officer were ineffective to prevent or correct the incorrect +risk ratings. +Loans to Several of Orrstown’s Largest Lending Relationships +Were Not Disclosed as Impaired +26. In 2010, three of the Bank’s largest customers, Lending Relationships A, B and C, +approached Orrstown requesting to modify the terms of their loans, each claiming they had +insufficient cash flow to repay their existing loans with Orrstown. These borrowers’ cash flow +problems were discussed at meetings of Orrstown’s Loan Committee, Executive Committee +and/or Board of Directors. As attendees at these meetings, Quinn, Everly and Embly knew or +should have known that the loans to Lending Relationships A, B and C were impaired or, at a +minimum, that these loans needed to be evaluated for impairment. Quinn, Everly and Embly +received copies of the internal loan presentation materials that set forth the borrowers’ financial +difficulties, but Quinn, Everly and Embly did not raise any concerns about whether the loans +should have been disclosed as impaired in accordance with ASC 310-10-50-12, or identified for +impairment analysis in accordance with ASC 310-10-35-14 and ASC 310-10-35-16. In 2012 and +2013, Orrstown sold the Lending Relationships A, B and C loans at a substantial discount to their +carrying values. +A. Lending Relationship A +27. As of December 31, 2010, outstanding loans to Lending Relationship A totaled +approximately $28.8 million. By July 13, 2010, Quinn, Everly and Embly knew or should have +known through loan presentation materials distributed at various committee meetings they +attended that the patriarch of Lending Relationship A was “struggling with cash flow” due to the +weakening real estate market. In or about the same time, Quinn, Everly and Embly were told that +the adult children, also borrowers, were “experiencing significant cash flow issues” and had +threatened to surrender their properties to the Bank. Earlier in May 2010, the patriarch’s brother, +himself a borrower, informed the Bank that he was “short” on money to continue construction of +his real estate projects. By December 9, 2010, Quinn, Everly and Embly were told that the +patriarch’s brother was still suffering the effects of the weakening economy, which hindered his +development plans. As a result of these financial difficulties, in 2010 Orrstown modified the +terms of approximately $21.5 million in loans to Lending Relationship A but did not evaluate, +identify, or disclose the loans as impaired, as required by GAAP. +B. Lending Relationship B +28. As of December 31, 2010, outstanding loans to Lending Relationship B totaled +$12.2 million. As early as June 8, 2010, Lending Relationship B requested loan modifications +because their commercial properties were “producing a negative cash flow after debt service.” +By June 28, 2010, Lending Relationship B had mentioned to the Bank on multiple occasions the +possibility of filing for bankruptcy. And by December 17, 2010, Quinn, Everly and Embly knew +or should have known that Lending Relationship B’s largest financed project was potentially +7 + + +“jeopardized” and that the borrowers were suffering the effects of the weakening economy and +experiencing “significantly strained cash flow[s].” Despite this information, on December 23, +2010, Orrstown approved modifications to the terms of Lending Relationship B loans but did not +evaluate, identify, or disclose them as impaired as required by GAAP. +C. Lending Relationship C +29. As of December 31, 2010, outstanding loans to Lending Relationship C totaled +$7.7 million. By September 8, 2010, Quinn, Everly and Embly knew or should have known that +the Bank had met with the principal for Lending Relationship C and one of his business partners +to discuss the declining economy’s impact on their commercial real estate portfolio. Quinn, +Everly and Embly knew or should have known that Lending Relationship C and the partner were +having “serious cash flow deficiencies.” As a result, Orrstown agreed to modify many of these +loans in September and October 2010 but did not evaluate, identify, or disclose them as impaired +as required by GAAP. +Orrstown Did Not Disclose Other Commercial Loans as Impaired +at the Time it Recognized Impairment Losses +30. In addition to Lending Relationships A, B and C, Orrstown incorrectly did not +disclose the value of other impaired loans in its quarterly filings on Form 10-Q for the periods +ended June 30, 2010 and September 30, 2010. During Q2 and Q3 2010, in connection with its +quarterly review and assessment of the adequacy of its ALLL, Orrstown’s Loan Review Officer +performed an analysis to measure the amount of impairment loss, if any, required under ASC +310-10-35, on individual loans rated “Substandard.” Under GAAP, loans with an impairment +loss must be disclosed as impaired. +31. As part of this Q2 and Q3 2010 review of Orrstown’s ALLL, the Loan Review +Officer followed the Bank’s loan policy by comparing the value at which the Bank carried each +classified loan on its books and records, to the estimated net realizable value of the collateral +securing each loan. Consistent with the Bank’s loan policy, in instances where the loan’s +carrying value exceeded the estimate of the collateral’s net realizable value, an impairment loss +was recorded in the amount of the difference. However, certain loans where impairment losses +were calculated were incorrectly not included in the Loan Review Officer’s ALLL schedule of +impaired loans. +32. As a result, the Q2 and Q3 2010 Forms 10-Q disclosures incorrectly omitted +impaired loans in the amounts of approximately $5.6 million as of June 30, 2010 and +approximately $18.5 million as of September 30, 2010. +33. The Loan Review Officer’s calculation of impairment losses was memorialized +and distributed to the Credit Administration Committee, which reviewed it but did not ensure +that loans with impairment losses were designated as impaired in Orrstown’s books and records +(the ALLL schedule). These inaccurate books and records were then used to prepare Orrstown’s +impaired loan disclosures included in its Q2 and Q3 2010 Forms 10-Q. Because Orrstown did +8 + + +not include the value of these impairments in its impaired loan disclosures, the disclosures were +materially misstated. +34. Everly and Embly were directly notified that the Loan Review Officer did not +appropriately record as impaired in Orrstown’s books and records loans that had been assigned +impairment losses. Specifically, in October 2010, Barton reviewed the Loan Review Officer’s +ALLL schedule, which included the impairment loss analysis discussed above, and informed +Everly and Embly that failing to disclose loans with impairment losses as impaired was +inconsistent with the accounting guidance. No one took corrective action. As a result, Orrstown’s +Q3 2010 Form 10-Q was filed without accurately disclosing Orrstown’s recorded investment in +impaired loans in accordance with GAAP. +Orrstown Did Not Accurately Disclose Impaired Loans Which Caused +it to Make Materially Misstated Filings +35. Orrstown did not accurately record certain loans as impaired, resulting in +materially misstated periodic filings filed with the Commission. The following Orrstown filings +were materially misstated in the manner described below: +a. Orrstown filed its Q2 2010 Form 10-Q with the Commission on August 5, +2010. In its filing, Orrstown disclosed in its Management’s Discussion and +Analysis of Financial Condition and Results of Operations (“MD&A”) +impaired loans of approximately $21.7 million. Orrstown did not disclose +approximately $46.6 million of additional impaired loans, an understatement +of approximately 215%. +b. Orrstown filed its Q3 2010 Form 10-Q with the Commission on November 5, +2010. In its filing, Orrstown disclosed in its MD&A impaired loans of +approximately $22.6 million. Orrstown did not disclose approximately $69.5 +million of additional impaired loans, an understatement of approximately +308%. +c. Orrstown filed its 2010 Form 10-K with the Commission on March 11, 2011. +In its filing, Orrstown disclosed impaired loans in the footnotes to its financial +statements of approximately $14.7 million. Orrstown did not disclose +approximately $51.0 million of additional impaired loans, an understatement +of approximately 346%. +d. Orrstown filed its Q1 2011 Form 10-Q with the Commission on May 10, +2011. In its filing, Orrstown disclosed impaired loans in the footnotes to its +financial statements of approximately $14.1 million. Orrstown did not +disclose approximately $51.0 million of additional impaired loans, an +understatement of approximately 362%. +9 + + +36. The misstatement in Orrstown’s 2010 Form 10-K described above was repeated +in the footnotes to the financial statements included in Orrstown’s Q2 2011 Form 10-Q, Q3 2011 +Form 10-Q and 2011 Form 10-K. +Orrstown Did Not Make and Keep Adequate Books and Records +by Failing to Comply with GAAP Provisions Relating to TDRs +and Loan Losses +A. Incorrect Application of the Provisions of ASU 2011-02 +37. In connection with the preparation of its Q2 2011 Form 10-Q, Orrstown elected to +early adopt the provisions of ASU 2011-02. This new accounting guidance was to be applied +retroactively to identify and report restructurings that occurred on or after January 1, 2011 that +qualified as TDRs. +38. As a result of its implementation of ASU 2011-02, Orrstown disclosed in its Q2 +2011 Form 10-Q that approximately $34 million of restructured loans qualified as TDRs. +However, at least $22 million of these loans were restructured in 2010 and were thus outside of +ASU 2011-02’s retroactive scope. +39. Barton was responsible for Orrstown’s implementation of ASU 2011-02 and +knew or should have known that retroactive application of this pronouncement to restructurings +that occurred prior to January 1, 2011 was not in accordance with GAAP. +40. Additionally, Quinn, Everly and Embly knew or should have known that +Orrstown was not permitted to retroactively apply ASU 2011-02 to restructurings before January +1, 2011. Nonetheless, Quinn, Everly, and Embly participated in and agreed to the decision to +apply ASU 2011-02 to loans that were restructured in 2010, inconsistent with GAAP. +B. Loan Losses Were Not Calculated in Accordance with GAAP +41. In connection with Orrstown’s recognition of approximately $34 million of TDRs +in Q2 2011, Barton performed an impairment analysis to determine if impairment losses needed +to be recorded for any of these TDRs – which, under GAAP are deemed impaired loans. +42. For a majority of the $34 million in loans, Barton utilized a discounted cash flow +model (“DCF Model”) to calculate impairment losses. But rather than using the expected future +cash flows and each loan’s effective interest rate in his DCF Model, as required by GAAP, +Barton used each loan’s contractual cash flows which he then discounted at a “market rate” to +arrive at the net realizable value of the loans. This approach did not comply with ASC 310-10- +35-22. +43. On or around September 2, 2011, Barton informed Quinn, Everly and Embly that +this methodology was “not technically within the accounting rules” but none of them took any +action to alter the DCF Model to conform to GAAP. +10 + + +C. Orrstown Utilized Stale Real Estate Appraisals in Calculating Fair Value Measurements +for Collateral Securing Certain Commercial Loans +44. As described above, during Q2 and Q3 2010, when the Bank performed an +impairment analysis on certain classified loans, its analysis did not comply with its loan policy +because it utilized stale real estate appraisals. Moreover, the Bank’s analysis did not comply with +GAAP because it incorporated inappropriate inputs into its collateral valuation models. +45. During Q2 and Q3 2010, Orrstown relied upon stale appraisals aged in excess of +two years when calculating impairment losses on certain of its commercial loans. Orrstown’s +reliance upon stale real estate appraisals ran counter to its own loan policy, which required that +all real estate loans be supported by current appraisals that were no more than two years old in a +stable real estate environment and no more than “a few months” old in a “rapidly escalating or +deteriorating market.” Despite these requirements, and the declining real estate and broader +economic market throughout 2010, Orrstown did not obtain current real estate appraisals or +reliable real estate appraisal updates on many of its loans, including those issued to Lending +Relationships A, B and C. +46. For example, during Q2 and Q3 2010, Orrstown evaluated approximately $42.3 +million and $49.2 million of “Substandard” rated loans for impairment loss, respectively. For Q2 +2010, approximately 40% of those loans were supported by real estate appraisals older than two +years and 14% of those loans were supported by real estate appraisals older than five years. For +Q3 2010, approximately 29% of those loans were supported by real estate appraisals older than +two years and 10% were supported by real estate appraisals older than five years. +47. Additionally, in Q2 and Q3 2010, Orrstown utilized the fair value of collateral to +measure impairment loss on certain commercial loans individually evaluated for impairment. +GAAP 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 and +provides a framework for measuring fair value in ASC 820. According to ASC 820, fair value +measurements are to be based on, among other things, inputs that a market participant would +incorporate into its valuation model as of the applicable measurement date. +48. During Q2 and Q3 2010, however, contrary to GAAP, Orrstown estimated the +current value of its real estate collateral by relying on stale real estate appraisals and discounted +the appraised values by a universal discount rate regardless of the age of the appraisal. The +discount was based primarily on a regulatory study conducted in 2004 which had no bearing on +the current real estate market as of 2010 and was irrelevant to the collateral valuation model as of +Q2 and Q3 2010. +49. As members of the Loan Committee, Quinn, Everly and Embly were ultimately +responsible for ensuring that each loan was supported by updated information and Embly, in +particular, was ultimately responsible for regulatory compliance regarding appraisals. Moreover, +Quinn, Everly and Embly knew or should have known that the Bank’s use of stale appraisals in +connection with the measurement of impairment loss, and its use of a universal discount rate, did +not comply with GAAP and Orrstown’s own loan policy. +11 + + +Orrstown Did Not Devise and Maintain a Sufficient System of +Internal Accounting Controls +50. During the Relevant Period, Orrstown did not maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions were recorded +as necessary to permit preparation of financial statements in accordance with GAAP. Orrstown’s +lack of internal accounting controls resulted in: (1) incorrect loan risk ratings; (2) incorrect +disclosures of impaired loans; (3) incorrect calculations and disclosures of loan losses; (4) +incorrect application of newly issued accounting pronouncements; and (5) the lack of action to +remedy accounting problems after being alerted to them. +51. Quinn, Everly and Embly were ultimately responsible for the timely +identification, evaluation and reporting of impaired loans. +52. As President and CEO, Quinn was responsible for the administration of +Orrstown’s loan policy. He was a member of the Loan Committee, Executive Committee and +Board of Directors. As principal executive officer of Orrstown, Quinn was responsible for +certifying in its periodic filings that Orrstown had adequate internal controls to provide +reasonable assurance regarding the reliability of financial reporting and preparation of financial +statements in accordance with GAAP. +53. As CFO, Everly was responsible for ensuring that Orrstown’s financial reporting +was materially accurate, complete and prepared in accordance with GAAP. He was a member of +the Loan Committee and Executive Committee and regularly attended meetings of the Board of +Directors. As principal financial officer of Orrstown, Everly was responsible for certifying in its +periodic filings that Orrstown had adequate internal controls to provide reasonable assurance +regarding the reliability of financial reporting and preparation of financial statements in +accordance with GAAP. +54. As CCO, Embly was responsible for credit underwriting, loan work out and loan +administration, including supervision of the loan review process and ensuring that material +adverse information concerning borrowers was timely incorporated into the loan ratings. He was +a member of the Loan Committee and Executive Committee and regularly attended meetings of +the Board of Directors. +55. Quinn, Everly and Embly were members of committees that reviewed borrowers’ +requests for loan modifications and, in the course of those meetings, received information +regarding the borrowers’ financial difficulties. +56. Barton was responsible for overseeing the finance department in coordinating +financial reporting and preparing monthly financial reports to senior management and the Board +of Directors. He was also responsible for implementing new accounting pronouncements and +ensuring that Orrstown’s accounting policies were consistent with GAAP. Barton drafted the +disclosure pertaining to the early adoption of ASU 2011-02 in the Q2 2011 Form 10-Q and +performed the calculation of loan loss reserves for the loans that were classified as TDRs in Q2 +2011. +12 + + +Orrstown Issued Securities During the Relevant Time Period +57. Orrstown offered securities in 2010 pursuant to a Form S-8 that it originally filed +on April 11, 2000 and again offered securities in 2011 pursuant to a Form S-8 that it filed on +June 3, 2011. The Form S-8 filed on April 11, 2000 incorporated by reference all subsequent +periodic filings under the Exchange Act for securities sold under this registration statement. +Thus, it incorporated by reference Orrstown’s Q2 and Q3 2010 Forms 10-Q, which materially +under-reported the Bank’s impaired loans. The Form S-8 filed on June 3, 2011 incorporated by +reference Orrstown’s 2010 Form 10-K and its Q1 2011 Form 10-Q and all subsequent periodic +filings under the Exchange Act for securities sold under this registration statement. Thus, it +incorporated by reference Orrstown’s Q2 and Q3 2011 Forms 10-Q and its 2011 Form 10-K, +which also materially under-reported the Bank’s impaired loans. +VIOLATIONS +58. 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 to make the statements made, in light of the +circumstances under which they were made, not misleading. +59. 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. +60. Exchange Act Section 13(a) and Rules 13a-1, 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, such annual and quarterly reports as the Commission may +require. +61. Exchange Act Rule 12b-20 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. +62. Exchange Act Rule 13a-14 requires an issuer’s principal executive and principal +financial officer to certify each periodic report containing financial statements filed by an issuer +pursuant to Section 13(a) of the Exchange Act. +63. 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. +64. 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 conformity with GAAP and to maintain accountability for assets. +13 + + +65. 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). +66. As a result of the conduct described above, Orrstown 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 and 13a-13 thereunder. +67. As a result of the conduct described above, Quinn violated Securities Act Sections +17(a)(2) and 17(a)(3), and Exchange Act Rules 13a-14 and 13b2-1, and caused Orrstown to +violate Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 and +13a-13 thereunder. +68. As a result of the conduct described above, Everly willfully2 violated Securities +Act Sections 17(a)(2) and 17(a)(3), and Exchange Act Rules 13a-14 and 13b2-1, and caused +Orrstown to violate Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b- +20, 13a-1 and 13a-13 thereunder. +69. As a result of the conduct described above, Embly violated Securities Act +Sections 17(a)(2) and 17(a)(3), Exchange Act Rule 13b2-1, and caused Orrstown to violate +Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 and 13a-13 +thereunder. +70. As a result of the conduct described above, Barton violated Exchange Act Rule +13b2-1 and caused Orrstown to violate Exchange Act Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B), and Rules 12b-20 and 13a-13. +71. As a result of the conduct described above, Everly also willfully violated the +federal securities laws or rules and regulations thereunder pursuant to Section 4C of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +ORRSTOWN’S REMEDIAL EFFORTS +72. In determining to accept Orrstown’s Offer, the Commission considered remedial +acts promptly undertaken by Orrstown and cooperation afforded the Commission staff. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondents’ Offers. Accordingly, pursuant to Section 8A + + +2 A willful violation of the securities laws means merely “‘that the person charged with the duty knows w hat +he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 +(D.C. Cir. 1949)). There is no requirement that the actor “‘also be aware that he is violating one of the Rules or +Acts.’” Id. (quoting Gearhart & Otis, Inc. v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). +14 + + +of the Securities Act and Sections 4C and 21C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, it is hereby ORDERED that: +A. Respondents Orrstown, Quinn, Everly and Embly cease and desist from +committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of +the Securities Act. +B. Respondents Orrstown, Quinn, Everly and Embly cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) +and (B) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 thereunder; Respondents +Quinn, Everly and Embly further cease and desist from committing or causing any violations and +any future violations of Exchange Act Rule 13b2-1; Respondents Quinn and Everly further cease +and desist from committing or causing any violations and any future violations of Exchange Act +Rule 13a-14. +C. Respondent Barton cease and desist from committing or causing any violations and +any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules +12b-20, 13a-13 and 13b2-1 thereunder. +D. Respondent Orrstown shall, within ten (10) days of the entry of this Order, 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 payment of this civil penalty is not timely made, additional interest shall accrue +pursuant to 31 U.S.C. §3717. +E. Respondent Quinn shall pay a civil penalty of $100,000 to the Securities and +Exchange Commission. Payment shall be made in the following installments: one installment of +$25,000 due within 10 days of the entry of this Order, and then three installments of $25,000 +each plus post-judgment interest due within 90, 180, and 270 days of the date of the entry of this +Order. If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. +§3717, shall be due and payable immediately, without further application. +F. Respondent Everly 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 payment of this civil penalty is not timely made, additional interest shall accrue +pursuant to 31 U.S.C. §3717. +G. Respondent Embly shall pay a civil penalty of $100,000 to the Securities and +Exchange Commission. Payment shall be made in the following installments: one installment of +$25,000 due within 10 days of the entry of this Order, and then three installments of $25,000 +each plus post-judgment interest due within 90, 180, and 270 days of the date of the entry of this +Order. If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. +§3717, shall be due and payable immediately, without further application. +15 + + +H. Respondent Barton shall, within ten (10) days of the entry of this Order, pay a +civil money penalty in the amount of $25,000, to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If payment of this civil penalty is not timely made, additional interest shall accrue +pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +i. Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +ii. 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 +iii. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Respondent as a Respondent in these proceedings, and the file number of these proceedings. A +copy of the cover letter and check or money order, or documentation of whatever other form of +payment is used, must be simultaneously sent to G. Jeffrey Boujoukos, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 1617 JFK Boulevard, Suite 520, +Philadelphia, Pennsylvania 19103. +I. Respondent Everly is denied the privilege of appearing and practicing before the +Commission as an accountant. +J. After three (3) years from the date of this Order, Respondent Everly 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: +i. 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. +1. 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, +16 + + +as long as he practices before the Commission in this capacity; +and/or +ii. An independent accountant. Such an application must satisfy the +Commission that: +1. 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; +2. 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; +3. Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and +4. Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. +K. The Commission will consider an application by Respondent Everly 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 the +applying Respondent’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. +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 +17 + + +order granting the Penalty Offset, notify the Commission's counsel in this action and pay the +amount of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall +not be deemed an additional civil penalty and shall not be deemed to change the amount of the +civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor +Action” means a private damages action brought against any Respondent by or on behalf of one +or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondents Orrstown, Quinn, Everly, Embly and Barton and further, any debt for +civil penalty or other amounts due by each of the aforementioned Respondents under this Order +or any other judgment, order, consent order, decree or settlement agreement entered in +connection with this proceeding, is a debt for the violation by said Respondents of the federal +securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3808.txt b/raw/aaer/2016/AAER-3808.txt new file mode 100644 index 0000000000000000000000000000000000000000..6e29d50d06774a2b7d72ccc1fa406b4f1a5b35b2 --- /dev/null +++ b/raw/aaer/2016/AAER-3808.txt @@ -0,0 +1,492 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 78957 / September 28, 2016 + +ACCOUNTING AND AUDIT ENFORCEMENT +Release No. 3808 / September 28, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17586 + + +In the Matter of + +ANHEUSER-BUSCH INBEV +SA/NV, + +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 Anheuser-Busch InBev SA/NV (“AB InBev” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns AB InBev’s violations of the books and records and internal +controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”), which occurred at its +Indian wholly owned subsidiary, Crown Beers India Private Limited (“Crown”). From 2009 to +2012, AB InBev held a 49% interest in an Indian joint venture, InBev India International Private +Limited (“IIIPL”), which managed the marketing and distribution of Crown beer. During this +period, IIIPL used third-party sales promoters to make improper payments to Indian government +officials to obtain beer orders and to increase brewery hours for Crown in 2011. IIIPL invoiced +Crown for reimbursement for certain of these expenses, and Crown paid or accrued them. In doing +so, Crown recorded certain of these expenses in its books as legitimate promotional costs. During +this period, Crown had inadequate internal accounting controls to detect and prevent these +improper payments and to ensure that transactions involving these promoters were recorded +properly in its books. As a result, Crown’s books, which were consolidated into AB InBev’s books +and records, did not accurately and fairly reflect the nature of the promoters’ transactions. +2. Furthermore, in December 2012, AB InBev entered into a separation agreement +with a former Crown employee containing language that impeded the employee from +communicating directly with the Commission staff about possible securities law violations. AB +InBev had also used the same or similar language in other separation agreements in the past. +Respondent + +3. AB InBev, a global brewer, is a Belgian company headquartered in Leuven, +Belgium. AB InBev was formed in November 2008 through the merger of Anheuser-Busch +Companies Inc. (“Anheuser-Busch”) and InBev SA/NV (“InBev”). AB InBev’s American +Depositary Receipts trade on the New York Stock Exchange and have been registered with the +Commission pursuant to Section 12(b) of the Exchange Act since September 16, 2009. AB InBev +has, through various direct and indirect subsidiaries and affiliates, approximately 155,000 +employees based in 25 countries around the world. AB InBev files annual reports with the +Commission on Form 20-F. +Other Relevant Entities + +4. Crown is a wholly owned subsidiary of AB InBev and is headquartered in +Hyderabad, Andhra Pradesh, India. Crown’s financial results are consolidated into AB InBev’s +financial statements, which are filed with the Commission. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +5. IIIPL, a defunct company formerly based in Gurgaon, India, was a joint venture +between AB InBev and RJ Corp, an Indian corporation. InBev (AB InBev’s predecessor) and RJ +Corp formed IIIPL in 2007 to brew and sell beer in India and Nepal. Prior to its dissolution in +early 2015, RJ Corp and AB InBev owned 51% and 49% of IIIPL, respectively. AB InBev and RJ +Corp each had the right to appoint four IIIPL directors, with RJ Corp having the right to appoint +the Chairman, who cast the tie-breaking vote on all but certain specified matters. RJ Corp +appointed the IIIPL CEO, who had the power to appoint the other members of the IIIPL +management team, except for the CFO, whom AB InBev appointed. Throughout the relevant +period, the top financial officer at Crown acted as the top financial officer at IIIPL. From mid- +2011 through early 2014, Crown’s in-house counsel also acted as IIIPL’s in-house counsel. +Facts +A. Background + +6. AB InBev’s predecessor corporate entities, Anheuser-Busch and InBev, +independently entered the Indian beer market before the two companies merged in November +2008. Anheuser-Busch entered the Indian market in 2007 through a joint venture with Crown and +subsequently bought out its partner, making Crown a wholly owned subsidiary. InBev entered the +Indian market in 2007 through IIIPL. Post-merger, AB InBev continued to operate in India +through both Crown and IIIPL. +7. Pre-merger, Crown controlled the marketing, distribution, and sale of the beer it +brewed. The Anheuser-Busch/InBev merger, however, triggered a provision in the IIIPL joint +venture shareholders’ agreement that required IIIPL to manage the marketing, distribution, and sale +of beer brewed by Crown. Thereafter, IIIPL controlled the third-party sales promoters that were +used to facilitate the sale and marketing of Crown’s beers in both Andhra Pradesh and Tamil Nadu. +Among other tasks, these promoters administered retail promotional programs and liaised with +Indian state government authorities. +8. The sale of beer in India is predominantly regulated by individual states. In the +state of Andhra Pradesh, the Andhra Pradesh Beverages Corporation Limited (“APBCL”), an +instrumentality of the government of Andhra Pradesh, purchases beer directly from brewers and +sells beer directly to private retailers. In the state of Tamil Nadu, the Tamil Nadu State Marketing +Corporation (“TASMAC”), an instrumentality of the government of Tamil Nadu, controls both +wholesale and retail beer sales, purchasing beer from brewers and selling to consumers through +TASMAC retail outlets. +B. Third-Party Promoters of AB InBev’s and IIIPL’s Beers Provided Improper Benefits +and Payments to Indian Government Officials + +9. In early 2009, IIIPL’s CEO and his appointed executives formulated a plan to +increase IIIPL’s market share in Andhra Pradesh by providing improper benefits and payments to +government officials through third-party sales promoters. +4 + +Promoter Company A +10. In 2009, IIIPL hired a promoter for the state of Andhra Pradesh, Promoter +Company A. Promoter Company A had no experience in the alcohol industry. Promoter +Company A received excessive commissions and reimbursements for questionable promotional +charges. For example, Promoter Company A sought reimbursement from IIIPL of certain +“display” charges that had no substantiation and were billed on a “per case” basis rather than based +on the actual amount spent on the display. Promoter Company A used these excessive +commissions and reimbursements to make improper payments to government officials at APBCL. +11. There was no executed contract in place to govern the relationship between +Promoter Company A and IIIPL. Neither IIIPL nor Crown conducted any due diligence on +Promoter Company A. Instead, the contractual terms of IIIPL’s agreement with Promoter +Company A were documented only in two short internal emails between IIIPL employees. +Promoter Company A was replaced by a successor entity in April 2012, but neither IIIPL nor +Crown conducted any due diligence on the successor entity at that time. Even though Crown’s in- +house counsel forwarded AB InBev’s FCPA due diligence forms to IIIPL staff and offered to help +complete them, the due diligence forms were never completed. Neither company executed a +written contract with the successor entity until September 2012. +12. In December 2009, AB InBev received an internal complaint regarding compliance +and internal control issues at IIIPL, including potential FCPA issues related to Promoter +Company A. In response, AB InBev expedited an already-planned internal audit of IIIPL, which +AB InBev staff conducted in early 2010. This audit did not scrutinize Promoter Company A’s +activities or expenses. Still, the 2010 audit identified various deficiencies at IIIPL, including +(a) a lack of documented business policies and procedures for significant functions such as +procurement, vendor selection, and expense reimbursement; (b) a lack of awareness about FCPA +compliance; and (c) inadequate information technology controls regarding financial processes and +expense payments. AB InBev did not rectify many of the issues identified in the audit until 2011 +or early 2012. +13. From April 2009 until March 2012, IIIPL generally incurred the initial costs of +marketing and selling Crown’s beer and then sent invoices to Crown for reimbursement. Crown, +in turn, recorded certain of these costs as expenses on its books and records. Crown thus either +incurred or accrued certain of Promoter Company A’s expenses and recorded them as legitimate +commissions or promotional costs, even though some of those amounts included improper +payments to government officials. +14. Despite the internal complaint and the 2010 audit results, Crown personnel did not +verify that a contract was in place with Promoter Company A and did not ensure that IIIPL +personnel had performed due diligence on Promoter Company A. As a result, Crown recorded +certain Promoter Company A expenses on its books in a manner that failed to accurately and fairly +reflect their true nature and purpose. +5 + +Promoter Company B +15. In or about 2011, IIIPL began working with an individual (the “Principal”) who had +connections in Andhra Pradesh, including to the son-in-law of the Andhra Pradesh Excise Minister. +The Principal used his local connections to secure extra brewing hours for Crown after the Andhra +Pradesh Excise Commissioner limited Crown’s production time to 8 hours per day. On April 1, +2011, before the Principal was hired in any capacity by IIIPL or Crown, and before the Principal +had entered into any contract, the Principal emailed IIIPL a signed order from the Andhra Pradesh +Excise Commissioner that gave Crown an additional 7.5 brewing hours per day. The Principal +helped IIIPL obtain further authorizations from the Andhra Pradesh Excise Commissioner to +operate for an additional 7.5 hours per day in May 2011, and an additional 7 hours per day in June +2011. Neither IIIPL nor Crown held any contractual relationship with, or had performed any due +diligence on, the Principal when he helped secure the additional brewing hours. +16. Around the same time, IIIPL engaged the Principal to assist in generating beer +orders from TASMAC in Tamil Nadu. In April 2011, the Principal secured orders of more than +534,000 cases of beer in Tamil Nadu, resulting in gross profits of approximately $637,000 to +Crown. This was the first and only time that IIIPL ever sold Crown beer in Tamil Nadu. +17. IIIPL utilized the Principal’s company, Promoter Company B, to promote beer in +Tamil Nadu despite the fact that Promoter Company B had no experience, staff, or infrastructure in +Tamil Nadu. +18. IIIPL personnel did not conduct due diligence on the Principal or Promoter +Company B before they began performing work for IIIPL. To conceal this fact, IIIPL employees +subsequently completed and backdated Promoter Company B’s due diligence forms to make it +appear as though they were completed in April 2011, when IIIPL initially engaged Promoter +Company B. In addition, IIIPL employees allowed the Principal to complete the due diligence +forms in the first instance, and then altered his responses to make them more suitable. +19. Neither Crown nor IIIPL had a written agreement in place with the Principal or +Promoter Company B. Rather, the basic terms of the engagement were first set out in an internal +email between IIIPL employees in June 2011, several months after IIIPL had begun to sell beer in +Tamil Nadu and after Promoter Company B had already invoiced IIIPL for its services. The terms +included an inflated commission rate, which Promoter Company B used to make improper +payments to TASMAC officials. IIIPL employees subsequently drafted and backdated a contract +with Promoter Company B to create the appearance that the contract had been executed on the date +that IIIPL initially engaged Promoter Company B. In reality, IIIPL did not execute a formal +contract with Promoter Company B until approximately January 2012. +20. Although they were on notice of internal controls issues at IIIPL and had received a +complaint about the Principal and Promoter Company B, Crown personnel did not verify the +existence of a written contract with Promoter Company B and did not confirm that IIIPL personnel +performed due diligence on Promoter Company B. +6 + +C. AB InBev’s Separation Agreement Contained Language that Impeded the Crown +Employee’s Communication with the Commission + +21. In 2010 and 2011, a Crown employee (the “Crown Employee”) informed AB +InBev personnel that, among other things, IIIPL may have been using Promoter Company A to +make improper payments to government officials. The Crown Employee also raised concerns to +AB InBev about Promoter Company B, questioning its lack of sales experience, staff, and +infrastructure. The Crown Employee reported to AB InBev personnel that the Principal had a local +reputation for “taking care of” government officials and suggested that AB InBev perform due +diligence on him. + +22. During the relevant period, the Crown Employee was employed by an AB InBev +subsidiary. +23. In early 2012, AB InBev’s subsidiary terminated the Crown Employee’s +employment. The Crown Employee and AB InBev’s subsidiary subsequently engaged in +mediation regarding potential employment law claims related to this termination. In late 2012, the +Crown Employee and AB InBev’s subsidiary entered into a Confidential Agreement and General +Release (the “Separation Agreement”) that resolved the Crown Employee’s claims. +24. Paragraph 7.A of the Separation Agreement includes the following language: +[The Crown Employee] agrees to keep in strict secrecy and confidence +any and all unique, confidential and/or proprietary information and +material belonging or relating to [the AB InBev subsidiary] that is not a +matter of common knowledge or otherwise generally available to the +public including, but not limited to, business, government affairs, +communications, financial, trade, technical or technological information. +[The Crown Employee] acknowledges and agrees that [the Crown +Employee] remains subject to the “Employment Agreement as to +Intellectual Property and Confidentiality,” which [the Crown Employee] +previously signed and is incorporated into the Agreement by reference. +25. Paragraph 7.C of the Separation Agreement includes the following language: +[The Crown Employee] agrees not to disclose, directly or indirectly, any +information regarding the substance of this Agreement to any person +other than [the Crown Employee’s] spouse, attorney, or financial or tax +advisor, except to the extent such disclosure may be required for +accounting or tax purposes or as otherwise required by law. +26. Paragraph 7.D of the Separation Agreement includes the following language: +[The Crown Employee] agrees that, if [the Crown Employee] violates in +any way any of the terms and conditions of paragraph 7, [the Crown +Employee] shall be liable to [the AB InBev subsidiary], and shall +7 + +immediately pay to [the AB InBev subsidiary] as liquidated damages and +not as a penalty, the total sum of $250,000.00 which represents +reasonable compensation for the loss incurred by [the AB InBev +subsidiary] as a result of such breach…. +27. After signing the Separation Agreement, the Crown Employee, who was previously +voluntarily communicating directly with the Commission staff, stopped doing so. The Crown +Employee stopped doing so because he believed that he was prohibited by the recently executed +Separation Agreement and any violation of the Separation Agreement would risk triggering the +Separation Agreement’s liquidated damages provision. Only after the Commission issued an +administrative subpoena for testimony and documents did the Crown Employee resume +communicating directly with the Commission staff. +28. AB InBev has used the same or similar language in other agreements in the past. +Document Destruction at IIIPL +29. In or about May 2013, Commission staff learned of IIIPL’s plans to destroy or hide +documents. The Commission staff informed AB InBev immediately thereafter, but the company +took no immediate corrective action. In September 2013, AB InBev notified the Commission staff +of a meeting in which several IIIPL managers instructed top IIIPL employees to remove potentially +inculpatory data from their offices and computers. Crown and IIIPL’s in-house counsel attended +the meeting, but never alerted AB InBev management to the document removal instructions. Other +IIIPL employees reported that they had helped or observed IIIPL managers take several binders out +of the building to destroy or move to a “secret location.” +AB InBev’s Investigation and Remedial Efforts +30. AB InBev did not report the 2009 and 2011 complaints to the Commission staff +before the Commission first contacted AB InBev in October 2011. During the investigation, AB +InBev did not respond to subpoenas in a timely manner, and made broad assertions of privilege +that required significant resources from the Commission staff to address and delayed the +production of responsive, non-privileged documents. The timeliness of AB InBev’s responses to +the Commission’s requests for documents and information improved over time. + +31. After the 2010 internal audit, AB InBev did improve some internal controls at +Crown and IIIPL, including by adopting AB InBev’s own policies, due diligence questionnaires, +and checklists; more sound controls over expenses and cash; and tighter controls over IIIPL’s +accounting software, and the eventual replacement in 2012 of a flawed accounting system with a +more sophisticated system. However, IIIPL employees were still able to circumvent many of these +controls between 2010 and 2012. AB InBev also conducted FCPA training at both IIIPL and +Crown, albeit over a year and a half after it received the first complaint regarding potential FCPA +violations. + +32. Additionally, AB InBev and RJ Corp terminated their joint venture and dissolved +IIIPL in early 2015. AB InBev now operates in India solely through its wholly owned subsidiary, +8 + +Crown, and has consolidated its Indian production, sales, and marketing functions at Crown. +Following the dissolution of IIIPL in 2015, AB InBev conducted extensive FCPA training for +Crown’s staff, and implemented improved compliance policies and controls at Crown, including +policies and controls relating to third-party due diligence and contracts. AB InBev also has hired a +dedicated India compliance manager who reports to a new India Legal Counsel and Head of +Compliance. + +33. In September 2015, AB InBev amended its separation agreements that impose +confidentiality restrictions on departing employees of its United States entities to make clear that +they do not prohibit the employees from reporting possible violations of law to governmental +agencies. Those separation agreements now include the following language: “I understand and +acknowledge that notwithstanding any other provision in this Agreement, I am not prohibited or in +any way restricted from reporting possible violations of law to a governmental agency or entity, +and I am not required to inform the Company if I make such reports.” +Legal Standards and Violations +34. 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. +35. 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. +36. Section 13(b)(2)(B) of the Exchange Act requires issuers 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 (a) executed in accordance with management’s general or specific authorization; +(b) recorded as necessary to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other applicable criteria; and (c) recorded as +necessary to maintain accountability for assets; and access to assets is permitted only in accordance +with management’s general or specific authorization. +37. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July +21, 2010, amended the Exchange Act by adding Section 21F, “Whistleblower Incentives and +Protection.” The Commission adopted Rule 21F-17(a), which provides that, “No person may take +any action to impede an individual from communicating directly with the Commission staff about +a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality +agreement . . . with respect to such communications.” Rule 21F-17(a) became effective on August +12, 2011. +9 + +38. As a result of the conduct described above, AB InBev violated Section 13(b)(2)(A) +of the Exchange Act, because its books and records did not, in reasonable detail, accurately and +fairly reflect the true nature and purpose of Promoter Company A’s illicit expenses. +39. AB InBev also violated Section 13(b)(2)(B) of the Exchange Act by failing to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that Crown executed transactions in accordance with management’s general or specific +authorization. +40. In addition, AB InBev violated Rule 21F-17(a) because the Separation Agreement +contained language that impeded the Crown Employee from communicating directly with the +Commission staff. Such restrictions on providing information regarding possible securities law +violations to the Commission undermine the purpose of Section 21F, which is to “encourage[e] +individuals to report to the Commission” [Adopting Release at p. 201], and violate Rule 21F-17(a) +by impeding individuals from communicating directly with the Commission staff about possible +securities law violations. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent AB InBev’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B), and Rule 21F-17, of the Exchange Act. +B. Respondent shall, within thirty (30) days of the entry of this Order, pay +disgorgement of $2,712,955, prejudgment interest of $292,381, and a civil penalty of $3,002,955, +for a total payment of $6,008,291 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury in accordance with Exchange Act Section 21F(g)(3). +If timely payment is not made, additional interest shall accrue pursuant to 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: +10 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying AB +InBev 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 Ansu Banerjee, Assistant Regional +Director, Los Angeles Regional Office, Division of Enforcement, United States Securities and +Exchange Commission, 444 S. Flower Street, Suite 900, Los Angeles, CA 90071. + +C. During a two-year term from the date the Order is issued, Respondent agrees, as set +forth below, to cooperate fully and truthfully with respect to this action and any other enforcement +litigation or investigation commenced by the Commission or to which the Commission is a party +into potential violations of the FCPA or Section 21F(h)(1)(A) of the Exchange Act and Rule 21F- +17 promulgated under the Exchange Act (the “Proceedings”). In addition, during this two-year +term, Respondent agrees to cooperate fully and truthfully, when directed by the Commission, in +an official investigation or proceeding by the United States Department of Justice into potential +violations of the FCPA (“Other Proceedings”). The full, truthful, and continuing cooperation of +Respondent during this two-year term shall include, but not be limited to: +(1) producing, in a responsive and prompt manner, all non-privileged +documents, information, and other materials to the Commission as +requested by the Commission’s staff, wherever located, in the possession, +custody, or control of the Respondent, including translations of any of the +foregoing; +(2) using its best efforts to secure the full, truthful, and continuing cooperation +of current and former directors, officers, employees and agents, including +making these persons available, when requested to do so by the +Commission’s staff, at Respondent’s expense, for interviews and the +provision of testimony in the investigation, trial and other judicial +proceedings in connection with the Proceedings or Other Proceedings; and +(3) entering into tolling agreements, when requested to do so by the +Commission. +D. During a two-year term as set forth below, Respondent shall report to the +Commission staff on the operation of AB InBev’s FCPA and anti-corruption compliance +program. If Respondent discovers credible evidence, not already reported to the Commission +staff, that: (1) questionable or corrupt payments or questionable or corrupt transfers of property or +interests may have been offered, promised, paid, or authorized by Respondent, or any entity or +person while working directly for Respondent, to any government official; (2) that related false +books and records have been maintained; or (3) that Respondent’s internal controls failed to detect +11 + +and prevent such conduct, Respondent shall promptly report such conduct to the Commission +staff. +E. During this two-year period: +(1) Respondent shall submit to the Commission staff a written report within one +year of the entry of this Order on the operation of AB InBev’s FCPA and +anti-corruption compliance program (the “Initial Report”). The Initial +Report shall be transmitted to Ansu Banerjee, Assistant Regional Director, +Los Angeles Regional Office, Division of Enforcement, United States +Securities and Exchange Commission, 444 S. Flower Street, Suite 900, Los +Angeles, CA 90071. Respondent may extend the time period for issuance +of the Initial Report with prior written approval of the Commission staff. +(2) Respondent shall undertake one follow-up review, incorporating any +comments provided by the Commission staff on the Initial Report, to further +monitor and assess the operation of its FCPA and anti-corruption +compliance program and whether Respondent’s policies and procedures are +reasonably designed to detect and prevent violations of the FCPA and other +applicable anti-corruption laws (the “Final Report”). +(3) The Final Report shall be completed by no later than one year after the +Initial Report, and shall be transmitted to Ansu Banerjee, Assistant Regional +Director, Los Angeles Regional Office, Division of Enforcement, United +States Securities and Exchange Commission, 444 S. Flower Street, Suite +900, Los Angeles, CA 90071. Respondent may extend the time period for +issuance of the Final Report with prior written approval of the Commission +staff. +(4) The 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 +(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. +(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. +12 + +(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. +F. AB InBev has agreed that, within 60 days from the date the Commission enters this +Order, it will make reasonable efforts to contact the former employees of AB InBev’s United +States entities previously identified by the Commission staff, and provide them with a copy of this +Order and a statement that AB InBev does not prohibit former employees from contacting the +Commission regarding possible violations of federal law or regulation. +G. AB InBev has agreed to certify, in writing, compliance with the undertaking set +forth in Paragraph IV.F above. The certification shall identify the undertaking, provide written +evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for further +evidence of compliance, and Respondent agrees to provide such evidence. The certification and +supporting material shall be submitted to Ansu Banerjee, Assistant Regional Director, Los +Angeles Regional Office, with a copy to the Office of the Chief Counsel of the Enforcement +Division, no later than sixty (60) days from the date of completion of the undertaking. +H. In determining to accept the Offer, the Commission considered the remedial acts +described above, cooperation afforded to the Commission staff, and this undertaking. + +By the Commission. + + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3809.txt b/raw/aaer/2016/AAER-3809.txt new file mode 100644 index 0000000000000000000000000000000000000000..8212a2db10d476ada2bb31c5a301c2719867f5dc --- /dev/null +++ b/raw/aaer/2016/AAER-3809.txt @@ -0,0 +1,294 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79004 / September 30, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3809 / September 30, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17605 + + +In the Matter of + +D’Arelli Pruzansky, P.A., +Joseph D’Arelli, CPA, and +Mitchell J. Pruzansky, 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 D’Arelli Pruzansky, P.A. (“Pruzansky, P.A.”), +Joseph D’Arelli, CPA (“D’Arelli”), and Mitchell J. Pruzansky, CPA (“Pruzansky”) (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 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 + +This matter involves violations of the auditor independence rules arising from the failure by +D’Arelli Pruzansky, P.A. and its two founding partners, Joseph D’Arelli and Mitchell J. Pruzansky, +to comply with audit partner rotation requirements during the course of their engagement as the +independent auditor for five reporting company clients with securities registered with the +Commission under Section 12 of the Exchange Act (collectively, the “issuer clients”). +Specifically, in 2014 and 2015, D’Arelli and Pruzansky failed to rotate off the audit engagements +after serving as lead audit partners for five consecutive fiscal years. As a result, the Respondents +were not independent with respect to the interim review services they provided the issuer clients. +These failures caused the issuer clients to file quarterly reports with the Commission that were not +reviewed by an independent public accountant as required by Regulation S-X of the Exchange Act. + +RESPONDENTS + +1. D’Arelli Pruzansky, P.A., f/k/a Gold Coast Audit & Tax, P.A., f/k/a Pruzansky & +Company P.A., f/k/a Mitchell J. Pruzansky, CPA, P.A. (“D’Arelli Pruzansky”, (“Pruzansky, P.A.” +or the “Firm”) is an accounting and auditing firm based in Coconut Creek, Florida. The Firm was +founded by Mitchell J. Pruzansky in May 2003 and changed its name to D’Arelli Pruzansky in +2012 after Joseph D’Arelli joined the Firm. D’Arelli Pruzansky has been registered with the +Public Company Accounting Oversight Board (“PCAOB”) since October 2012. In 2015, the +Firm’s client list included 17 public companies and six registered broker-dealers. D’Arelli +Pruzansky has no disciplinary history. + +2. Joseph D’Arelli, age 47, is a certified public accountant (“CPA”) licensed to +practice in New York and Florida since 1998 and 2004, respectively. D’Arelli held a license to +practice as a CPA in Virginia from 2001 to 2013. D’Arelli became a partner and shareholder of +D’Arelli Pruzansky in 2012. In May 2016, D’Arelli left the Firm and is currently employed as a +controller of a public company. D’Arelli has no disciplinary history. + +3. Mitchell Pruzansky, age 55, is a CPA licensed to practice in New York and +Florida since 1987 and 1990, respectively. Since 2015, Pruzansky has held a provisional CPA +license in Missouri. Pruzansky is the founding partner and shareholder at the Firm. Pruzansky has +no disciplinary history. + + + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + +3 + +FACTS + +Issuer Engagements + +4. D’Arelli commenced his role as lead audit partner for one of the issuer clients in +2010, while employed at another PCAOB-registered audit firm. Between 2010 and 2014, he +served as the issuer client’s lead audit partner for each of the five fiscal year audits and continued +to serve as lead audit partner for the quarterly reviews after the fifth fiscal year. D’Arelli rotated +off serving as the client’s lead audit partner prior to the sixth fiscal year audit. + +5. Pruzansky similarly commenced his role as lead audit partner for the other four +issuer clients in 2009, also while employed at another PCAOB-registered audit firm, and served as +lead audit partner on five fiscal year audits for each. Following the fifth fiscal year audits, he +served as lead audit partner for certain quarterly reviews for these four issuer clients. Pruzansky +rotated off serving as the clients’ lead audit partner prior to the sixth fiscal year audit for each +client. + +6. During a PCAOB inspection in July 2015, the Firm was informed by the PCAOB +inspection staff that it had failed to comply with the SEC’s partner rotation requirements with +regard to two issuer audit clients. Specifically, D’Arelli and Pruzansky (collectively, the +“Partners”) failed to rotate off the audit engagements as lead audit partners after the required five +fiscal year period. + +7. In August 2015, the Firm reviewed all of its engagements to identify the universe of +issuer audit clients that may have had a similar rotation issue. This review found that the rotation +issue existed for three additional issuer clients. Thus, the Firm and the Partners were not +independent with respect to the audit services they provided to five issuer clients in connection +with certain quarterly reviews as listed below. The Firm self-reported these violations to the +Commission’s staff and took prompt remedial measures. + +Issuer Audit Services Beyond Five Fiscal Years +1 2015: Q1, 2, 3 +2 2014: Q1, 2, 3 +3 2014: Q1, 2, 3 +4 2014: Q1, 2 +5 2014: Q1, 2 + +Auditor Partner Rotation and Independence + +8. Section 10A(j) of the Exchange Act, Audit Partner Rotation, provides “[i]t shall be +unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or +coordinating) audit partner (having primary responsibility for the audit), or the audit partner +responsible for reviewing the audit, has performed audit services for that issuer in each of the + +4 + +previous five fiscal years of that issuer.” Rule 10A-2 of the Exchange Act, Auditor Independence, +provides that it shall be unlawful for an auditor not to be independent with respect to, among other +requirements, the partner rotation requirements of the Commission’s Regulation S-X. Rule 2- +01(c)(6)(i)(A) of Regulation S-X allows engagement and concurring partners to serve for five +consecutive years, after which they may not serve in either role for another period of five years. + +9. The Firm was not independent with respect to the various 2014 and 2015 quarterly +reviews for the five issuer clients, as a consequence of D’Arelli’s failure to rotate off the +engagement on the quarterly review of one issuer client’s first three quarters of 2015, and +Pruzansky’s failure to rotate off the engagement on the various quarterly reviews for the other four +issuer clients in 2014. + +10. D’Arelli and Pruzansky had previously served as lead engagement partners on these +engagements for five consecutive years and were not eligible to serve in that role for any review or +audit for the next five consecutive years. + +11. Section 13(a) of the Exchange Act and Rule 13a-13 require issuers with securities +registered under Section 12 of the Exchange Act to file with the Commission accurate quarterly +reports on Form 10-Q. No showing of scienter is necessary to establish a violation of Section 13(a) +or the rules thereunder. See SEC v. Savoy Indus., Inc. 587 F.2d 1149, 1166-67 (D.C. Cir. 1978). + +12. The above-described actions by the Firm and the Partners caused the five issuer +clients, all of which had securities registered under Section 12 of the Exchange Act, to violate +Section 13a of the Exchange Act and Rule 13a-13 thereunder. Rule 10-01(d) of Regulation S-X +requires the interim financial statements included in a Form 10-Q to be reviewed by an +independent public accountant. The Firm’s and the Partners’ rotation violations caused the issuer +clients to fail to comply with Rule 10-01(d) and, in turn, violate Section 13(a) and Rule 13a-13. + +VIOLATIONS + +13. As a result of the conduct described above, Respondent D’Arelli Pruzansky, P.A. +violated Section 10A(j) of the Exchange Act and Rule 10A-2 thereunder, which makes it unlawful +for an auditor not to be independent with respect to, among other requirements, the partner rotation +requirements. + +14. As a result of the conduct described above, Respondents D’Arelli and Pruzansky +caused the Firm’s violations of Section 10A(j) of the Exchange Act and Rule 10A-2 thereunder. + +15. Also as a result of the conduct described above, Respondents caused the five issuer +clients to violate Section 13(a) of the Exchange Act and Rule 13a-13 thereunder. + + + + +5 + + +REMEDIAL EFFORTS + +In determining to accept the Offers, the Commission considered remedial acts promptly +undertaken by Respondents and cooperation afforded the Commission staff. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondents cease and desist from +committing or causing any violations and any future violations of Sections 10A(j) and 13(a) of the +Exchange Act and Rules 10A-2 and 13a-13 thereunder. + + B. Respondents shall jointly and severally pay a civil 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). Payment shall be made in the following +installments: + +(i) $5,000 due within 21 days from the entry of this Order; + +(ii) $7,500 due within 90 days from the entry of this Order; + +(iii) $12,500 due within 180 days of the entry of this Order; + +(iv) $12,500 due within 270 days of the entry of this Order; and + +(v) $12,500 due within 360 days of the entry of this Order. + +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of civil penalties, plus any additional interest accrued pursuant to 31 U.S.C. § +3717, shall be due and payable immediately, without further application. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + + +6 + +(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 +D’Arelli Pruzansky, P.A., Joseph D’Arelli, and Mitchell J. Pruzansky as Respondents in these +proceedings, and the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to Glenn S. Gordon, Associate Regional Director, Miami Regional +Office, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131. + + 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 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. + +7 + + +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 Joseph D’Arelli and Mitchell J. Pruzansky, and further, any debt for disgorgement, +prejudgment interest, civil penalty or other amounts due by Respondents Joseph D’Arelli and +Mitchell J. Pruzansky 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 Joseph D’Arelli and Mitchell J. Pruzansky of the federal securities laws or any +regulation or order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy +Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3810.txt b/raw/aaer/2016/AAER-3810.txt new file mode 100644 index 0000000000000000000000000000000000000000..9af59b7a215445277fdab6ef355ce560ed3a2b2b --- /dev/null +++ b/raw/aaer/2016/AAER-3810.txt @@ -0,0 +1,336 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79005 / September 30, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3810 / September 30, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17606 + +In the Matter of + +GlaxoSmithKline plc, + +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 GlaxoSmithKline plc (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings, Pursuant to 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + +A. These proceedings arise out of GSK’s violations of the internal controls and +recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 U.S.C. § +78dd]. + +B. Between at least 2010 and June 2013, employees and agents of GSK’s China-based +subsidiary and a China-based joint-venture engaged in various transactions and schemes to provide +things of value to foreign officials, including healthcare professionals (“HCPs”), in order to +improperly influence them and increase sales of GSK products in China. + +C. This misconduct was facilitated in part by the use of collusive third parties that +ostensibly provided legitimate travel and other services. The funds used for the improper +inducements were frequently obtained under the guise of, and falsely recorded in GSK’s books and +records as, legitimate travel and entertainment expense, marketing expense, speaker payments, +medical associations payments, and promotion expense. Throughout this period GSK failed to +devise and maintain a sufficient system of internal accounting controls and lacked an effective anti- +corruption compliance program. + +D. The deficiencies in GSK’s internal accounting controls and compliance program +also led to instances of similar improper conduct in connection with sales in other countries in +which GSK operates. + + +Respondent + +E. GlaxoSmithKline plc is a corporation organized in the United Kingdom. Its +headquarters are located in Middlesex, United Kingdom. GSK’s common stock is registered with +the Commission under Section 12(b) of the Securities Exchange Act and trades on the New York +Stock Exchange under the symbol ‘GSK’. + +F. GSK is a global provider of pharmaceutical and consumer health care products and +its products are sold in at least 150 countries. + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +Other Relevant Entities + +G. GlaxoSmithKline (China) Investment Co Ltd (“GSKCI”) is operated from +Shanghai, China. GSKCI operations include the sale and marketing of pharmaceutical products. +GSKCI is a wholly-owned indirect subsidiary of GSK. + +H. Sino-American Tianjin Smith Kline & French Laboratories Ltd (“TSKF”) is a +public-private joint venture with Tianjin Zhong Xin Pharmaceutical Group Corporation Ltd and +Tianjin Pharmaceutical Group Co Ltd. GSK indirectly owns 55 percent of TSKF. + +Facts + +I. From at least 2010 to June 2013, employees and agents of GSKCI and TSKF +engaged in transactions and schemes to corruptly transfer things of value to foreign officials in +China to increase sales of pharmaceutical products. The payments were made to increase sales +through increased prescriptions by individual HCPs and purchases by hospital administrative staff +responsible for product selection or purchase. The conduct occurred across all geographic areas +within the sales and marketing functions and impacted all product lines. + +J. The corrupt payments took varied forms, including gifts, improper travel and +entertainment with no or little educational purpose, shopping excursions, family and home visits, +and cash. The costs associated with these payments were recorded in GSK’s books and records +as legitimate expenses, such as medical association sponsorships, employee expenses, conferences, +speaker fees, and marketing costs. + +K. These improper practices were pervasive among GSKCI’s and TSKF’s sales and +marketing representatives and were condoned by regional and district managers. For example, a +2013 work plan submitted by a sales representative to a regional sales manager described the intent +to pay, among other things, an HCP RMB 20/box of prescribed product every month, and deliver +appropriate gifts on each holiday in exchange for a guarantee of more than 40 boxes of prescribed +product every month. + +L. Among the ways employees were able to fund payments to HCPs was the use of +collusive third party vendors, such as those used to perform planning and travel services for events +involving HCPs. Between 2010 and June 2013, GSKCI spent nearly RMB 1.4 billion (USD $225 +million) on planning and travel services. Test sampling showed that approximately 44 percent of +the sampled invoices were inflated and approximately 12 percent were for events that did not +occur. + +M. Controls weaknesses also permitted ostensibly legitimate speaker fees to be used to +improperly influence HCPs. While GSK’s policies as of 2010 placed limits on the amount of fees +paid to speakers per hour and by 2012 cumulatively per year, there was no effective system in +place to ensure the actual identity of a speaker. Of approximately RMB 106 million (USD $17 +million) spent by GSKI in speaker fees, approximately RMB 14 million (USD $2.2 million) was +paid to persons whose qualification as an HCP could not be verified. + 4 + +N. Marketing programs were another mechanism used to improperly influence HCPs. +For example, in 2010, GSKCI engaged a local vendor to facilitate a national marketing program +called the Cold Chain Project. The project was intended to provide healthcare clinics with tools to +facilitate the storage and administration of vaccines that required refrigeration. However, the +project was instead used to provide HCPs with gifts such as laptops, tablets, and other electronic +devices. Over the life of the project, GSKCI paid out RMB 14.6 million (approximately USD $2.3 +million). The project was created and administered by senior marketing and sales managers of +GSKCI. The clinics selected were based upon the potential to market additional pharmaceutical +products. + +O. During this period, local internal audit and compliance reviews identified controls +deficiencies and evidence of some mechanisms that were used to fund the improper payments, but +they were treated as isolated instances rather than signs of a larger problem. For example, in 2013 a +Sales Rep Office Audit was conducted by internal audit with respect to the Guangzhou office. +Among the problems identified were: + + Issues of falsified POS slips and fake bank statements + Issues of fake invoices claimed from hotels and restaurants for sales +meeting activities. These invoices came from a local preferred meeting +agency used by the Guangzhou office. + Compliance and New Employee training not timely completed + Sales employees’ salaries were significantly driven by commissions that +could lead to an incentive to improperly inflate sales. The audit sampled 20 +percent of the sales team for the office and found that for 41 percent their +sales commission bonuses were greater than 50 percent of their income. + +P. As early as 2010, internal audit identified problems related to sales and promotions +staff practices in China. Among other findings it noted: + +[d]uring 2010, several new policies governing commercial +activities such as grants and donations and sponsorships +were introduced. The significant changes, combined with +the high staff turnover, contribute to an environment where +many commercial and medical staff do not understand how +to apply policies or the rationale behind them. This was +evidenced by approval of non-compliant activities, a lack of +clarity on which policy to apply for activities such as grants, +and weaknesses in documentation to support the legitimate +intent of activities such as advisory boards and sponsorships +of HCPs to attend meetings. + +Q. As a result of the conduct described above, Respondent violated Sections +13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) +and 78m(b)(2)(B)]. + 5 +GSK’s Remedial Efforts +R. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +1. During the course of the investigation, Respondent provided prompt and +regular briefings regarding its own internal investigation in China, and with +respect to other countries. Respondent timely conveyed the facts it learned in +the course of its own investigation, promptly responded to document requests +by the Commission staff, and provided translations of documents as needed. +2. Respondent also provided detailed and timely information regarding its +remedial efforts, enhancements to its compliance program and implementation +of key initiatives. +3. Respondent made global changes to its business. This included the +elimination of most payments to doctors, including fees to HCPs to speak +about the Company’s prescription medicines, and altering the compensation +structure for its sales force to eliminate incentive pay based on the number of +prescriptions generated. Respondent enhanced its global risk assessment +process, strengthened its monitoring and risk assessment tools, and increased +its global compliance organization. Respondent also enhanced its third-party +oversight program, including increasing the number and scope of third-party +audits, and increased training and education of employees on anti-bribery +issues. +Undertakings + + S. 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 t o 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: ( a) +conduct an initial review and submit an initial report, and ( b) conduct and +prepare at least two follow-up reviews and reports, as described below: + +i. 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 + 6 +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 exten d the time +period for issuance of the Initial Report with prior written +approval of the Commission staff. + +ii. 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”). +iii. 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 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. +iv. 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 co operation, 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 + 7 +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’s Offer. Accordingly, pursuant to Section 21C of the Exchange Act, it is +hereby ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 +[15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $20,000,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment +must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying GSK as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Charles Cain, Division of Enforcement, Securities +and Exchange Commission, 100 F St., NE, Mailstop 5631, Washington, DC 20549. + + 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 + 8 +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + D. Respondent shall comply with the undertakings enumerated in Section III above. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3811.txt b/raw/aaer/2016/AAER-3811.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5810cf04d8812ecca8cf54332d7023c959d2034 --- /dev/null +++ b/raw/aaer/2016/AAER-3811.txt @@ -0,0 +1,51 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79019 / September 30, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3811 / September 30, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17611 +In the Matter of +ALAN RITTER, CPA +Respondent. +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE +I. +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Alan Ritter pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)].1 +II. +The Commission finds that: +1. Ritter maintained a certified public accountant license from the state of New York +beginning in February 1974 until October 2014, when the Board of Regents in New York State +granted Ritter’s application to surrender his license. +2. On September 14, 2012, Ritter pleaded guilty in the United States District Court +for the Southern District of New York to three counts of wire fraud in violation of 18 U.S.C. +Section 1343 in United States v. Alan Ritter, 12-CR-704. +3. On January 24, 2013 Ritter was sentenced to three years imprisonment followed +by three years of supervised release. He was also ordered to forfeit $6,046,403.50, make +restitution totaling $4,160,607.90, and pay a $300 special assessment. +III. + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + +2 + +In view of the foregoing, the Commission finds that Ritter has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. +Accordingly, it is ORDERED, that Alan Ritter is forthwith suspended from appearing or +practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3812.txt b/raw/aaer/2016/AAER-3812.txt new file mode 100644 index 0000000000000000000000000000000000000000..33bf30e4cb84cf649bf025a87ec8cd85a0ce972c --- /dev/null +++ b/raw/aaer/2016/AAER-3812.txt @@ -0,0 +1,115 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79020 / September 30, 2016 +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4544 / September 30, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3812 / September 30, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17612 + + +In the Matter of + +DENNIS DUBAN, CPA + +Respondent. +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940 +AND RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”) against Dennis Duban +(“Respondent” or “Duban”). The Commission also deems it appropriate to issue an order of +forthwith suspension of Respondent pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)(2)].1 +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(2) provides in pertinent part: “Any… person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + 2 +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +Section III.5. below, and consents to the entry of this Order Instituting Administrative Proceedings +Pursuant to Section 203(f) of the Investment Adviser Act of 1940 and Rule 102(e)(2) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), +as set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds that: +1. Respondent became licensed as a Certified Public Accountant (“CPA”) in California +in 1976, in Washington in 1993, in Hawaii in 1999, and in New York in 2001. +2. From October 2006 through March 2012, Respondent operated Dennis L. Duban, +CPA, a state-registered advisory firm, as a sole proprietor. +3. On September 15, 2010, Duban was charged with two counts of conspiracy to +defraud in violation of Title 18 United States Code, Section 371 and three counts of violating Title +26 United States Code, Section 7206(2) in a criminal action entitled United States v. Dennis +Lawrence Duban, 10-CR-631 (LEK) before the United States District Court for the District of +Hawaii. +4. On February 7, 2011, and May 26, 2011, Respondent, as Chief Compliance Officer +for Dennis L. Duban, CPA, falsely certified that neither Dennis L. Duban, CPA, nor its advisory +affiliates had been charged with any felony in the past ten years in its Form ADVs. An “advisory +affiliate” includes an investment adviser’s non-clerical employees, its officers, partners, and +directors, and persons controlling or controlled by the adviser. +5. On October 1, 2012, Respondent pleaded guilty in U.S. v. Duban to one count of +conspiracy to defraud the Internal Revenue Service in violation of Title 18 United States Code, +Section 371, and one count of willfully aiding and assisting in the preparation of a false personal +income tax return in violation of Title 26, United States Code, Section 7206(2). On June 3, 2014, +the court entered judgment against Duban, sentencing him to a prison term of two years followed by +three years of supervised release. He was also fined $30,000 and ordered to pay a $200 special +assessment. +6. In his plea agreement, Duban admitted inter alia, that he provided accounting and +tax planning services to Individual A, Individual B, and Company C; that he did not report as +income on Individual A’s individual tax return certain payments for personal expenses made on +Individual A’s behalf by Company C; and that he underreported the gain on sale of property on +Individual B’s personal tax return. Duban admitted that these tax returns were materially false and +his actions in preparing them were willful and knowing. +7. Duban’s Washington CPA license lapsed in 2013. He surrendered or forfeited his +Hawaii CPA license in 2013 due to disciplinary action. In December 2014, Duban’s application to + 3 +surrender his New York CPA license was granted. Duban surrendered his California CPA license +via stipulated settlement effective January 1, 2015. +IV. +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Duban’s Offer. +Accordingly, it is hereby ORDERED pursuant to Section 203(f) of the Advisers Act, that +Duban be, and hereby is barred from association with any broker, dealer, investment adviser, +municipal securities dealer, or transfer agent; +Any reapplication for association by the Respondent will be subject to the applicable laws +and regulations governing the reentry process, and reentry may be conditioned upon a number of +factors, including, but not limited to, the satisfaction of any or all of the following: (a) any +disgorgement ordered against the Respondent, whether or not the Commission has fully or partially +waived payment of such disgorgement; (b) any arbitration award related to the conduct that served +as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. +In view of the foregoing, the Commission finds that Duban has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. +Accordingly, it is hereby ORDERED, that Dennis Duban is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. +By the Commission. + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3813.txt b/raw/aaer/2016/AAER-3813.txt new file mode 100644 index 0000000000000000000000000000000000000000..588caf5ce9d617b07ebe2677b08c63c031dd555a --- /dev/null +++ b/raw/aaer/2016/AAER-3813.txt @@ -0,0 +1,52 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79021 / September 30, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3813 / September 30, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17613 +In the Matter of +STEVEN M. BRAZILE, CPA +Respondent. +ORDER OF SUSPENSION PURSUANT +TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE +I. +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Steven M. Brazile pursuant to Rule 102(e)(2) of the Commission’s Rules +of Practice [17 C.F.R. § 201.102(e)(2)].1 +II. +The Commission finds that: +1. Brazile maintained a certified public accountant license from the state of Texas +beginning in March 1991 until March 2013, when his license expired. In September 2014, +Brazile surrendered his certificate for revocation in lieu of further disciplinary action. +2. On July 30, 2013, Brazile pleaded guilty in the United States District Court for the +Northern District of Illinois to one count of interstate transportation of a security obtained by +fraud in violation of 18 U.S.C. Section 2314 in United States v. Steven M. Brazile, 13-CR-560. +3. On November 13, 2013, Brazile was sentenced to 48 months imprisonment, +followed by three years of supervised release. The Court ordered Brazile to make full restitution +of $3,902,880.85 and to pay an assessment. In addition, the Court entered a forfeiture order +against him. + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + +2 + +III. +In view of the foregoing, the Commission finds that Brazile has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. +Accordingly, it is ORDERED, that Steven M. Brazile is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3814.txt b/raw/aaer/2016/AAER-3814.txt new file mode 100644 index 0000000000000000000000000000000000000000..011ec021206b042bb9a6de0268152e081756c74d --- /dev/null +++ b/raw/aaer/2016/AAER-3814.txt @@ -0,0 +1,1614 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79109 / October 18, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3814 / October 18, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17628 + +In the Matter of + + +ERNST & YOUNG LLP, +CRAIG R. FRONCKIEWICZ, CPA, +AND +SARAH E. ADAMS, 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 (“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 +Ernst & Young LLP (“Ernst & Young”), Craig R. Fronckiewicz, CPA (“Fronckiewicz”), and +Sarah E. Adams, CPA (collectively, “Respondents”), pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)2 of the Commission’s +Rules of Practice. +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 censure a person or deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + + +2 + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceeding brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, Respondents consent to the entry of this Order, as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +SUMMARY +1. This matter involves violations of the federal securities laws and improper professional +conduct by Ernst & Young, Fronckiewicz, and Adams while serving as the external auditor, +coordinating (i.e., signing) partner, and tax partner, respectively, for Weatherford International +plc f/k/a Weatherford International Ltd. (“Weatherford”). In connection with its 2007-2010 +financial statements, Weatherford, a large multinational provider of oil and natural gas +equipment and services, issued false financial statements that inflated its earnings in violation of +U.S. Generally Accepted Accounting Principles (“GAAP”). Weatherford improperly inflated its +earnings and materially understated its effective tax rate (“ETR”) and tax expense through the +use of deceptive intercompany tax accounting. + +2. During each of those years, Weatherford repeatedly and publicly disclosed ETR and +recorded tax expense it knew, or was reckless in not knowing, were fabricated. Each year, +Weatherford made unsupported post-closing adjustments to accounting data that intentionally +lowered its actual ETR and tax expense. To do so, Weatherford reversed accounting data that +had been correctly input into Weatherford’s consolidated tax provision from the company’s +accounting system. Weatherford’s fraud created the misperception that the tax structure it +designed to reduce its tax expense and ETR was far more successful than it actually was. From +2007 to 2010, Weatherford regularly touted its favorable ETR to analysts and investors as one of +its key competitive advantages, which it attributed to its superior international tax avoidance +structure. The purportedly lower ETR rates that Weatherford reported throughout this period +proved illusory, however. + +3. On March 1, 2011, Weatherford announced that it would be restating its financial results +for 2007-2010 and that a material weakness existed in its internal control over financial reporting +(“ICFR”) for the accounting of income taxes. That restatement, which was filed on March 8, +2011, reduced previously reported net income by approximately $500 million (the “First +Restatement”). $461 million of the First Restatement resulted from a four-year income tax +accounting fraud. After announcing the First Restatement, Weatherford’s stock price declined +nearly 11% in one trading day ($2.38 per share), closing at $21.14 per share on March 2, 2011. +The decline eliminated over $1.7 billion from Weatherford’s market capitalization. + +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 + + +4. Ernst & Young’s audit team, including Fronckiewicz and Adams, did not detect the four- +year fraud. The audit team was aware of the existence of the post-closing adjustments each year. +However, they failed to perform audit procedures required by Public Company Accounting +Oversight Board (“PCAOB”) standards that would have likely uncovered the fraudulent scheme +as early as 2007 and in each year thereafter. In addition, during 2010, the audit team failed to +perform any additional inquiries or perform other appropriate procedures during quarterly reviews +of Weatherford’s financials to ascertain why the company was experiencing a huge unexplained +income tax receivable that grew to over $400 million by year-end 2010. + +5. Respondents failed to comply with PCAOB standards related to due professional care, +professional skepticism, supervision, staffing, training, and documentation. Ernst & Young +issued audit reports, signed by Fronckiewicz, containing unqualified opinions on the financial +statements in Weatherford’s 2007, 2008, and 2009 Form 10-Ks, which contained material +misstatements. Ernst & Young’s reports, which Respondents knew would be filed with +Weatherford’s Form 10-Ks, inaccurately stated that Ernst & Young conducted its audits in +accordance with PCAOB standards and that Weatherford’s financial statements were fairly +presented in all material respects in conformity with GAAP. + +6. Throughout the relevant period, Ernst & Young’s National Office issued annual findings +to its personnel recognizing the need for increased focus and expanded audit procedures due to +the audit teams’ failure on “more than an infrequent basis” to conduct audits of income tax +accounting in accordance with PCAOB standards. The National Office also indicated that it was +an area requiring significant improvement. However, Ernst & Young did not take effective +measures to minimize the likelihood of failed audits, which led to its failure to detect the +Weatherford fraud. + +7. By failing to comply with PCAOB standards, Respondents were a cause of +Weatherford’s issuance of materially false and misleading financial statements in its periodic +filings and submissions from 2007 through the third quarter of 2010 and, therefore, were a cause +of Weatherford’s violations of Exchange Act Section 13(a) and Exchange Act Rules 12b-20, +13a-1, and 13a-13 promulgated thereunder. + +8. As a result of the conduct described herein, Respondents also violated the federal +securities laws and rules and regulations thereunder pursuant to Section 4C of the Exchange Act +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +RESPONDENTS +9. Ernst & Young LLP is a professional services limited liability partnership, +headquartered in New York City, with offices located throughout the United States. It is a +member firm of Ernst & Young Global Limited and provides auditing, consulting, and tax +services to a variety of companies, including companies whose securities are registered with the +Commission and trade in the U.S. markets. Ernst & Young was Weatherford’s auditor from +2001 to March 2013. On March 7, 2013, Weatherford’s audit committee decided not to re- +appoint Ernst & Young. + + + +4 + +10. Craig R. Fronckiewicz, age 50, of Spring, Texas is an assurance partner at Ernst & +Young. Fronckiewicz was the coordinating partner and had final responsibility for the audits and +quarterly reviews of Weatherford’s financial statements from 2006 through fiscal year-end 2010. +As the coordinating partner, Fronckiewicz supervised Ernst & Young’s engagements to audit and +review Weatherford’s financial statements throughout that period. Fronckiewicz was an +engagement partner on the Weatherford audit in 2004 and 2005. Throughout the relevant period, +Fronckiewicz was licensed as a Certified Public Accountant (“CPA”) by the State of Texas. + +11. Sarah E. Adams, age 52 of Houston, Texas, was a tax partner at Ernst & Young until +July 2014 and a member of the firm’s federal tax group. Adams served as the tax partner on the +Weatherford audit engagement team from 2007 through March 2013. As the tax partner, Adams +reviewed the work of, and supervised Ernst & Young’s tax professionals on the audit +engagement team who performed audit and review procedures related to Weatherford’s income +tax accounting throughout that period. Adams was the tax senior manager on the Weatherford +audit from 2001 through 2006. Throughout the relevant period, Adams was licensed as a CPA +by the States of Alabama and Texas. +RELEVANT ENTITY +12. Weatherford International plc f/k/a Weatherford International Ltd. is a multinational +Irish public limited company based in Switzerland, with offices in Houston, Texas. +Weatherford’s shares are registered with the Commission pursuant to Exchange Act Section +12(b) and are listed on the NYSE under the symbol “WFT.” Weatherford files periodic reports, +including Forms 10-K and 10-Q, with the Commission pursuant to Exchange Act Section 13(a) +and related rules thereunder. +FACTS +Weatherford’s Aggressive Tax Strategy +13. Throughout Ernst & Young’s tenure as Weatherford’s auditor, Weatherford employed an +aggressive strategy to become a top-tier multinational provider of oil and natural gas equipment +and services. One part of that strategy was based on exponential revenue growth fueled by +hundreds of acquisitions designed to expand Weatherford’s multinational footprint. During the +decade before its March 2011 restatement, Weatherford’s revenue increased from $1.8 billion to +$10.2 billion. + +14. Another key component of Weatherford’s strategy was to develop a superior international +tax avoidance structure that reduced the company’s ETR and tax expense (and increased +Earnings Per Share (“EPS”) and cash flow) while providing a competitive advantage over U.S.- +based peer companies. In 2002, Weatherford changed its place of incorporation from the U.S. to +Bermuda, a 0% tax jurisdiction, through a process known as inversion.4 From 2003 through + +4 In 2009, Weatherford took steps to preserve the tax avoidance structure it created by changing its place of +incorporation from Bermuda to Switzerland through a series of share exchange transactions commonly referred to as +redomestication. In 2014, Weatherford changed its place of incorporation from Switzerland to Ireland when, +through merger agreement, Weatherford International plc, an Ireland-based public limited company, became the +new public holding company/parent of Weatherford’s group of companies. + + +5 + +2006, Weatherford further refined its international tax structure by implementing a series of +hybrid instruments to facilitate the movement of revenue from higher tax rate jurisdictions (e.g., +Canada and United States) to lower tax rate jurisdictions (e.g., Hungary and Luxembourg). + +15. While these international tax avoidance strategies reduced Weatherford’s ETR from +36.3% in 2001 to 25.9% by the end of 2006, its CFO remarked that Weatherford’s ETR +remained somewhat above that of other inverted peer companies in his response to an analyst’s +question during the company’s year-end earnings call on January 30, 2007. Soon thereafter, +Weatherford started reporting ETR results that created a false perception that its international tax +structure was outperforming similarly-situated competitors by a significant margin. For +example, in 2008 and 2009, fueled by its deceptive income tax accounting practices, +Weatherford reported pre-restatement ETRs of 17.1% and 6.5%, respectively. + +16. In connection with fiscal years 2007 through 2010, Weatherford’s Vice President of Tax +(“VP of Tax”) and tax manager engaged in fraudulent practices relating to income tax accounting +that violated GAAP and made Weatherford’s financial statements materially false and +misleading. Each year, they made or authorized unsupported post-closing adjustments within a +line item on the consolidated tax provision labeled intercompany “dividend exclusion.”5 These +dividend exclusion adjustments, which ranged from $286 million to $439 million per year, +involved different Weatherford entities within Weatherford’s corporate elimination account, +which was known as the “Eliminations region.” These adjustments were then tax effected at +35%, which falsely lowered Weatherford’s year-end provision for income taxes by $100 million +to $154 million each year. These dividend exclusion adjustments also overstated net income, +understated ETR and tax expense, and ultimately created a $461 million phantom income tax +receivable. These adjustments were made to allow Weatherford’s reported ETR and earnings +results to better align with analysts’ expectations and Weatherford’s previously-announced +projected results. +Ernst & Young’s High-Risk Assessments of Weatherford +17. In 2001, Weatherford became a client of Ernst & Young’s Southwest Region, with the +engagement team based in Houston. Weatherford quickly became one of the largest clients in +the region. It also had a widely-held reputation in Ernst & Young’s Southwest Region as a +particularly risky and difficult client. From at least 2004, Ernst & Young concluded that +Weatherford posed a “significant risk to the firm; that is, there is a significant chance the firm +will suffer damage to its reputation, monetarily, or both.” Accordingly, Ernst & Young +designated “close monitoring” status upon Weatherford, the highest-risk category that the firm +recognized. Risk factors the firm specifically identified in reaching this assessment included +factors that were among the causes of the audit failure in this matter, including: + + a history of completing significant or unusual transactions shortly before or at year- +end or quarter end; + an ability to book journal entries without multiple levels of review; + + +5 Dividend exclusion represents the amount of intercompany dividends that a corporation must exclude from +its taxable income. + + +6 + + difficulties in auditing Weatherford’s complex tax structure in a timely manner; + pressure on management to meet earnings and EPS requirements; and + significant pressure for “marginal GAAP.” +Ernst & Young’s policies and procedures, which were not adhered to by Ernst & Young’s audit +team, required more detailed review by senior engagement professionals when auditing close- +monitoring clients, in recognition of basic audit and quality control standards that required +heightened professional due care and scrutiny when faced with a higher risk of material +misstatement. +18. Ernst & Young consistently perceived Weatherford as a challenging and demanding +client known for taking aggressive accounting positions. This was particularly true in the area of +income tax accounting, where Weatherford employed a complex international tax structure that +raised significant concerns for Ernst & Young engagement personnel and required formal and +informal consultations with Ernst & Young’s National Professional Practice Group (“PPG”) +dating back to at least the 2006 fiscal year audit. + +19. In 2005, the audit team was aware of numerous errors affecting deferred tax asset and +liability cumulative balances that were caused by Weatherford’s failure to maintain tax basis +balance sheets. Ernst & Young ultimately determined that these errors reflected a single ICFR +significant deficiency and not a material weakness. In 2006, PPG was consulted on material out- +of-period income tax accounting errors identified by Ernst & Young tax engagement personnel +that enabled Weatherford to meet its fourth quarter earnings projections. Ernst & Young +concluded, after consultation with PPG, that an ICFR deficiency existed because Weatherford’s +internal supervisory review of its consolidated tax provision was not being executed with +sensitivity high enough to detect or prevent a financial misstatement. Weatherford’s income tax +accounting, therefore, warranted Respondents’ heightened skepticism as an area that presented a +high risk of financial misstatement. + +20. These and other elevated risks associated with Weatherford’s tax accounting raised +considerable red flags for Respondents, in part, because they involved an audit area that was +inherently high risk and one that Ernst & Young itself had recognized was in need of significant +improvement due to recurrent issues on multiple audit engagements. For example, Ernst & +Young’s policies and procedures required its auditors to conduct significantly more detailed +review of income tax workpapers than those in other, less risky, areas. Ernst & Young’s policies +and procedures, which were not adhered to by the audit team, regarding tax workpapers required +the following heightened supervisory audit review by both assurance and tax professionals on all +Commission registrant engagements: + + assurance professionals must perform a detailed and second (or executive) level +review of the income tax working papers; and + the tax review must be performed by a tax executive director, principal, or partner +with the appropriate experience and background. +Ernst & Young’s policies and procedures made clear that audit procedures over income tax +accounting required a collaborative approach in which both tax and assurance personnel were +viewed as members of the engagement team, both responsible for performing their work in + + +7 + +accordance with PCAOB standards. Under applicable PCAOB standards, Adams was an +assistant responsible for assisting Fronckiewicz in the planning and supervision of certain areas +of the audit. +21. While these policies and procedures applied to all of Ernst & Young’s Commission +registrant clients, the need for extensive supervision and review in the area of income tax +accounting was especially important in the highest-risk environments of its close monitoring +engagements, such as the audit of Weatherford and its income tax accounting. As described +herein, Respondents failed repeatedly to follow or adequately supervise that these policies and +procedures were followed. +Weatherford Engages in Fraud in 2007 +22. In December 2006, Weatherford, through its VP of Tax, initially forecasted an ETR of +29% for fiscal year 2007. However, Weatherford emails among its senior management reflected +that the company was under pressure to meet Wall Street expectations and to offset shortfalls in +its quarterly earnings targets by lowering its ETR. + +23. Throughout the first three quarters of 2007, Weatherford recorded ETR and tax expense +pursuant to FIN 18, “Accounting for Income Taxes in Interim Periods.” FIN 18 prescribes an +estimated annualized ETR approach for computing the tax provisions for the first three quarters +of the year, which is based on a company’s best estimate of current year ordinary income. +GAAP, however, does not allow companies to use FIN 18 to calculate their year-end tax +provisions. GAAP required Weatherford to record ETR and tax expense at year end pursuant to +FAS 109, “Accounting for Income Taxes.”6 FAS 109 establishes standards on how companies +should account for and report the effects of income taxes, including the calculation of the year- +end consolidated tax provision. + +24. Shortly before Weatherford was scheduled to release its year-end financial results for +2007, Weatherford’s VP of Tax and its tax manager discovered the year-end ETR and tax +expense that had been calculated pursuant to FAS 109 far exceeded ETR estimates and tax +expense disseminated publicly to analysts and investors during the first three quarters of 2007 +based on their FIN 18 estimates. Faced with what they considered to be an immovable deadline +for reporting earnings, the Weatherford VP of Tax and tax manager falsified the year-end +consolidated tax provision by making an unsubstantiated manual $439.7 million post-closing +“plug” adjustment to two different Weatherford Luxembourg entities within Weatherford’s +Eliminations region. To do so, they intentionally reversed accounting data that had been +correctly input to Weatherford’s consolidated tax provision via the company’s accounting +system, as follows: + + +6 Effective for interim and annual periods ending after September 15, 2009, FASB codified authoritative +accounting literature in the Accounting Standards Codification. As such, FIN 18 and FAS 109 were superseded by +ASC Topic 740. The substantive provisions of the codified guidance are consistent with the superseded standards. + + +8 + + + +25. The resulting plug adjustment, which the VP of Tax and tax manager then improperly +applied a 35% tax rate to, allowed Weatherford to reduce its tax expense by $153.9 million for +the year and to lower its ETR in line with previous estimates publicly disclosed during quarterly +calls with analysts. As a result, the ETR announced to analysts and investors during its year-end +conference call allowed Weatherford to ultimately meet Wall Street’s earnings expectations. +Respondents’ Fiscal Year 2007 Audit +26. During 2007, when Weatherford’s fraud began, the company was, based on audit fees, +Ernst & Young’s 14th largest close monitoring client firm-wide and the fourth-largest close +monitoring client in its Southwest Region, in terms of audit fees. As part of its yearly client +continuance process, Ernst & Young once again classified Weatherford as close monitoring +based, in part, upon the following characteristics: + + a domineering CEO, + rapid growth and acquisitive nature of the company, + a history of completing significant or unusual transactions at quarter-end or year-end, + a concern that Weatherford “operates in a decentralized manner and has the ability to +book journal entries without multiple levels of review,” and + the difficulty of auditing Weatherford’s complex tax structure in a timely fashion. +Further, as noted above, the audit team had identified Weatherford as having a significant +deficiency in 2005 for not maintaining tax basis balance sheets, and in consultation with PPG, +made a 2006 deficiency determination regarding control issues over Weatherford’s tax provision. +Despite the close monitoring high risk status and known deficiencies in its controls over income +taxes, virtually all of the 2007 audit procedures regarding Weatherford’s income tax accounting +were conducted by Ernst & Young’s tax professionals without sufficient detailed assistance +from, or coordination with, assurance personnel, as required by Ernst & Young policies. +27. During the audit, a tax senior under Adams who was tasked with reviewing +Weatherford’s consolidated tax provision brought the $439 million manual post-closing +adjustment to Adams’ attention. Her emails to Adams (“This deserves a huh?”) and to the +Weatherford tax manager (“. . . I do not mean to sound like a broken record, but I am not +following this.”) made clear there were significant unanswered questions surrounding the +dividend exclusion adjustment. + +28. Although Weatherford, its VP of Tax, and its tax manager did not inform Respondents +that they had backed into the ETR by putting in a plug to match what they expected the ETR to +WFT Luxembourg SARL 195,430,220$ +WFT Financing (Luxembourg) SARL 244,298,216$ +Total Unsupported Adjustment $439,728,436 +Tax Rate Improperly Applied 35% +2007 Plugged Tax Benefit 153,904,953$ +Unsupported Manual Entries - Fiscal Year 2007 + + +9 + +be, their oral explanation of the reason for the adjustment (that it was made in order to achieve +better matching of intercompany activity per tax given the Eliminations region has a 35% ETR +and Luxembourg has a 0% ETR) did not make sense. Nevertheless, the audit team, including +Adams, ultimately accepted oral representations from Weatherford regarding the basis for the +adjustment without any corroborating documents. Adams then signed off on the income tax +audit workpapers. Fronckiewicz signed off on the tax provision workpapers that reflected the +dividend exclusion adjustment, but did not sign off on the workpapers identifying Weatherford’s +oral explanations for the adjustment. + +29. Fronckiewicz and Adams both were aware of the adjustment and its material impact on +reducing Weatherford’s ETR, yet they failed to review meaningfully or substantiate the +adjustment through basic reconciliation or other audit procedures that likely would have revealed +the error. Fronckiewicz and Adams neither performed, nor asked others to perform, any +corroborating procedures to substantiate the $439 million dividend exclusion adjustment that +drove Weatherford’s ETR down by approximately nine percent for the year. Despite signing off +on an audit checklist indicating that such steps had been performed, Fronckiewicz did not ensure +that assurance personnel performed “required detailed and second-level reviews” of the income +tax accounting workpapers prepared and reviewed by Ernst & Young tax engagement personnel. +This was contrary to Ernst & Young’s policies. +Weatherford’s Fraud Continues From 2008 Through 2010 +30. During 2008-2010, Weatherford’s tax department again observed large gaps between the +actual ETR and tax expense it calculated at year-end and the lower estimated ETR and resulting +tax expense that it had reported to analysts and investors. During 2008-2010, Weatherford’s tax +department made additional unsubstantiated manual post-closing dividend exclusion +adjustments, or plugs, between $286.6 million to $303.6 million each year and overrode +accounting data that had been automatically and correctly input into Weatherford’s consolidated +tax provision. These dividend exclusion adjustments, which involved Luxembourg and Bermuda +entities within Weatherford’s Eliminations region, improperly lowered Weatherford’s tax +expense by $106.3 million, $101.6 million, and $100.3 million during 2008, 2009, and 2010, +respectively. + + + +10 + + + +31. In addition to year-end, Weatherford made an earlier plug adjustment each year to +conceal its scheme during a “pretend” hard close of Weatherford’s third quarter tax accounts and +tax provisions. The pretend hard close was a “dry run” that permitted Ernst & Young’s audit +team to conduct early testing of tax accounts and identify potential control and financial +statement issues in advance of the year-end audit. During both the pretend hard close and at +year-end, the audit team failed to obtain, review, and analyze supporting documentation for the +dividend exclusion adjustments and then signed off on the reasonableness of Weatherford’s +accounting at year end. + +32. For three of the four fiscal years, the dividend exclusion adjustments involved different +entities within Weatherford’s Eliminations region, a red flag missed by the audit team. For +example, the dividend exclusion adjustments made within Weatherford’s Eliminations region in +2009 and 2010 involved the same Bermuda entity, but the dividend exclusion adjustments made +in 2007 and 2008 were associated with three different Luxembourg entities. Weatherford also +aggravated the magnitude of the fraud by inappropriately tax-effecting these adjustments by +attributing a 35% tax rate to calculate the “tax benefit” purportedly associated with either 0%- +tax-rate (Bermuda) or low-single-tax-rate (Luxembourg) jurisdictions. +Respondents’ Fiscal Year 2008 Audit + +33. As the fraud continued into 2008, Weatherford was, based on audit fees, Ernst & +Young’s 13th largest close monitoring client firm-wide and the third-largest close monitoring +client in its Southwest Region. Prior to the initiation of the 2008 audit engagement, Ernst & +Young reconfirmed Weatherford’s “close monitoring” status based on many of the same high- +risk characteristics identified in 2007, as well as some additional concerns, including low bond +WFT Luxembourg SARL 195,429,960$ +WFT Investment (Luxembourg) SARL 108,245,404$ +Total Unsupported Adjustment $303,675,364 +Tax Rate Improperly Applied 35% +2008 Plugged Tax Benefit 106,286,377$ +Total Unsupported Adj. - WFT Bermuda Ltd. 290,407,796$ +Tax Rate Improperly Applied 35% +2009 Plugged Tax Benefit 101,642,729$ +Total Unsupported Adj. - WFT Bermuda Ltd. 286,632,936$ +Tax Rate Improperly Applied 35% +2010 Plugged Tax Benefit 100,321,528$ +Unsupported Manual Entries - Fiscal Year 2008 +Unsupported Manual Entries - Fiscal Year 2009 +Unsupported Manual Entries - Fiscal Year 2010 + + +11 + +ratings, a then-ongoing Foreign Corrupt Practices Act investigation,7 and the risk that “pressure +exists for [Weatherford] management to meet the earnings and EPS requirements or expectations +of third parties.” Indeed, the audit planning documents for 2008 explicitly identified concerns +about Weatherford’s “extreme sensitivity to earnings and the possible pressure that could be +imposed on the tax director to decrease the effective tax rate.” Ernst & Young’s engagement +team, however, did not modify its audit plan or procedures to consider the significant risk of +material misstatement stemming from concerns regarding Weatherford’s tax director, who was +the VP of Tax, and its tax department until the 2010 audit. + +34. Ernst & Young’s fiscal year 2008 audit procedures for Weatherford’s income tax +accounting again were conducted by its tax engagement personnel without significant assistance +from, or coordination with, assurance personnel. Once again, the tax senior from the prior year’s +engagement, now a first year tax manager, identified the tax adjustment and questioned +Weatherford’s responses regarding the $303.7 manual dividend exclusion adjustment, which +generated a tax benefit to Weatherford of $106.3 million and increased net income by the same +amount. + +35. Ernst & Young’s first-year tax manager tried to corroborate the initial answers she +received from Weatherford’s tax manager by obtaining documentation and challenging +Weatherford’s tax treatment of the adjustment, which involved a different combination of +Luxembourg entities within Weatherford’s Elimination region than those used in 2007. +However, she was unable to corroborate Weatherford’s misleading explanations for the +adjustment. The questions the first-year tax manager raised about the adjustments remained +unresolved as Weatherford’s Form 10-K filing date drew near. As late as February 23, 2009, just +one day before Weatherford filed its fiscal year 2008 Form 10-K, she continued to receive +inconsistent and incomprehensible answers about the basis for the dividend exclusion adjustment +from Weatherford’s tax manager that neither she nor Adams could resolve. + +36. The issues identified by the first-year tax manager should have raised red flags for the +audit team concerning the adjustment itself and why the adjustment was made to different +Luxembourg entities than those used in the prior year. Instead, on February 23, 2009, +Fronckiewicz and Adams signed off on the engagement team’s Income Tax Review +Memorandum (“Memorandum”) summarizing the engagement team’s audit procedures over +Weatherford’s income tax accounting. The Memorandum contained representations that “we +believe that all significant tax matters, tax exposure items, and financial statement presentation +and disclosure matters have been considered during our audit . . . and appropriately addressed.” +The Memorandum went on to state that “the income tax accounts are free of material error” and +that “we believe the tax working papers appropriately document the procedures performed, +evidence obtained, and conclusions reached by us in performing our tax review.” + +37. On February 24, 2009, the day after Fronckiewicz and Adams signed off on the +Memorandum, the first-year tax manager performed additional work at Adams’ request. That + +7 In November 2013, the Commission and U.S. Department of Justice charged Weatherford with committing +widespread FCPA and sanctioned-country violations that led to Weatherford’s payment of nearly $253 million in +fines. SEC Charges Weatherford International with FCPA Violations, SEC Press Release 2013-252 (November 26, +2013). + + +12 + +day, the first-year tax manager drafted an audit workpaper which demonstrated that +Weatherford’s post-closing, $303 million, manual adjustment was erroneously attributed to two +Luxembourg entities. Rather than challenge the legitimacy of Weatherford’s adjustment, +however, Adams signed off, on February 24, 2009, on workpapers that changed the dividend +exclusion adjustment to a Weatherford Bermuda entity in a 0% tax jurisdiction rather than +Weatherford’s proposed Luxembourg entities. The audit team then re-applied Weatherford’s +application of a 35% tax rate benefit to the newly made adjustment involving Bermuda.8 Later +that same day, Weatherford filed its Form 10-K for fiscal year 2008. There was no explanation +in the workpapers for why Weatherford applied the 35% tax rate benefit to a Bermuda entity, +which the audit team knew was a 0% tax jurisdiction. + +38. Although Weatherford, its VP of Tax, and its tax manager did not inform the audit team +of the true reason for the 2008 dividend exclusion adjustment, Fronckiewicz and Adams neither +performed, nor asked others to perform, any corroborating procedures to support the basis for the +adjustments. Required reconciliation or other audit procedures would have likely identified the +error or, at a minimum, revealed that there was no reasonable basis for making this adjustment as +the Bermuda tax rate was 0%. Fronckiewicz did not review the relevant workpapers and once +again failed to ensure his assurance personnel performed the required detailed and second-level +reviews of the income tax accounting workpapers, as required by Ernst & Young’s policies. +Fronckiewicz and Adams were both aware of the dividend exclusion adjustment before signoff. +Adams knew, and Fronckiewicz knew, or should have known, that Weatherford made similar +post-closing adjustments the year prior that lacked supporting documentation. + +Respondents’ Fiscal Year 2009 Audit + +39. In 2009, Weatherford became, based on audit fees, Ernst & Young’s 8th largest close +monitoring client firm-wide and the largest close monitoring client in the Southwest Region. +Prior to the initiation of the 2009 engagement, Ernst & Young reconfirmed Weatherford’s “close +monitoring” status based on many of the same high-risk characteristics it identified in 2007 and +2008. As in 2008, the engagement team did not appropriately modify its audit plan and +procedures over Weatherford’s income tax accounting despite the identified risks, including the +knowledge that Weatherford had made sizeable post-closing adjustments without supporting +documentation in the prior two years. Ernst & Young’s 2009 audit procedures over +Weatherford’s income tax accounting again were conducted by tax personnel without significant +assistance from, or coordination with, assurance personnel, as required by Ernst & Young +policies. Indeed, the budgeted audit plan prepared by Fronckiewicz, with input from Adams, +contemplated that virtually all of the audit procedures regarding Weatherford’s income tax +accounting would be conducted by Ernst & Young tax personnel. + +40. In December 2009, just after the commencement of the fiscal year-end audit, the previous +year’s tax manager on the engagement resigned from Ernst & Young. Adams understood that +this resignation required the engagement team members to perform work at levels higher than +what they thought they might be comfortable doing. While a new tax senior manager was + +8 Weatherford financial statements for year-end 2008 continued to reflect the $106 million fraudulent tax +benefit associated with the Luxembourg entities because the audit team deemed the difference between the +adjustments to be immaterial. + + +13 + +assigned to the Weatherford engagement for a portion of the 2009 year-end audit, the audit work +for Weatherford’s consolidated tax provision principally fell to two tax seniors who had +previously worked on the Weatherford engagement, one of whom had not yet passed the CPA +exam. + +41. During the fiscal year 2009 audit, Weatherford represented to Ernst & Young’s tax +personnel that its $101.6 million tax benefit was supported by a $290 million dividend exclusion +adjustment involving a Bermuda entity. There is no evidence in the audit workpapers that the +engagement team questioned this adjustment or sought supporting documentation to corroborate +it. The sole support for Weatherford’s 2009 dividend adjustment in the audit workpapers +consisted of an oral representation that appears to have been copied from the prior year’s audit +workpapers verbatim. That purported oral representation does not even relate to the $290 +million Bermuda adjustment, but inexplicably references $523 million in fiscal year 2009 +dividend exclusions connected to Luxembourg entities and an explanation the audit team rejected +on the last day of the prior-year’s audit. + +42. The 2009 audit workpapers and lead schedules addressing the dividend adjustment +evidence no review or sign-off by either Fronckiewicz or Adams, although both signed off on an +audit checklist and the final Memorandum certifying that they reviewed the work performed as a +basis for their representations that Weatherford’s income tax accounts were prepared in +conformity with GAAP. This was contrary to Ernst & Young’s policies. + +43. The audit team’s failure to obtain sufficient competent evidential matter for +Weatherford’s 2009 dividend exclusion adjustment is particularly troubling for several reasons. +First, as noted above, the audit documentation does not reflect any evidence of work performed +on the 2009 dividend exclusion adjustment involving Bermuda. Instead, fourth quarter 2009 tax +provision audit workpapers prepared by one tax senior and reviewed by a second tax senior and +an assurance manager with no prior international tax experience erroneously identify a +previously rejected explanation from the prior year involving Luxembourg entities as support +that a $101.6 million tax benefit “is reasonable.” There is no evidence that either Fronckiewicz +or Adams conducted any review of the tax workpapers associated with this issue at fiscal year- +end 2009. + +44. Second, the audit team failed to reconcile a $155.8 million debit in the income tax +payable account, which had accumulated within Weatherford’s Elimination region solely as a +result of the dividend exclusion adjustments. Specifically, they failed to perform the following +steps necessary to audit the income tax accounts and thus failed to uncover Weatherford’s errors: +(i) a reconciliation of the current income tax payable/receivable accounts; (ii) a reconciliation of +the prior year income tax provisions to filed returns; (iii) an appropriately detailed ETR +reconciliation; or (iv) obtaining sufficient competent evidential matter to support the plug +adjustments. + +45. While all Respondents should have exhibited heightened professional skepticism toward +Weatherford’s income tax accounting throughout the relevant period, they had an additional +reason to review Weatherford’s income tax accounting with such heightened due care and +professional skepticism during the 2009 audit. Respondents, particularly Adams, had historically + + +14 + +viewed the Weatherford VP of Tax as difficult, intimidating to junior personnel, and stubborn; +particularly with respect to the tax positions he took on behalf of the company. By year-end +2009, concerns regarding the VP of Tax, who was by then also a Weatherford officer, rose +considerably. Adams made clear to others within Ernst & Young, including Fronckiewicz, that +she distrusted Weatherford’s VP of Tax and believed he was misrepresenting income tax +transactions in violation of GAAP in order to improve the company’s ETR and net income. +However, nothing was done to increase skepticism of Weatherford’s tax provision and Ernst & +Young’s engagement team continued to rely on oral explanations for the plug adjustments. + +46. Third, PPG conducted three formal consultations directly or indirectly related to +Weatherford’s income tax accounting during 2009. One consultation included a significant +deficiency determination involving internal control failures over the company’s tax accounting +that caused a $39 million out-of-period misstatement error to the consolidated tax provision. The +audit team uncovered the $39 million out-of-period misstatement error on Weatherford’s +consolidated tax provision during the 2009 year-end audit of Weatherford. The $39 million +error, which overstated Weatherford’s income tax liability and decreased its net income, arose +from Weatherford’s failure to follow GAAP accounting for certain deferred taxes. Weatherford +management concluded, and Respondents ultimately agreed, that the underlying root cause of the +$39 million error did not constitute a material weakness in Weatherford’s ICFR for income tax +accounting, which would require disclosure. Weatherford management concluded the error +stemmed from a significant deficiency in internal controls, which did not require disclosure. +After consultation with PPG, Respondents concluded the error arose from Weatherford’s internal +control failures, including “limited oversight from the financial reporting group over the income +tax process,” and “a lack of depth of experience in GAAP accounting for income taxes, which +limits the effectiveness of the reviews that are performed.” Separate consultations included the +tax and book accounting for a multi-million dollar IP migration, and a formal consultation +regarding materiality and tolerable error thresholds (which impacted the work performed by the +audit team on all of Weatherford’s accounts, including income taxes). + +47. Despite identifying these internal control deficiencies, the audit team conducted +insufficient substantive testing of Weatherford’s consolidated tax provision, which could have +caused them to question the single largest downward driver of Weatherford’s ETR for the year: +the manual post-closing $290 million dividend exclusion adjustment to the company’s +consolidated tax provision involving an entity in Bermuda, a 0% tax jurisdiction, which was then +tax effected in the Eliminations region by 35% to produce a tax benefit of $101.6 million. That +improper tax benefit increased Weatherford’s net income by 66% for the year. + +Fiscal Year 2010 Quarterly Interim Reviews + +48. The fraudulent plug adjustments and the resulting improper tax benefits recorded from +2007 through 2010 created a $461 million debit balance to Weatherford’s current income tax +payable, which Weatherford reclassified as an income tax receivable for reporting purposes. +“Current income tax payable” is a balance sheet liability account with a credit balance comprised +of taxes to be paid within a year. While income tax receivables with debit balances may arise for +short periods, such as when a company is due a tax refund, the multi-year large debit balance + + +15 + +Weatherford recorded should have raised red flags for the audit team long before the First +Restatement. + +49. Weatherford’s $461 million income tax receivable balance was not the product of an +abnormally large anticipated tax refund. Instead, this phantom income tax receivable occurred +because the current income tax payable accounts annually recorded from Weatherford’s +consolidated tax provision were understated by the amount of each year’s fraudulent tax benefit. +Over time, this disparity created a huge debit balance anomaly within Weatherford that was as +high as $155.8 million at December 31, 2009, grew to $279.2 million at June 30, 2010, and +continued upward to $441.6 million at December 31, 2010.9 + +50. Throughout 2010, the audit team saw Weatherford’s income tax receivable balance grow +without explanation by $286.8 million, from $155.8 million at the beginning of the year to +$441.6 million by December 31, 2010. During the first six months of 2010, Weatherford’s tax +receivable balance grew by $123.4 million, to $279.2 million at June 30, 2010. Ernst & Young’s +interim review workpapers for the second quarter of 2010 indicated the audit team did “not have +the detail of this account” and “will prove out these receivables as part of interim testing” during +the pretend hard close. However, they failed to modify the review plan to include or otherwise +conduct sufficient inquiries or analytical procedures related to the tax receivable as part of their +interim reviews. Ernst & Young’s workpapers for its 2010 interim reviews contain no evidence +that even minimal review of Weatherford’s income tax receivable took place despite the glaring +tax receivable balance. + +51. Notwithstanding the absence of audit documentation, Adams reviewed the large tax +receivable balance during the second quarter of 2010 and thought that the large -- $123.4 million +-- continued growth in that balance did not seem analytically possible. She discussed the +receivable balance with Fronckiewicz and approached Weatherford’s VP of Tax for an +explanation about why the income tax receivable was so large, and why Weatherford would +continue to be making such large payments. When the VP of Tax did not have a response to +those questions, however, Adams did not make any additional inquiries or perform other +appropriate procedures to provide a basis for communicating whether she was aware of any +material departures from GAAP as it pertains to the $279.2 million income tax receivable +balance during the second quarter review of Weatherford’s financials. Instead, Adams indicated +to Weatherford’s VP of Tax that she would be expecting the company would reconcile their +payable/receivable balances for the year-end audit. As a result, the audit team performed no +extended procedures regarding Weatherford’s income tax receivable during the third quarter +either, choosing to wait until the receivable swelled to $441.6 million at year end to address the +issue in February 2011. It was not until February 2011, after concluding that a material +weakness in ICFR related to income tax accounting existed as of year-end, that Ernst & Young’s +engagement team performed additional review of Weatherford’s income tax receivable balance +and discovered the phantom $461 million receivable in the Eliminations region account that +occurred due to the four year fraud, which, in turn, led to the First Restatement. + + +9 The year-end 2010 current income tax balance of $441,553,629 included the $461 million phantom +receivable and a $20 million credit balance to “U.S. Income Tax Payable.” + + +16 + +52. The First Restatement did not correct all of the income tax accounting errors in +Weatherford’s financial statements. After the First Restatement was announced in March 2011, +Weatherford announced two additional restatements in February and July 2012, respectively. +The two restatements resulted from multiple types of tax accounting errors that were uncovered +as part of Weatherford’s remediation efforts.10 Weatherford initiated internal investigations after +filing its first and second restatements. In August 2012, the company informed Ernst & Young +for the first time the true reason for the $461 million error in the First Restatement; namely, that +its VP of Tax and tax manager had backed into Weatherford’s ETR by putting in a plug to match +what they expected the estimated ETR to be for four years. Ernst & Young then immediately +advised Weatherford’s Audit Committee that a possible illegal act had occurred and requested an +independent investigation into the matter, which was performed. + +Respondents’ Audits and Interim Reviews +Were Not Performed in Accordance with PCAOB Standards + +53. Respondents’ audits of Weatherford’s financial statements for fiscal years 2007, 2008, +and 2009 and their interim reviews of Weatherford’s financial statements during 2010 were +deficient. The audit team failed to identify the material understatement of Weatherford’s tax +expense and the associated phantom income tax receivable, in part, because they failed to perform +procedures to obtain sufficient evidence to support Weatherford’s income tax accounting in +accordance with PCAOB standards. In auditing Weatherford’s consolidated tax provision and +related income tax account balances and disclosures, the audit team failed to exercise due +professional care, and professional skepticism, and they failed to obtain sufficient competent +evidential matter to support a reasonable basis for an opinion regarding the financial statements. +The audit team knew they were auditing a high-risk area of a high-risk, close monitoring client, yet +they never insisted on, nor obtained, corroborating documentation to substantiate the abnormally +large dividend exclusion adjustments made by Weatherford’s VP of Tax and tax manager year after +year. The audit team also never performed certain required substantive audit procedures, such as +reconciliations that would have possibly identified the material errors in Weatherford’s income tax +receivable balances. + +54. Ernst & Young issued audit reports expressing unqualified opinions in connection with +its audits of Weatherford’s financial statements in fiscal years 2007 through 2009. Ernst & +Young’s audit team, including Fronckiewicz and Adams, was aware of Weatherford’s manual +post-closing adjustments each year. Further, Adams failed to obtain supporting documentation +to corroborate oral representations provided by Weatherford’s VP of Tax and tax manager. In +2008 and 2009, Fronckiewicz and Adams missed two opportunities each year during the pretend +hard close and at year end to uncover these plug adjustments. In 2010, Respondents conducted +interim reviews of Weatherford’s quarterly financial statements and failed to perform inquiries +and analytical procedures sufficient to ascertain why Weatherford’s $155.8 million income tax + +10 The second restatement included fraudulent conduct involving Weatherford’s failure to accrue for $84 +million in withholding taxes prior to 2012. Specifically, before Weatherford filed its Form 10-Q for the period +ending September 20, 2011, Weatherford and the VP of Tax knew, or were reckless in not knowing, that their failure +to accrue for withholding taxes on intercompany transactions was a deviation from GAAP that would cause +Weatherford’s statements to be materially misstated. + + +17 + +receivable, which was already growing significantly by the end of 2009, increased by an +additional $285.8 million over a single year. + +Ernst & Young’s Recognition that its Auditing of Income Tax Accounting Was an Area +Requiring Significant Improvement + +55. Beginning as early as 2004 and continuing throughout the relevant period, the national +office of Ernst & Young annually informed its personnel that, based on external and internal +inspection results, its auditing of income tax accounting was a firm-wide “specific focus” as a +top area requiring significant improvement. In fact, between 2006 and 2009, Ernst & Young +issued at least six memos, including three in November 2009 alone, to its personnel addressing +deficiencies in its audits of income tax accounting. Deficiencies in this area occurring on “more +than an infrequent basis” were typically highlighted, often in bold. Ernst & Young consistently +stressed the following issues throughout its memos: + + Ineffective supervision and review by assurance and tax professionals, especially +detailed and second-level review by assurance professionals; + Inadequate exercise of due professional care and professional skepticism; and + Insufficient audit documentation, including repeated observations that tax workpapers +appeared to be carried forward from year to year and failed to include appropriate +analyses and supporting documentation to support the auditors’ conclusions. + +56. Ernst & Young failed to remediate longstanding failures in the audits of income tax +accounting. Although Ernst & Young enhanced its policies and procedures in 2004, including +adding a tax supplement and audit procedures checklist with additional training, it continued to +observe issues with multiple engagement teams’ auditing of income tax accounting on an annual +basis. Ernst & Young’s yearly “observations” of these issues and the firm’s reminders to +“necessitate a heightened level of professional skepticism and executive involvement on each +engagement” were insufficient to change behavior adequately during the relevant period. In fact, +the very failings that Ernst & Young observed on a number of engagements over the auditing of +income taxes were the failures that Fronckiewicz, Adams, and their engagement team were making +year after year on the Weatherford audits. Despite Ernst & Young’s recognition of these problems, +the firm did not develop specific training to effectively assist its assurance and tax professionals in +their review and documentation in the tax workpapers until 2010, at the earliest. + +Staffing, Training, and Supervision + +57. Ernst & Young’s staffing, training, and supervision of engagement personnel on the 2007, +2008, and 2009 Weatherford audits were insufficient for a client with the complexity and risk +attributable to this company. First, Ernst & Young consistently staffed tax personnel on the 2007, +2008, and 2009 Weatherford audits at levels significantly beyond their capabilities. By doing so, +it also left the Weatherford audit significantly understaffed compared to prior years. Ernst & +Young’s tax teams below the partner level were similarly inexperienced in 2008 and 2009. + +58. Second, Ernst & Young’s tax team on the Weatherford audit lacked the necessary training +and proficiency to perform audit procedures to determine conformance with professional guidance + + +18 + +under GAAP related to tax provisions. Key tax team personnel did not receive appropriate +training on due professional care and skepticism until 2009, at the earliest. On the Weatherford +audits for 2007, 2008, and 2009, tax professionals lacking appropriate audit training and +experience were required to perform consolidated tax provision audit work that should have been +conducted by Ernst & Young assurance and tax personnel under the ultimate supervision of the +assurance partners. + +59. Staffing and training issues on the Weatherford audits were not limited to tax personnel. +There was also a shortage of qualified assurance managers in Ernst & Young’s Houston office and, +because of Weatherford’s reputation as a “very adversarial” client, staffing the Weatherford audit +was a perennial issue. Ernst & Young managers resisted working on the Weatherford audit and +threatened to quit if assigned to the engagement. Senior management in Ernst & Young’s +Southwest Region were aware of managers’ reluctance to work on the Weatherford audit. They +called Weatherford “one of the most challenging and demanding clients” in the region and noted: + + “[T]he Weatherford . . . engagement has historically been difficult and hard on our +people, frequently resulting in high turnover and generalized dissatisfaction within +our team.” + “Weatherford is an offshore company with a complex tax structure, and a tax +accounting process that historically had had issues.” + +60. Despite these well-known concerns, Ernst & Young regional senior management denied +Fronckiewicz’s request for an assurance manager well suited to a difficult, public company like +Weatherford before the start of the 2009 fiscal year audit. Ernst & Young assigned an assurance +manager who had limited previous public company experience and had little training or experience +in complex international tax accounting. Notwithstanding that lack of experience, Fronckiewicz +assigned this manager the task of reviewing the income tax workpapers during the 2009 audit. + +61. On March 29, 2011, shortly after the filing of the First Restatement, Ernst & Young’s +Quality Implementation Leader for the Southwest Region drafted an engagement quality +occurrence report that identified for PPG the following contributing factors as among the causes of +Weatherford’s March 8, 2011 restatement: (1) inconsistent and, at times, inadequate tax staffing; +and (2) performance issues regarding the coordination of work between the tax and assurance teams +on the engagement. This draft report, which was not finalized, also found that there was a lack of +appropriate supervision and review over the audits of Weatherford’s income tax accounting +during the 2007, 2008, and 2009 audits. + +62. For example, Fronckiewicz failed to consistently adhere to Ernst & Young policies and +procedures requiring a detailed and second-level review of income tax accounting workpapers by +sufficiently experienced assurance professionals. When Fronckiewicz attempted to conduct that +review himself, he performed only a cursory review and failed to exercise the due professional +care and skepticism required under the circumstances. He also failed to perform adequate +reviews to determine that others on the engagement team, particularly Adams, exercised the due +professional care and skepticism warranted by PCAOB standards. Adams supervised Ernst & +Young tax professionals that she knew were inexperienced and untrained and did not seek +additional training for these individuals. Adams and Fronckiewicz also knew that the + + +19 + +Weatherford audit required their tax staff to perform consolidated tax provision audit work in a +difficult, high-pressure environment under severe time constraints. Adams and Fronckiewicz +also engaged in unreasonable conduct by requiring their junior and inexperienced tax staff to +audit tax accounting that should have been conducted by assurance and tax personnel under the +ultimate supervision of the assurance partners. + +63. The staffing, training, and supervision on the Weatherford engagement identified above +were the responsibility of Fronckiewicz, Adams, and Ernst & Young. At the time, Ernst & Young +had no mechanism to ensure that the highest-risk areas of its highest risk clients had a team +composed of assurance and tax professionals that was properly selected, trained and supervised. +Ernst & Young did not sufficiently monitor partner and manager workloads based on client +complexity and difficulty. Similarly, Ernst & Young did not adequately screen the selection and +training of tax personnel to ensure appropriate staffing on complex, difficult, or high-risk audits +during the relevant period. Until 2011, Ernst & Young also failed to conduct mandatory training for +tax managers and partners involving the coordination and execution of the audit of income tax +accounts. + +VIOLATIONS + +Rule 102(e) and Section 4C of the Exchange Act + +64. Respondents’ 2007, 2008, and 2009 audits and the 2010 interim reviews of Weatherford’s +financial statements were deficient and not performed in accordance with PCAOB Standards.11 +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice and Section 4C of the Exchange Act +authorize the Commission to censure or deny, temporarily or permanently, the privilege of +appearing or practicing before the Commission to accountants who are found to have engaged in +improper professional conduct. Under Rule 102(e)(1)(iv), the term “improper professional +conduct” includes two types of negligent conduct: (1) a single instance of highly unreasonable +conduct that results in violation of professional standards in circumstances in which 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. + +65. As set forth above, Respondents knew, or should have known, of Weatherford’s income +tax accounting errors prior to February 2011. Ernst & Young engagement personnel did not +understand the basis for the dividend exclusion adjustment each year and failed to seek sufficient +competent evidential matter to discern the purpose, nature, and extent of the dividend exclusion +adjustments and the related phantom income tax receivable on the financial statements. Instead, +oral representations by Weatherford’s tax manager were the sole basis for Ernst & Young’s +conclusions that the dividend exclusion adjustments were reasonable. The audit team failed to +conduct procedures necessary for obtaining sufficient evidence for Weatherford’s income tax +accounting. For example, the audit team did not reconcile the current income tax +payable/receivable accounts even though there was an unexpected, unusual, and unexplainable +large debit balance in the income tax payable account. The audit team failed to take appropriate + +11 References to auditing standards in this Order are to PCAOB Standards in effect at the time the audit work +was performed. + + +20 + +action in response to red flags regarding Weatherford’s evolving and inconsistent reasoning +behind its dividend exclusion adjustments. Ernst & Young engagement personnel, including +Fronckiewicz and Adams, knew, or should have known, that the conclusions reached in the +workpapers did not make sense and were unsupported. These repeated failures, taken together, +evidence a repeated disregard of some of the most important auditing principles. That disregard +is especially troubling because these failures occurred over multiple years in an area – income +tax accounting – the firm had already identified as a significant issue, and while Respondents +audited the highest-risk area of one of its largest, high-risk, close monitoring clients. Ernst & +Young’s review of the audits shortly after the filing of the First Restatement confirmed that the +Weatherford audits suffered from a lack of appropriate supervision and review, inadequate and +insufficient tax staffing, and unsatisfactory coordination between tax and assurance personnel on +the engagement. + +66. Had Respondents conducted the Weatherford audits in accordance with PCAOB standards, +Respondents could have exposed and put an end to the company’s fraud. Instead, Ernst & Young +issued audit reports in 2007, 2008, and 2009 containing unqualified opinions that were filed with +Weatherford’s financial statements in the Form 10-Ks. In those reports, Ernst & Young +inaccurately stated the audit had been conducted in accordance with PCAOB Standards and that +Weatherford’s financial statements presented fairly, in all material respects, the company’s +position and results in conformity with GAAP. + +Failure to exercise due professional care and an +attitude of professional skepticism (AU § 230) + +67. PCAOB standards require auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report. (AU § 230.01) An auditor must +exercise professional skepticism, which is an attitude that includes “a questioning mind and a +critical assessment of audit evidence.” (AU § 230.07) “Since evidence is gathered and evaluated +throughout the audit, professional skepticism should be exercised throughout the audit process.” +(AU § 230.08) In exercising professional skepticism, an auditor should not be satisfied with less +than persuasive evidence because of a belief that management is honest. (AU § 230.09, see also +AU § 316.13) Whenever the auditor has concluded that there is significant risk of material +misstatement of the financial statements, the auditor should consider this conclusion in determining +the nature, timing, or extent of procedures. “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) In addition, PCAOB standards require auditors to exercise due professional care in the +“application of field work and reporting standards to a review of interim financial information.” +(AU § 722.01) + +68. As a result of Respondents’ conduct described above, Respondents failed to exercise due +professional care and an attitude of professional skepticism in its 2007, 2008, and 2009 audits and +2010 interim reviews of Weatherford’s financials. + + + +21 + +Failure to obtain sufficient competent evidential matter +concerning the dividend exclusion adjustment and phantom +income tax receivable balance (AU §§ 326, 333) + +69. PCAOB standards require auditors to obtain sufficient competent evidential matter to +afford a reasonable basis for an opinion with respect to the financial statements under audit. (AU § +326.01) To be “competent,” evidence, regardless of its form, “must be both valid and relevant.” +(AU § 326.21) Auditors must be thorough in their search for evidential matter and unbiased in +their evaluation and consider relevant evidential matter regardless of whether it corroborates or +contradicts assertions in the financial statements. (AU § 326.25) + +70. PCAOB standards also require an auditor to obtain sufficient competent evidential matter +concerning the assertions in an issuer's financial statements, and state that an auditor’s substantive +procedures should include examining material adjustments made during the course of preparing the +financial statements. (AU § 326.19) + +71. PCAOB standards also provide that management representations “are not a substitute for +the application of th[e] auditing procedures necessary to afford a reasonable basis for an opinion +regarding the financial statements under audit,” that “the auditor obtains written representations +from management to complement other auditing procedures,” and that “[i]n exercising professional +skepticism, the auditor should not be satisfied with less than persuasive evidence because of a +belief that management is honest.” (AU §§ 333.02, 333.03, see also AU § 230.09) + +72. As a result of the conduct described above, Respondents failed to obtain sufficient +competent evidential matter concerning the assertions in Weatherford’s financial statements with +regard to its consolidated tax provisions, despite the clear need for heightened scrutiny presented +by the Weatherford audits. Instead, the audit team relied on the unverified oral statements of +Weatherford management, even though Weatherford provided explanations that were imprecise, +lacked sufficient detail, and were inconsistent with other audit evidence. Respondents also did +not properly reconcile the tax provision and the income tax accounting balances during the 2007, +2008, and 2009 audits of Weatherford’s financials. + +Failure to properly supervise the engagement team (AU § 311) + +73. PCAOB standards note that audit “assistants,” including firm personnel other than the +auditor with final responsibility for the audit, are to be “properly supervised.” (AU §§ 311.01, +311.02, see also AU § 150.02) Those standards further require that assistants be informed of their +responsibilities and the objectives of procedures assigned to them, and that the work of assistants +be reviewed to determine whether it was adequately performed. (AU §§ 311.12, 311.13) + +74. As a result of the conduct described above, Respondents failed to properly supervise the +engagement team on its 2007, 2008, and 2009 Weatherford engagements. + + + + + +22 + +Failure related to adequate training, competency, and proficiency +(AU §§ 210.01, 161, QC 20 and 40) + +75. PCAOB standards require that the audit be performed by “a person or persons having +adequate technical training and proficiency as an auditor.” (AU § 210.01) PCAOB quality control +standards require an auditing firm to establish policies and procedures which provide the firm with +reasonable assurance that (a) those hired possess the appropriate characteristics to enable them to +perform competently and (b) work is assigned to personnel having the degree of technical training +and proficiency required in the circumstances. (QC 20.13 and QC 40.02) PCAOB standards also +require that a firm of independent auditors has a responsibility to adopt a system of quality control, +including policies and procedures to provide reasonable assurance that its personnel comply with +PCAOB standards in its audit engagements. (AU § 161) + +76. As a result of the conduct described above, Respondents failed to meet the standard that +required adequate training, competency, and proficiency in staffing the 2007, 2008, and 2009 +Weatherford audits. + +Failure to Make Additional Inquiries or Perform Additional Procedures +In the Course of Reviewing Interim Financial Information (AU § 722) + +77. PCAOB standards provide: + +A review consists principally of performing analytical procedures and making inquiries +of persons responsible for financial and accounting matters, and does not contemplate (a) +tests of accounting records through inspection, observation, or confirmation; (b) tests of +controls to evaluate their effectiveness; (c) obtaining corroborating evidence in response +to inquiries; or (d) performing certain other procedures ordinarily performed in an audit. +A review may bring to the accountant’s attention significant matters affecting the interim +financial information, but it does not provide assurance that the accountant will become +aware of all significant matters that would be identified in an audit. + +(AU 722.07) + +If, in performing a review of interim financial information, the accountant becomes aware +of information that leads him or her to believe that the interim financial information may +not be in conformity with generally accepted accounting principles in all material respects, +the accountant should make additional inquiries or perform other procedures that the +accountant considers appropriate to provide a basis for communicating whether he or she is +aware of any material modifications that should be made to the interim financial +information. For example, if the accountant’s interim review procedures lead him or her +to question whether a significant sales transaction is recorded in conformity with +generally accepted accounting principles, the accountant should perform additional +procedures, such as discussing the terms of the transaction with senior marketing and +accounting personnel, reading the sales contract, or both, to resolve his or her questions. + +(AU § 722.22) + + +23 + + +78. As a result of Respondents’ conduct described above, Respondents violated AU § 722 +when they failed to make any additional inquiries or perform other appropriate procedures to +provide a basis for communicating whether they were aware of any material departures from GAAP +during the course of their second and third quarter 2010 review of Weatherford’s income tax +receivable balance. + +Failure to Prepare Required Documentation (AS 3) + +79. PCAOB standards mandate that an auditor’s documentation contain sufficient information +to enable an experienced auditor, having no previous connection to the engagement to: (1) +understand the nature, timing, extent and results of the procedures performed, evidence obtained +and conclusions reached; and (2) determine who performed the work and the date such work was +completed as well as the person who reviewed the work and the date of such review. (AS 3.6) +Auditors are also required to document significant findings and issues, including the actions taken +to address them and the basis for the conclusions reached. (AS 3.12) Because it is the written +record supporting the representations in the auditor’s report, audit documentation should, among +other things, “[s]upport the basis for the auditor’s conclusions concerning every relevant financial +statement assertion, and … [d]emonstrate that the underlying accounting records agreed or +reconciled with the financial statements.” (AS 3.5) + +80. As a result of Respondents’ conduct described above, Respondents failed to prepare and +retain required audit documentation in sufficient detail to provide a clear understanding of its +purpose, source, and conclusions reached on its 2007, 2008, and 2009 Weatherford engagements. + +81. The workpapers were not sufficient to enable a qualified professional who reviews them +to understand the work that Respondents performed, the analysis, or the conclusions reached. +Ernst & Young engagement personnel, including Fronckiewicz and Adams, could not explain +what the audit team had done, even after looking over workpapers that they had prepared or +reviewed themselves. + +Findings +82. As a result of the conduct described above, the Commission finds that Respondents +engaged in improper professional conduct within the meaning of Sections 4C(a)(2) and 4C(b)(2) +of the Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B) of the Commission’s Rules of +Practice. Respondents’ conduct during the 2007, 2008, and 2009 audits of Weatherford and +during the 2010 quarterly reviews of the company’s income tax receivable balance involved +repeated instances of unreasonable conduct, each resulting in violations of PCAOB standards +and indicated a lack of competence, and Respondents’ conduct also satisfies the standard of +highly unreasonable conduct resulting in violations of PCAOB standards in circumstances in +which heightened scrutiny was warranted. + + + +24 + +RESPONDENTS WERE A CAUSE OF WEATHERFORD’S VIOLATIONS +OF EXCHANGE ACT SECTION 13(a) AND RELEVANT RULES THEREUNDER + +83. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder require +every issuer of securities registered pursuant to Section 12 of the Exchange Act to file with the +Commission information, documents, and annual and quarterly reports as the Commission may +require, and mandate that periodic reports contain such further material information as may be +necessary to make the required statements not misleading. The obligation to file such reports +embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 +F.2d 1149, 1165 (D.C. Cir. 1978). + +84. Weatherford violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 thereunder by including in numerous of its periodic filings and submissions financial +statements from fiscal year 2007 through the third quarter of 2010 that were materially false and +misleading. For each of those years, Ernst & Young issued audit reports containing unqualified +opinions stating that Ernst & Young conducted an audit of the company’s annual financial +statements in accordance with PCAOB standards, and that Weatherford’s financial statements +were presented fairly, in all material respects, in conformity with GAAP. Ernst & Young +consented to the inclusion of these audit reports in Weatherford’s Forms 10-K for fiscal years 2007 +through 2009. However, Ernst & Young’s audit reports were inaccurate because Respondents +failed to conduct these audits in accordance with PCAOB standards. Respondents’ failure to +comply with PCAOB standards during 2007 through 2009 was a cause of Weatherford’s +violations. + +85. As a result of the conduct described above, Respondents were a cause of Weatherford’s +issuance of materially false and misleading financial statements in its periodic filings and +submissions from 2007 through the third quarter of 2010 and, therefore, were a cause of +Weatherford’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 thereunder. +REMEDIAL ACTIONS +After the filing of the First Restatement, Ernst & Young took a series of remedial steps +intended to enhance its system of quality controls as they related to: (a) identification and +assessment of, and response to, high-risk audits; (b) the staffing, training and oversight of +assurance and tax professionals assigned to engagements; (c) the coordination between assurance +and tax personnel; (d) guidance for the performance of audit and review procedures relating to +income tax accounting; and (e) internal quality reviews of audits on a pre-issuance and post- +issuance basis. These steps included the expansion of PPG, the development and expansion of +the Tax Accounting and Risk Advisory Services Network within the Tax Practice, the +development and expansion of a Quality Network within the Assurance Practice, revised +programs for the performance of audit procedures relating to tax provisions, improved +engagement staffing tools, an enhanced Engagement Quality Review process, and expanded +training, including in the area of fraud detection. +In determining to accept Ernst & Young’s Offer, the Commission considered remedial acts +undertaken by Ernst & Young and significant cooperation afforded the Commission staff. + + +25 + +UNDERTAKINGS +Ernst & Young undertakes to complete the following actions: +1. Notification. Ernst & Young shall provide all audit personnel a copy of this Order +within ten (10) business days after entry of the Order. + +2. Ernst & Young Policies Report and Validation Plan. + +Within thirty (30) days after the entry of this Order, Ernst & Young shall submit to +the Commission staff a report (the “Ernst & Young Policies Report”) describing in +reasonable detail its quality controls set forth in its audit manual and audit- and +quality-related guidance and policies, relating to its policies and procedures set forth +therein for Ernst & Young’s quality management system and its audit and interim +review procedures regarding the subject areas specified below (hereinafter referred to +as “Specified Ernst & Young Policies”). The Ernst & Young Policies Report shall +also describe in reasonable detail Ernst & Young’s methodology and work plan to +review, test, and assess whether the Specified Ernst & Young Policies are designed to +provide reasonable assurance of compliance with Commission regulations and +PCAOB standards and rules (the “Validation Plan”). The Commission staff may +make reasonable requests for further evidence of the quality controls and validation +plan set forth in the Ernst & Young Policies Report and Validation Plan, and Ernst & +Young agrees to provide such evidence. The Validation Plan, not unacceptable to the +Commission staff, shall include detailed review, testing, and assessment of the +following Specified Ernst & Young Policies as they relate to high risk clients, +including those clients designated as high risk because of their accounting for income +taxes, that are subject to expanded monitoring procedures (“Close Monitoring +Clients”): +(a) client continuance practices, including, client designation, acceptance, retention, +risk identification, and assessment of identified risk areas of such clients; +(b) audit and interim review procedures for addressing identified risk areas; the +coordination of relative responsibilities for audit and interim review procedures +between Assurance and Tax personnel; and Ernst & Young’s tax provision +supplement and related guidance materials and practice aids; +(c) staffing and selection of audit personnel, workload reviews for audit personnel at +or above senior manager; and obtaining reasonable assurance that coordinating (i.e., +signing) partners, Assurance and Tax reviewers and supervisors have the appropriate +experience and training to respond to identified risk areas for the audit; + +(d) professional education in the following areas: due professional care, professional +skepticism, detecting and reporting material misstatements caused by fraud, obtaining +sufficient appropriate audit evidence, audit documentation, substantive and controls +procedures over financial reporting for income taxes, tax training for Assurance +personnel, and assurance training for Tax personnel; and + + +26 + + +(e) regional and national office participation in, or supervision of, audit and interim +review engagements, including responding to identified risk areas, implementation +and monitoring of engagement milestones, quality network coaching, consultations +with regional or national office technical oversight professionals, root cause analysis, +engagement quality reviews, quality occurrence reviews, and other pre-issuance and +post-issuance engagement reviews. + +3. Initial Validation Report and Certification. + +a. Initial Validation Report. Within two hundred seventy (270) days after the +issuance of the Ernst & Young Policies Report and Validation Plan, Ernst & +Young shall submit to the Commission staff a written report setting forth a +complete description of the testing, analysis, and results of its Validation Plan +(“Initial Validation Report”). + +b. Initial Validation Certification. The Initial Validation Report shall include a +certification executed by: (a) Americas Vice Chair of Professional Practice; (b) +Americas Vice Chair of Assurance; and (c) Americas Vice Chair of Tax +(collectively “Ernst & Young’s Americas Vice Chairs”) that the Specified Ernst +& Young Policies are designed to provide reasonable assurance of compliance +with Commission regulations and PCAOB standards and rules, and if deficiencies +in the design or operation of the Specified Ernst & Young Policies are identified, +shall report such deficiencies to the Commission staff (“Initial Validation +Certification”). The Commission staff may make reasonable requests for further +evidence of compliance, including the testing results, and Ernst & Young agrees +to provide such evidence. If significant deficiencies are identified, Ernst & +Young shall report such deficiencies to the Commission staff and state that it +cannot certify compliance. + +4. Second Validation Plan. Within sixty (60) days after the issuance of the Initial +Validation Report, Ernst & Young shall submit to the Commission staff an updated +validation plan not unacceptable to the Commission staff: (a) to review, test, and +assess whether the Specified Ernst & Young Policies are designed to provide +reasonable assurance of compliance with Commission regulations and PCAOB +standards and rules; and (b) a remediation plan that contains a description of any +deficiencies identified, and a schedule of remedial measures to correct significant +deficiencies (collectively, the “Second Validation Plan”). + +5. Second Validation Report and Certification. + +a. Second Validation Report. Within one (1) year after the issuance of the Initial +Validation Report, Ernst & Young shall submit to the Commission staff a written +report setting forth a complete description of the testing, analysis, and results of +its Second Validation Plan (“Second Validation Report”). + + +27 + + +b. Second Validation Certification. The Second Validation Report shall include a +certification executed by the Ernst & Young’s Americas Vice Chairs that the +Specified Ernst & Young Policies are designed to provide reasonable assurance of +compliance with Commission regulations and PCAOB standards and rules, and if +deficiencies in the design or operation of the Specified Ernst & Young Policies +are identified, shall report such deficiencies to the Commission staff (“Second +Validation Certification”). The Commission staff may make reasonable requests +for further evidence of compliance, including the testing results, and Ernst & +Young agrees to provide such evidence. If significant deficiencies are identified, +Ernst & Young shall report such deficiencies to Commission staff and state that it +cannot certify compliance. + +6. Subsequent Plans, Reports, and Certifications. If Ernst & Young identifies +significant deficiencies in the design or operation of the Specified Ernst & Young +Policies in the Second Validation Report, Ernst & Young shall repeat the +undertakings described in Paragraphs 4 and 5 annually until such time that no +significant deficiencies are identified. At that time, Ernst & Young shall issue a +Final Validation Report that includes a certification executed by Ernst & Young’s +United States Chairman that Ernst & Young executed the Final Validation Plan and +that the Specified Ernst & Young Policies are operating as designed and provide +reasonable assurance of compliance with all Commission regulations and PCAOB +standards and rules (“Final Validation Certification”). + +7. Internal Team Leader. Ernst & Young shall appoint an Internal Team Leader +(“ITL”) knowledgeable and experienced in U.S. GAAP, Commission regulations, +and PCAOB standards and rules not unacceptable to Commission staff to oversee +these undertakings. The ITL shall continue in this role until all undertakings have +been deemed satisfied by the Commission staff. The ITL shall have overall +responsibility for the planning and scope of all Validation Plans. The ITL also shall +have overall responsibility for developing the methodology for the selection of Ernst +& Young controls subject to review not unacceptable to Commission staff. The +methodology used to select Ernst & Young controls subject to review shall be +designed to include the operation of these controls on the audits of SEC Registrant +clients designated as Close Monitoring Clients, including those clients designated as +Close Monitoring Clients because of their accounting for income taxes. The ITL +shall also oversee testing to determine whether the controls result in SEC Registrant +clients receiving the appropriate risk designations, including designation as Close +Monitoring Clients, as appropriate. The ITL shall engage Professional Practice +personnel, Quality Implementation Leaders, Control & Methodology Leaders, and +other Ernst & Young professionals with appropriate experience, and outside +consultants or third-party support, if needed, to develop the Validation Plans and to +perform all reviews, testing, and preparation of all reports described in these +undertakings. The ITL shall oversee the preparation of all reports submitted to the +Commission staff. Ernst & Young shall provide the ITL with staffing and other +resources as necessary to accomplish these undertakings in a timely manner. Ernst + + +28 + +& Young shall not impose any planning or limitations on the ITL in the execution of +his or her duties and shall not interfere or attempt to influence the ITL during the +course of these undertakings. + +8. Submissions to the Commission Staff. The Commission staff may request access to +documents, internal review and PCAOB inspection materials, training materials, +Ernst & Young personnel, and/or meetings with Ernst & Young, within thirty (30) +days of receipt of any Report, Plan, or Certification. Within fifteen (15) days of +receipt of the above requested information or meetings, the Commission staff may +submit to Ernst & Young any questions regarding the Reports, Plans, or +Certifications, and Ernst & Young agrees to address all such questions within fifteen +(15) days of receipt. Unless otherwise directed by the Commission staff, all Reports, +Plans, Certifications, and other documents required to be provided to the +Commission staff shall be sent to James Valentino, Senior Counsel, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, +DC 20549-5631, or such other address as the Commission may provide, with a copy +to the Office of Chief Counsel of the Enforcement Division (the “Designees”). Ernst +& Young will make all Reports, Plans, and Certifications available to PCAOB staff +upon request. All such Reports, Plans, Certifications, and other documents provided to +the Commission staff pursuant to these undertakings likely will 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 (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. + +9. Unless otherwise notified by the Division of Enforcement, these undertakings are +deemed satisfied upon the later of: (a) two years after the entry of this Order; or (b) +written confirmation by the Designees that they have received a Final Validation +Certification free from Significant Deficiencies. + +10. Recordkeeping. Ernst & Young shall preserve and retain all documentation +regarding all certifications and reports for seven (7) years and will make it available +to the staffs of the Commission or the PCAOB upon request. + +11. Deadlines. For good cause shown, the Commission staff may in its sole discretion +extend any of the procedural dates relating to the undertakings. Deadlines for +procedural dates shall be counted in calendar days, unless otherwise specified. If the +last calendar day falls on a weekend or a federal holiday, the next business day shall +be considered to be the last day. + +12. Petition to Reopen Matter. In determining whether to accept Ernst & Young’s Offer, +the Commission has considered these undertakings. Ernst & Young agrees that if + + +29 + +the Division of Enforcement believes that Ernst & Young has not satisfied these +undertakings, it may petition the Commission to reopen the matter to determine +whether additional sanctions are appropriate. + +13. Ongoing Cooperation. Ernst & Young (including its partners, principals, officers, +agents, and employees) shall cooperate fully with the Commission with respect to +this action and any related judicial or administrative proceeding or investigation +commenced by the Commission or to which the Commission is a party and subject +to compliance with applicable law. Ernst & Young agrees that such cooperation +shall include, but is not limited to: + +a. Production of Information. At the Commission’s request, upon reasonable notice, +and without subpoena, Ernst & Young (including its partners, principals, officers, +agents, and employees) shall truthfully and completely disclose all information +requested by the Commission staff in connection with the Commission’s +investigation, litigation or other related proceedings, except with respect to +information related to clients other than Weatherford, which information shall be +produced in response to subpoena or other appropriate legal process; + +b. Production of Documents. At the Commission’s request, upon reasonable notice, +and without subpoena, Ernst & Young (including its partners, principals, officers, +agents, and employees) shall provide any document, record or other tangible +evidence requested by the Commission staff in connection with the Commission’s +investigation, litigation or other related proceedings, except with respect to +documents related to clients other than Weatherford, which information shall be +produced in response to subpoena or other appropriate legal process; and + +c. Production of Cooperative Personnel. At the Commission’s request, upon +reasonable notice, and without subpoena, Ernst & Young (including its partners, +principals, officers, agents, and employees) shall secure the attendance and +truthful statements, deposition, or testimony of any Ernst & Young partner, +principal, officer, agent, or employee, excluding any person who is a party to any +related litigated judicial or administrative proceeding, at any meeting, interview, +testimony, deposition, trial, or other legal proceeding. +The foregoing obligations are subject to Ernst & Young’s reservation of rights: +(i) to claim that documents or information requested is subject to attorney- +client privilege or attorney-work-product protection; and +(ii) to seek entry of a confidentiality order as to sensitive business documents +or information, sensitive personnel documents or information, or +confidential information pertaining to clients other than Weatherford. + +d. Service and Personal Jurisdiction Consents. Ernst & Young further agrees that, +with respect to this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a +party, it will: (i) accept service by email, mail or facsimile transmission of notices, + + +30 + +requests, or subpoenas issued by the Commission for documents or testimony at +depositions, hearings, or trials, or in connection with any related investigation by +the Commission staff (“Commission Service”); (ii) appoint Ernst & Young’s +undersigned attorney as agent to receive Commission Service; (iii) with respect to +Commission Service, waive the territorial limits upon service contained in Rule +45 for the Federal Rules of Civil Procedure and any applicable local rules, +provided that the party requesting the testimony reimburses Ernst & Young’s +travel, lodging, and subsistence expenses at the then-prevailing U.S. Government +per diem rates; and (iv) consent to personal jurisdiction over Ernst & Young in +any United States District Court for purposes of enforcing any Commission +Service. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effectively immediately, that: +A. Pursuant to Section 21C of the Exchange Act, Ernst & Young shall cease and desist +from committing or causing any violations and any future violations of Section 13(a) +of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder. + +B. Ernst & Young is censured. + +C. Fronckiewicz shall cease and desist from committing or causing any violations and any +future violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 promulgated thereunder. + +D. Fronckiewicz is denied the privilege of appearing or practicing before the Commission +as an accountant. + +E. After two years from the date of this Order, Fronckiewicz 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 +Fronckiewicz’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: + + + +31 + + (a) Fronckiewicz, or the public accounting firm with which he/she is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + (b) Fronckiewicz, 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) Fronckiewicz 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) Fronckiewicz acknowledges his responsibility, as long as +Fronckiewicz appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +F. The Commission will consider an application by Fronckiewicz 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 Fronckiewicz’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + +G. Adams shall cease and desist from committing or causing any violations and any future +violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 +promulgated thereunder. + +H. Adams is denied the privilege of appearing or practicing before the Commission as an +accountant. + +I. After one year from the date of this Order, Adams 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 Adams’ + + +32 + +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) Adams, 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) Adams, 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) Adams 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) Adams acknowledges her responsibility, as long as Adams 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. + +J. The Commission will consider an application by Adams 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 Adams’ character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + +K. Ernst & Young shall, within twenty-one (21) days of the entry of this Order, pay +disgorgement in the amount of $9,000,000 and prejudgment interest of $1,840,107 to +the Securities and Exchange Commission. If timely payment is not made, additional +interest shall accrue pursuant to SEC Rule of Practice 600. + +L. Ernst & Young shall, within twenty-one (21) days of the entry of this Order, pay a +civil money penalty of $1,000,000 to the Securities and Exchange Commission. If + + +33 + +timely payment is not made additional interest shall accrue pursuant to 31 U.S.C. § +3717. + +M. Payment ordered in Paragraphs K. and L. above must be made in one of the following +ways: + +(1) Ernst & Young may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Ernst & Young 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) Ernst & Young 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 +Ernst & Young 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 +simultaneously sent to Tracy L. Price, Assistant Director, Division of Enforcement, +Securities and Exchange Commission, 100 F St., N.E., Washington, DC 20549-5631. + +N. 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 K. and L. 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, Ernst & Young 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 Ernst & Young’s payment of a +civil penalty in this action (“Penalty Offset”). If the court in any Related Investor +Action grants such a Penalty Offset, Ernst & Young 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. + + + +34 + +For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Ernst & Young 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. + +O. Ernst & Young shall comply with the undertakings enumerated in Section III. above. + + + By the Commission. + + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3815.txt b/raw/aaer/2016/AAER-3815.txt new file mode 100644 index 0000000000000000000000000000000000000000..607519ab8ba185199258e00b3246a6473f6b7737 --- /dev/null +++ b/raw/aaer/2016/AAER-3815.txt @@ -0,0 +1,169 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79120 / October 19, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3815 / October 19, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17633 + + +In the Matter of + +DAVID A. ARONSON, CPA, + +Respondent. + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S +RULES OF PRACTICE + +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 A. +Aronson, CPA (“Respondent” or “Aronson”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 +II. +After an investigation, the Division of Enforcement alleges that: + +1 Section 4C provides, in relevant part, that: + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + The Commission may … deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + 2 +A. RESPONDENT + David A. Aronson, CPA, age 56, of North Miami, Florida, is a certified public accountant +licensed in the state of Florida. Aronson has functioned as an accountant to Company A and +Company B, from at least October 2, 2015 to approximately February 2016. From March 2005 +through October 2, 2015, Aronson was the sole proprietor of a Public Company Accounting +Oversight Board (“PCAOB”)-registered public accounting firm and was engaged as Company A’s +auditor from 2013 through July 2015, and as Company B’s auditor from 2011 through June 2015. +Aronson consented to a PCAOB order dated October 2, 2015 pursuant to which he was barred +from being an associated person of a registered public accounting firm. +B. FACTS +1. ARONSON’S UNLAWFUL ASSOCIATION +a. Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) +states that it is “unlawful for any person that is ... barred from being associated +with a registered public accounting firm [...] willfully to become or remain +associated with any issuer […] in an accountancy or financial management +capacity [...] without the consent of the [PCAOB] or the Commission.” +b. On October 2, 2015, the PCAOB filed a settled action against Aronson and his +firm, David A. Aronson, CPA, for multiple deficiencies in audit work +performed between 2011 and 2015 on several public company engagements, +including Company B (the “PCAOB Order”). The PCAOB Order, which was +and is available on its website, revoked the registration of his accounting firm +and barred Aronson from being an associated person of a registered public +accounting firm. +c. Company A is a Delaware corporation and at all relevant times its common +stock was registered with the Commission pursuant to Section 12(g) of the +Exchange Act. +d. Company B is a Nevada corporation and at all relevant times its common stock +was registered with the Commission pursuant to Section 12(g) of the Exchange +Act. +e. Aronson continued to perform accountancy or financial management services +after the PCAOB Order for Company A until February 2016, including, but not +limited to, preparing Company A’s financial statements, and the notes to the +financial statements, and preparation of the company’s Management Discussion +& Analysis section for its Form 10-Q for the period ended November 30, 2015. +f. Additionally, after the PCAOB Order was issued, Aronson continued to +perform accountancy or financial management services for Company B until +February 2016, including, but not limited to, preparing Company B’s financial +statements and the notes to the financial statements for its Form 10-Q for the + 3 +period ended September 30, 2015 and preparation of the financial statements for +Company B’s Form 10-K for the period ended December 31, 2015.3 +g. Aronson received payment for accountancy or financial management work he +performed despite having been barred by the PCAOB. + +h. Aronson never requested or received consent from the PCAOB or the +Commission to remain associated with Company A or Company B in this +accountancy or financial management capacity. +2. VIOLATION +As a result of the conduct described above, Aronson willfully violated Section 105(c)(7)(B) +of Sarbanes-Oxley, which prohibits a person barred from associating with a registered public +accounting firm from willfully becoming or remaining associated with an issuer in an accountancy +or financial management capacity without consent of the PCAOB or the Commission. +III. +In view of the allegations made by the Division of Enforcement, the Commission deems it +appropriate that public administrative and cease-and-desist proceedings be instituted to determine: +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; +B. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing any violation and any future violation of +Section 105(c)(7)(B) of Sarbanes-Oxley. +C. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, Aronson should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as an accountant; +D. Whether, pursuant to Section 21B of the Exchange Act, civil penalties should be +levied against Respondent; and + +E. Whether, pursuant to Sections 21B and 21C of the Exchange Act, Aronson should +be subject to disgorgement with prejudgment interest. +IV. +IT IS ORDERED that a public hearing for purposes of taking evidence on the questions set +forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from +service of this Order at a time and place to be fixed and before an Administrative Law Judge to be + +3 Company B terminated Aronson as its accountant on February 10, 2016 prior to the filing of its 2015 Form +10-K. + 4 +designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondent as provided for in the Commission’s +Rules of Practice. + +IT IS FURTHER ORDERED that, pursuant to Rule 360(a)(2) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.360(a)(2), the Administrative Law Judge shall issue an initial +decision no later than 120 days from the occurrence of one of the following events: (A) The +completion of post-hearing briefing in a proceeding where the hearing has been completed; (B) +Where the hearing officer has determined that no hearing is necessary, upon completion of +briefing on a motion pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250; or (C) The determination by the hearing officer that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no hearing is +necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3816.txt b/raw/aaer/2016/AAER-3816.txt new file mode 100644 index 0000000000000000000000000000000000000000..e87ed699ab583a8e167ddaf6b85fd40ecd06739f --- /dev/null +++ b/raw/aaer/2016/AAER-3816.txt @@ -0,0 +1,664 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79127 / October 20, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3816 / October 20, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17639 + + +In the Matter of + +FMC TECHNOLOGIES, +INC., JEFFREY FAVRET, +CPA, and STEVEN K. +CROFT, 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, 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 FMC Technologies, Inc. (“FMCTI”), Jeffrey +Favret, CPA (“Favret”), and Steven K. Croft, CPA (“Croft”) (collectively, “Respondents”), and +that public administrative proceedings be, and hereby are, instituted against Favret and Croft +pursuant to Section 4C1 of the Exchange Act and Rule 102(e)(1)(iii)2 of the Commission’s Rules of +Practice. + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings and Imposing Remedial Sanctions, Cease-and-Desist Orders and Penalties (“Order”), as +set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +This matter involves various books and records and internal accounting controls violations +by FMC Technologies, Inc. and two of its former executives: segment controller Jeffrey Favret and +his subordinate, business unit controller Steven Croft. + +During the first quarter of 2013, Favret and Croft improperly reversed required accruals to +improve their segment’s results. Their improper adjustments, which overstated their segment’s +pre-tax operating profits by $800,000 in that period, enabled the segment to meet its internal target. +Favret and Croft continued to understate this accrual inappropriately in part of the second quarter +of 2013. + +Favret and Croft also failed to comply with FMCTI’s internal accounting controls by not +reporting internally, as required, that they had corrected a $730,000 error recorded in 2012 that +increased their segment’s operating results in the first quarter of 2013. Within about two weeks of +discussing this correction, Favret and Croft signed management representation letters attesting +there had been no out-of-period adjustments larger than $250,000 recorded during the period +ending March 31, 2013. + +Separately, Croft failed to comply with FMCTI’s internal accounting controls by directing +that his business unit switch to a new accounting system before obtaining assurance that the new +system would operate properly. This failure resulted in errors that significantly overstated the +segment’s results in two quarterly periods in 2014. + +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 + + FMCTI committed other books and records and internal accounting controls violations as +well. Another business that FMCTI acquired in 2012 failed to account properly for the same +accrual account that Favret and Croft used improperly. And FMCTI improperly accounted for +interest income associated with certain large intercompany loans, which resulted in an $8 million +out-of-period adjustment in 2014. + +RESPONDENTS + +1. FMC Technologies, Inc., a Delaware corporation headquartered in Houston, Texas, +describes itself as a global provider of technology solutions for the energy industry. FMCTI is a +Fortune 500 company whose common stock is registered with the Commission pursuant to Section +12(b) of the Securities Act of 1933 and trades on the New York Stock Exchange. FMCTI has +three reporting segments: Subsea Technologies, Surface Technologies, and Energy Infrastructure. +Energy Infrastructure is FMCTI’s smallest segment. During most of the relevant period, Jeffrey +Favret was Energy Infrastructure’s controller. During 2012, Energy Infrastructure acquired +Automation & Control (“A&C”) as a new business unit. Steven Croft was A&C’s controller. +2. Jeffrey Favret, CPA, 55, is a resident of Spring, Texas and holds a Louisiana CPA +license, which expired in 2012. From May 2012 until May 2013, Favret was the controller of +FMCTI's Energy Infrastructure segment. +3. Steven K. Croft, CPA, 42, is a resident of Manhattan, Kansas and holds an inactive +Louisiana CPA license. Croft is currently the controller of a private company. Croft served as +FMCTI’s consolidations and reporting manager from April 2010 until mid-2012, when he became +the controller of Automation & Control (“A&C”), a newly acquired FMCTI business unit in the +company’s Energy Infrastructure segment. As controller of A&C, Croft reported to Segment +Controller Jeffrey Favret until Favret’s departure from FMCTI in May 2013. +FACTS +Favret’s and Croft’s Manipulation of a Paid Time Off Account to Improve Segment Results +FMCTI’s Paid Time Off Policy +4. FMCTI has an atypical paid time off ("PTO") policy in that employees earn their +full-year PTO allowances on January 1 of each year, instead of ratably in each pay period. For +example, whereas in most companies, an employee who receives 12 days of PTO per year earns 1 +day of leave each month, an FMCTI employee with the same amount of PTO would earn the entire +12 days on January 1. If that employee were to resign from FMCTI on January 2, she would be +paid for all 12 days. Because this liability accrues on January 1, Generally Accepted Accounting +Principles (“GAAP”) require FMCTI to establish a reserve for its full-year PTO liabilities as of +January 1.4 Throughout the relevant period, FMCTI had internal accounting policies, described as +"Financial Standards," which specified that PTO accruals must be maintained in this manner. + +4 ASC 710-10-25-1 Compensated Absences, states that “An employer shall accrue a liability for employees’ +compensation for future absences if . . . [t]he obligation relates to rights that vest or accumulate.” + +4 + + +5. Like many employers, FMCTI allowed its employees to roll over a certain amount +of unused PTO from one year to the next. GAAP required FMCTI's PTO accounts to hold the full +year PTO liabilities for the current year as well as the amount of unused PTO employees were +allowed to carry from the prior year (the "roll-over") on January 1 of each year. +Croft Records the Required PTO Accruals. +6. In May 2012, FMCTI acquired a private company that it renamed Automation and +Control ("A&C"). A&C had a traditional PTO policy wherein employees earned their leave over +the course of each year. A&C accrued this liability ratably. A&C continued using this PTO policy +throughout 2012. + +7. FMCTI required A&C to adopt FMCTI's PTO policy as of January 1, 2013. +Consequently, on January 1, 2013, A&C was required to record an accrual for its full-year 2013 +PTO liability, while also maintaining an accrual for the 2012 PTO roll-over. + +8. As A&C's controller, Croft was responsible for ensuring that the business unit was +appropriately accounting for its PTO liability. Because he was new to the role, Croft consulted in +January 2013 with a long-time FMCTI employee to determine what accrual he needed to establish +for A&C's 2013 PTO liability. At that point, FMCTI's PTO accrual included only the 2012 roll- +over ($223,000). They concluded that A&C was required to also accrue the entire amount of its +full-year 2013 PTO liability ($928,000). In late January 2013, Croft directed his staff to accrue this +additional liability. +Favret and Croft Revise A&C's Approach to the PTO Accrual. +9. The 2013 PTO accrual had a significant, negative impact on not only A&C's +January results, but on the Energy Infrastructure segment's results as well. Favret and other +executives in the segment were under pressure from the head of Energy Infrastructure to "push" +their teams "to discomfort" to make up for lower revenues and earnings, and Favret began to +question whether it was necessary for A&C to record the entire 2013 PTO accrual in January. +10. In early February 2013, Favret and Croft decided – without consulting FMCTI's +corporate accounting office – to accrue for A&C's 2013 PTO liability ratably over the course of +2013, instead of accruing the liability all at once. Croft then directed a subordinate to reduce +A&C's 2013 PTO accrual by almost $800,000, leaving only the 2012 roll-over accrual ($223,000) +plus two-twelfths (representing two months' worth of accruals) of the full-year 2013 accrual +($154,667). This method of accruing for A&C’s PTO liability did not comply with FMCTI’s +accounting policy and resulted in an understatement of the required liability, which was not in +compliance with GAAP. + +11. Neither Favret nor Croft ever sought or received guidance, much less approval, +from FMCTI’s corporate accounting office before adopting this new approach. + + +5 +12. In mid-March 2013, an FMCTI internal audit manager conducting a review of +A&C advised Croft that his business unit needed to record the full 2013 PTO accrual. +Favret and Croft Revise the Approach Again, Completely Eliminating the 2013 PTO Accrual. +13. During the quarterly closing process in April 2013, Favret and Croft again sought to +improve results for the first quarter. The head of Energy Infrastructure directed Favret to "push +everyone for a couple of hundred k each above their stretch" and to "[s]ee if you can scratch out +100k somewhere" and told Favret to "keep following up with [Croft] please - has to be more +there." + +14. During this effort, Croft informed Favret that A&C's results may be even lower +than they had anticipated. Croft warned Favret that A&C's bonus accrual was not sufficient to +cover a larger-than-expected bonus payout for 2012. + +15. To improve the segment's results, Favret and Croft decided during early April 2013 +to eliminate A&C's 2013 PTO accrual entirely. Doing so left only the 2012 roll-over accrual +($223,000) on A&C's general ledger for the quarter ended March 31, 2013. + +16. The failure to accrue anything for A&C’s 2013 PTO liability meant FMCTI’s +accrued liability for PTO was understated and was not in compliance with GAAP. + +17. By not accruing anything for the 2013 PTO liability, Favret and Croft overstated +the Energy Infrastructure segment's operating profits by about 10 percent for the quarter ended +March 31, 2013 and allowed the company to claim that the segment's operating profit as a +percentage of revenue had increased from 6.8 percent to 7.4 percent as compared to the prior year’s +first quarter. But for Favret and Croft's misconduct, Energy Infrastructure's operating profit as a +percentage of revenue would have decreased to 6.7 percent. + +18. Croft eliminated the 2013 PTO accrual at Favret's direction. After Favret and Croft +“scrubbed” A&C’s quarterly numbers together, Favret reported to the head of the Energy +Infrastructure segment that he had changed Croft’s computation for PTO, which subsequently +reflected no accrual for 2013. Croft did not seek advice from anyone in FMCTI's internal audit or +corporate accounting group even though an FMCTI internal audit manager had recently told him +that A&C needed to have the full 2013 PTO accrual on its books and even though Croft was in +contact with FMCTI's corporate accounting group at that time on other issues. + +19. One of FMCTI’s internal accounting controls required segment and business unit +controllers to certify whether all significant liabilities, including accounts payable and payroll, had +been properly recorded. Both Favret and Croft signed quarterly management representation letters +to FMCTI’s corporate controller on April 15, 2013 and April 11, 2013, respectively, in which they +represented that all such liabilities had been properly recorded. + +6 +Favret and Croft Revise the Approach Yet Again, Using the 2012 Rollover Accrual to Improve +April 2013 Results. +20. During April 2013, Favret and Croft reduced A&C's PTO accrual yet again. With +nothing left on the books for A&C's 2013 PTO liability, this time they decided to release most of +the 2012 PTO rollover. The new approach was to accrue the 2012 PTO rollover ratably such that +A&C would not be fully accrued for this liability, which clearly existed as of the end of 2012, until +the end of 2013. +21. After discussing with Favret, Croft directed a subordinate to reverse all but one- +third ($74,357) of the 2012 PTO rollover ($223,000) that had remained on A&C's books at the end +of the first quarter. This action improved A&C's income by nearly $150,000 for the month. + +22. The change in methodology to a ratable accrual of the 2012 rollover and the failure +to accrue anything for A&C’s 2013 PTO liability, meant FMCTI was not in compliance with +GAAP. +FMCTI Re-Establishes A&C's 2013 PTO Accrual and the 2012 Roll-Over. +23. FMCTI's corporate accounting group learned about the issues with A&C's PTO +accrual in late May or early June 2013. Before the end of the second quarter, the corporate +accounting group directed A&C to re-establish its full-year 2013 PTO accrual and the 2012 +rollover accrual by adding $1.18 million to A&C's vacation accrual account. +Schilling Robotics' Improper Accounting for its 2013 PTO Liability +24. Schilling Robotics was another entity FMCTI acquired in 2012 that, like A&C, +adopted FMCTI's PTO policy on January 1, 2013. Schilling, which was part of FMCTI's Subsea +segment, also failed to properly accrue for its PTO liabilities in accordance with GAAP and +FMCTI's accounting policies. Upon adoption of FMCTI’s benefits program, Schilling took ratable +accruals for its PTO liability throughout 2013 rather than recording the entire 2013 PTO liability +($1.4 million) as of January 1, 2013. +Favret and Croft Fail to Report Internally an Out-of-Period Adjustment as Required by +FMCTI’s Internal Controls. +25. On March 30, 2013, during the same quarter in which Favret and Croft eliminated +A&C's 2013 PTO accrual, Croft sought approval from Favret to capitalize $730,000 in research +and development costs that A&C had previously expensed in 2012. This spending should have +been capitalized as incurred during 2012. Favret approved the capitalization, which corrected the +earlier accounting treatment. Favret directed Croft to reverse the $730,000 into income and +capitalize the research and development costs. Though FMCTI's corporate accounting office had, +only three weeks earlier, notified Favret that FMCTI's threshold for reporting internally out of +period adjustments was $250,000 (pre-tax), he instructed Croft that the $730,000 was "not material +enough to call an out of period charge." + + +7 +26. One of FMCTI's internal accounting controls was to require segment and business +unit controllers to certify whether they had made accounting entries during any given quarter over +the $250,000 threshold that related to a prior period. Both Favret and Croft signed quarterly +management representation letters to FMCTI's corporate controller on April 15, 2013 and April 11, +2013, respectively, in which they represented that they had made no such entries. These statements +were false. Both Favret and Croft knew that A&C had recorded the $730,000 adjustment related to +2012 less than two weeks prior. +Croft's Additional Failure to Comply with FMCTI's Internal Controls +27. In January 2014, A&C implemented a new accounting system to replace a legacy +accounting system that required the business unit to calculate revenue manually. FMCTI's internal +accounting controls required that A&C either adequately test the new system before relying on it or +maintain the old and new systems in parallel until the new system proved reliable. Despite this, +Croft discontinued the legacy system as soon as the new accounting system became operable, +before it was tested and found to be working reliably. + +28. During A&C's transition to the new system, contractors made errors in using the +new system that resulted in the Energy Infrastructure segment improperly recognizing $6.7 million +in revenue. These errors went undetected for two quarters, causing overstatements in the Energy +Infrastructure segment's operating results in FMCTI's Forms 10-Q for the quarters ended March +31, 2014 and June 30, 2014. +Internal Controls Failures in Recording Inter-Company Loans Result in Additional Out-of- +Period Adjustments. +29. As part of an April 2012 tax restructuring of FMC subsidiaries in Europe, FMC’s +Luxembourg subsidiary, which functions in U.S. dollars, made an 11.5 billion Norwegian Kroner +(NOK) inter-company loan to FMC’s Norwegian subsidiary, which functions in NOK. The loan +between the two subsidiaries was considered to be part of FMC’s net investment in the Norwegian +subsidiary under GAAP within FMCTI’s consolidated financial statements, which meant that only +the interest income and accrued interest receivable (and not the principal balance) needed to be re- +measured quarterly for currency fluctuations.5 + +30. FMCTI's Luxembourg entity did not, however, perform the required re- +measurements. Due to a lack of internal accounting controls for non-routine tax transactions, the +Luxembourg entity recorded its interest income receivable along with the loan principal in a +general ledger account that did not automatically re-measure for currency fluctuations. As a result, +the entity failed to re-measure the interest payments from NOK into U.S. dollars from the time of +the loan's inception in April 2012 until the accounting error was discovered in the third quarter of +2014. The Norwegian entity also failed to make the necessary interest payments to the +Luxembourg entity, triggering penalties that also needed to be re-measured. The required re- +measurement of the penalties and interest required FMCTI to record an unrealized foreign currency + +5 See ASC 830-20-35-2 through 35-4. + +8 +loss of $20.9 million in the quarter ended September 30, 2014, $8.1 million of which was an out- +of-period adjustment to correct the prior failures to re-measure. +VIOLATIONS + +31. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and the dispositions of their assets. +32. 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. +33. Exchange Act Section 13(b)(5) provides that no person shall knowingly circumvent +or knowingly fail to implement a system of internal accounting controls or knowingly falsify any +book, record, or account. +34. Exchange Act Rule 13b2-1 provides that no person shall, directly or indirectly, +falsify or cause to be falsified, any book, record or account subject to Exchange Act Section +13(b)(2)(A). +35. As a result of the conduct described above, FMCTI violated Exchange Act Sections +13(b)(2)(A) and 13(b)(2)(B) because it failed to make and keep appropriate books and records and +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that its newly acquired business units recorded the necessary accruals for their PTO +liabilities, reported out-of-period adjustments, appropriately tested new revenue calculation +systems before discontinuing old systems, and properly recorded inter-company loans. +36. As a result of the conduct described above, Favret violated Exchange Act Section +13(b)(5) and Exchange Act Rule 13b2-1 and caused FMCTI’s violations of Exchange Act Sections +13(b)(2)(A) and 13(b)(2)(B) because he willfully manipulated FMCTI’s PTO accrual and failed to +report an out-of-period adjustment. +37. As a result of the conduct described above, Croft violated Exchange Act Section +13(b)(5) and Exchange Act Rule 13b2-1 and caused FMCTI’s violations of Exchange Act Sections +13(b)(2)(A) and 13(b)(2)(B) because he willfully manipulated FMCTI’s PTO accrual, failed to +report an out-of-period adjustment, and discontinued A&C’s old revenue calculation system before +the new system was found to be working properly. + +9 +FINDINGS +38. Based on the foregoing, the Commission finds that FMCTI violated +Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. +39. Based on the foregoing, the Commission finds that Favret (a) willfully violated +Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; and (b) willfully aided and +abetted and caused FMCTI’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange +Act. +40. Based on the foregoing, the Commission finds that Croft (a) willfully violated +Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; and (b) willfully aided and +abetted and caused FMCTI’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange +Act. +UNDERTAKINGS +Respondent FMCTI undertakes to: +41. Cooperate fully with the Commission in any and all investigations, litigations, or +other proceedings relating to or arising from the matters described in the Order. In connection with +such cooperation, Respondent FMCTI shall: +a. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject to any +restrictions under the law of any foreign jurisdiction; +b. Use its best efforts to cause its officers, employees, and directors to be +interviewed by Commission staff at such times and places as the staff reasonably may +direct; +c. Use its best efforts to cause its officers, employees, and directors to appear +and testify without service of a notice or subpoena in such investigations, depositions, +hearings, or trials as may be requested by the Commission staff; and +d. In connection with any testimony of Respondent FMCTI’s officers, +employees, and directors to be conducted at deposition, hearing, or trial pursuant to a notice +or subpoena, Respondent FMCTI: +i. Agrees that any such notice or subpoena for Respondent FMCTI’s +officers’, employees’, and directors’ appearance and testimony may be served by +regular or electronic mail on: John C. Wander, Esq., Vinson & Elkins LLP, 2001 +Ross Avenue, Suite 3700, Dallas, Texas 75201-2975; jwander@VELaw.com; and +ii. Agrees that any such notice or subpoena for Respondent FMCTI’s +officers’, employees’, and directors’ appearance and testimony in any action +pending in a United States District Court may be served, and may require + +10 +testimony, beyond the territorial limits imposed by the Federal Rules of Civil +Procedure. +Respondent Favret undertakes to: +42. Cooperate fully with the Commission in any and all investigations, litigations, or +other proceedings relating to or arising from the matters described in the Order. In connection with +such cooperation, Respondent Favret shall: +a. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject +to any restrictions under the law of any foreign jurisdiction; +b. Appear and be interviewed by Commission staff at such times and places as +the staff reasonably may direct; +c. Appear and testify without service of a notice or subpoena in such +investigations, depositions, hearings, or trials as may be requested by the +Commission staff; and +d. In connection with any testimony of Respondent to be conducted at +deposition, hearing, or trial pursuant to a notice or subpoena, Respondent +Favret: +i. Agrees that any such notice or subpoena for Respondent Favret’s +appearance and testimony may be served by regular or electronic mail on: Kenneth +P. Held, Esq., Schiffer Odom Hicks & Johnson PLLC, 700 Louisiana St., Suite +1200, Houston, TX 77002; kheld@sohjlaw.com; and +ii. Agrees that any such notice or subpoena for Respondent Favret’s +appearance and testimony in any action pending in a United States District Court +may be served, and may require testimony, beyond the territorial limits imposed by +the Federal Rules of Civil Procedure. +Respondent Croft undertakes to: +43. Cooperate fully with the Commission in any and all investigations, litigations, or +other proceedings relating to or arising from the matters described in the Order. In connection with +such cooperation, Respondent Croft shall: +e. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject +to any restrictions under the law of any foreign jurisdiction; +f. Appear and be interviewed by Commission staff at such times and places as +the staff reasonably may direct; + +11 +g. Appear and testify without service of a notice or subpoena in such +investigations, depositions, hearings, or trials as may be requested by the +Commission staff; and +h. In connection with any testimony of Respondent to be conducted at +deposition, hearing, or trial pursuant to a notice or subpoena, Respondent +Croft: +iii. Agrees that any such notice or subpoena for Respondent Croft’s +appearance and testimony may be served by regular or electronic mail on: Josh +Roseman, Esq., Jones Day, 2727 N. Harwood Street, Dallas, Texas 75201; +jsroseman@JonesDay.com; and +iv. Agrees that any such notice or subpoena for Respondent Croft’s +appearance and testimony in any action pending in a United States District Court +may be served, and may require testimony, beyond the territorial limits imposed by +the Federal Rules of Civil Procedure. + In determining whether to accept the Respondents’ Offers, 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 FMCTI’s, Respondent Favret’s and Respondent Croft’s Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. FMCTI Technologies, Inc. shall 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. Jeffrey Favret shall 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 +Exchange Act Rule 13b2-1. +C. Favret is denied the privilege of appearing or practicing before the Commission as +an accountant. After two years from the date of this order, Favret 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 Favret’s work in his practice before +the Commission will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he practices +before the Commission in this capacity; and/or + +12 +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Favret, 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) Favret, 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 Favret’s or the firm’s quality control +system that would indicate that Favret will not receive appropriate supervision; +(c) Favret 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) Favret acknowledges his responsibility, as long as Favret appears +or practices before the Commission as an independent accountant, to comply with +all requirements of the Commission and the Board, including, but not limited to, +all requirements relating to registration, inspections, concurring partner reviews +and quality control standards. +D. The Commission will consider an application by Favret 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 Favret’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. +E. Steven K. Croft shall 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 Exchange Act Rule 13b2-1. +F. Croft is denied the privilege of appearing or practicing before the Commission as an +accountant. After two years from the date of this order, Croft 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 Croft’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 + +13 +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Croft, 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) Croft, 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 Croft’s or the firm’s quality control +system that would indicate that Croft will not receive appropriate supervision; +(c) Croft 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) Croft acknowledges his responsibility, as long as Croft 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 Croft 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 Croft’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. +H. FMCTI shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $2,500,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + Payment must be made in one of the following ways: + +(1) Respondent FMCTI may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; + +(2) Respondent FMCTI 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 + + +14 +(3) Respondent FMCTI may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and +Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +FMC Technologies, 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 Rami Sibay, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + +I. Respondent Favret shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $30,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + Payment must be made in one of the following ways: + +(1) Respondent Favret may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent Favret 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 Favret may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and +Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Jeffrey Favret 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 Rami Sibay, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + +15 +J. Respondent Steven K. Croft shall pay civil penalties of $10,000.00, to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. Payment shall be made in installments +according to the following schedule: (1) $2,500.00 within 14 days of the entry of this Order; (2) +$1,500.00 by December 31, 2016; (3) $1,500.00 by March 31, 2017; (4) $1,500.00 by June 30, +2017; (5) $1,500.00 by September 30, 2017; and (6) $1,500.00 by December 31, 2017. Payments +shall be deemed made on the date they are received by the Commission and shall be applied first to +post judgment interest, which accrues pursuant to 31 U.S.C. § 3717 on any unpaid amounts due +after 14 days of the entry of this Order. Prior to making the final payment set forth herein, +Respondent shall contact the staff of the Commission for the amount due for final payment. If any +payment is not made by the date the payment is required according the schedule set forth above, +the entire outstanding balance of civil penalties, plus any additional interest accrued pursuant to 31 +U.S.C. § 3717, shall be due and payable immediately, without further application. +Payment must be made in one of the following ways: + +(1) Respondent Croft may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent Croft 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 Croft 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 +Steven Croft 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 Rami Sibay, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. +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 penalties, 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 civil +penalties in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a + +16 +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 Jeffrey Favret and Steven K. Croft, and further, any debt for disgorgement, +prejudgment interest, civil penalty or other amounts due by Respondents Favret and Croft 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 Favret and Croft of the +federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3817.txt b/raw/aaer/2016/AAER-3817.txt new file mode 100644 index 0000000000000000000000000000000000000000..3de00b5712e0c62e73cf17a45e9ccb73ac06bbdb --- /dev/null +++ b/raw/aaer/2016/AAER-3817.txt @@ -0,0 +1,101 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79137 / October 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3817 / October 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17640 + + +In the Matter of + +JULIANNE M. CHANDLER, + +Respondent. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Julianne +M. Chandler (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, 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. + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by +order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name +. . . [p]ermanently enjoined by any court of competent jurisdiction, by reason of his or her misconduct in +an action brought by the Commission, from violating or aiding and abetting the violation of any provision +of the Federal securities laws or of the rules and regulations thereunder. + 2 + +III. + On the basis of this Order and Respondent’s Offer, the Commission finds that: +1. Respondent Chandler is a resident of North Carolina. She joined Lime Energy Co. +(“Lime”) in May 2009, where she held positions as Senior Accounting Manager and Business Unit +Controller before becoming Corporate Controller in August 2011, the position she held until her +termination from the company in November 2012. +2. Lime is a Delaware corporation that, during the relevant time period, was in the +business of planning and delivering clean energy solutions to assist clients in achieving their +energy efficiency and renewable energy goals. Its headquarters are in Newark, New Jersey. +During the relevant time period, Lime’s common stock was registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and traded +on the NASDAQ Capital Market under the trading symbol “LIME.” Its stock is now quoted on +OTC Link (previously “Pink Sheets”) operated by OTC Markets Group, Inc. + +3. On October 18, 2016, 2016, the U.S. District Court for the Southern District of New +York entered a Final Judgment by consent against Chandler, permanently enjoining her from +violations of Section 17(a ) of the Securities Act of 1933 , Sections 10(b) and 13(b)(5) of the +Exchange Act, and Exchange Act Rules 10b -5 and 13b2-1, and aiding and abetting violations of +Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13. +SEC v. Lime Energy Co. et al ., 1:16-CV-08088-ALC (S.D.N.Y.). Chandler was ordered to pay a +civil penalty of $25,000 and barred from serving as an officer or director of a public company for a +period of five years from entry of the Final Judgment. +4. Among other things, the Commission’s Complaint alleges that Chandler +circumvented Lime’s internal accounting controls and falsified or caused to be falsified the +company’s books and records by facilitating the improper early recognition of revenue by +employees in Lime’s Utilities Division. The Complaint also alleges that Chandler participated in +the improper recognition of material amounts of revenue by Lime employees in its Public Sector +and Utilities Divisions. The Complaint further alleges that Chandler knew at the time that Lime +was trying to meet certain revenue targets and that the revenue was being recognized by Lime +employees in order to achieve those revenue goals. + +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Chandler’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Chandler is denied the privilege of appearing or practicing before the Commission +as an accountant. + 3 + B. After five 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 an +accountant. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3818.txt b/raw/aaer/2016/AAER-3818.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c96f0af5f1370e27b2d6b57663a2dbb205acf78 --- /dev/null +++ b/raw/aaer/2016/AAER-3818.txt @@ -0,0 +1,725 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79147 / October 24, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3818 / October 24, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17228 + + +In the Matter of + +David S. Hall, P.C. d/b/a The Hall +Group CPAs, +David S. Hall, CPA, +Michelle L. Helterbran Cochran, CPA, +and +Susan A. Cisneros + +Respondents. + + + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE AS TO RESPONDENTS +DAVID S. HALL, P.C. D/B/A THE +HALL GROUP CPAs AND DAVID S. +HALL, CPA + +I. + The Securities and Exchange Commission (“Commission”) instituted public +administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 and Rule 102(e)2 of the Commission’s Rules of Practice + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + 2 +against Respondents David S. Hall, P.C. d/b/a The Hall Group CPAs, David S. Hall, CPA, +Michelle L. Helterbran Cochran, CPA, and Susan A. Cisneros on April 26, 2016. + +II. + + Respondents David S. Hall, P.C. d/b/a The Hall Group CPAs and David S. Hall, +CPA (the “Hall Respondents”) have submitted an Offer of Settlement (“Offer”) which the +Commission has determined to accept. Solely for the purpose of these proceedings and any +other proceedings brought by or on behalf of the Commission, or to which the Commission +is a party, and without admitting or denying the findings herein, except as to the +Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, and as provided herein in Section X, the Hall Respondents consent to the +entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease-and- +Desist Order as to Respondents David S. Hall, P.C. d/b/a The Hall Group CPAs and David +S. Hall, CPA (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: + +A. SETTLING RESPONDENTS + +1. David S. Hall, P.C. d/b/a/ The Hall Group CPAs 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, PLLC (“Thakkar CPA”)4 acquired +certain assets of David S. Hall, P.C. on or about January 6, 2014 (the “Closing Date”), after + +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 the Hall Respondents’ Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +4 On April 6, 2016, the Commission issued an Order finding that Thakkar CPA, its managing +partner, and its owner, engaged in improper professional conduct and violated or willfully +violated Rule 2-02 of Regulation S-X and caused issuers to violate Section 13(a) of the Exchange +Act and Rules 13a-1 and 13a-13 thereunder. The Order also found that Thakkar CPA’s Vice +President of Operations caused Thakkar CPA’s violations of Rule 2-02(b)(1) of Regulation S-X +and caused issuers to violate Section 13(a) of the Exchange Act, and Rules 13a-1 and 13a-13 +thereunder. In the Matter of Thakkar CPA, PLLC et. al, Exchange Act Rel. No. 77542 (April 6, +2016). + 3 +which the latter firm ceased operations. Thakkar CPA agreed to pay David S. Hall, P.C. +$450,000 in cash at closing and to enter into a 5%, two-year promissory note for $313,516. +On March 25, 2015, David S. Hall, P.C. requested that its registration with the PCAOB be +withdrawn. In their June 16, 2016 answer to the order instituting these proceedings, the +Hall Group and David Hall admitted the findings in paragraphs 7, 9, 12-14, 18, 20-21, and +28 below. And in his September 2, 2016 Order on Motions for Summary Disposition in +these proceedings, the administrative law judge found in favor of the Division of +Enforcement as against the Hall Group and David Hall, at least as to the period +commencing July 2013, on the matters set forth in paragraphs 6, 15-16, 19, 22, 27, 29-30, +33-35, and 38 below. + +2. David S. Hall, age 58 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 for DynaResource, Inc., (“DynaResource”) whose auditor was David S. +Hall, P.C. d/b/a The Hall Group CPAs through January 29, 2014 and, later, Thakkar CPA +d/b/a The Hall Group CPAs for the 2013 audit and 2014 reviews. In their June 16, 2016 +answer to the order instituting these proceedings, the Hall Group and David Hall admitted +the findings in paragraphs 7, 9, 12-14, 18, 20-21, and 28 below. And in his September 2, +2016 Order on Motions for Summary Disposition in these proceedings, the administrative +law judge found in favor of the Division of Enforcement as against the Hall Group and +David Hall, at least as to the period commencing July 2013, on the matters set forth in +paragraphs 6, 15-16, 19, 22, 27, 29-30, 33-35, and 38 below. + +B. +OTHER RESPONDENTS + +3. Michelle L. Helterbran Cochran (“Helterbran”), age 47 and a resident of +Coppell, Texas, is a CPA licensed in the state of Texas. From September 2007 through +July 2013, Helterbran was employed by David S. Hall, P.C. and became a non-equity +partner with that firm in February 2012. + +4. Susan A. Cisneros (“Cisneros”), age 58 and a resident of Flower Mound, +Texas, holds a Master’s of Science degree in Accounting from the University of North +Texas but is not a CPA. Cisneros worked as an audit senior for David S. Hall, P.C. from +January 2005 through January 2012 and again from May 2013 through December 2013. + +C. +OTHER RELEVANT ENTITIES + +5. Thakkar CPA, is a Texas corporation formed to acquire certain assets of +David S. Hall, P.C. and provided auditing services for multiple public companies between +January 2014 and January 2015 signing audit reports as “The Hall Group CPAs,” but never +became registered with the PCAOB. + + 4 +D. FACTS + +i. Failure to Conduct Audits and Reviews in Accordance with PCAOB +Standards + +6. The Hall Group, Hall, Helterbran, and Cisneros collectively failed to +conduct at least 16 annual audits and 35 quarterly reviews5 in accordance with PCAOB +standards in at least three ways: (1) they repeatedly failed to prepare adequate audit +documentation in connection with audit and review engagements; (2) failed to conduct – or +failed to obtain – an engagement quality review (“EQR”) of audit and review engagements +by a qualified reviewer; and (3) on at least four engagements, The Hall Group and Hall +performed audit services while the firm’s independence was impaired. As a result, The +Hall Group falsely stated that it conducted its audits in accordance with PCAOB standards +in at least 16 annual audit reports for eight issuers. Additionally, Hall, after becoming CFO +of DynaResource, Inc., allowed Thakkar CPA to provide audit services to DynaResource, +Inc. even though he knew he had a direct financial interest in and a business relationship +with the company’s external audit firm. + +a. Failure to Adequately Prepare Required Audit Documentation + +7. PCAOB Auditing Standard No. 3, Audit Documentation (“AS 3”), states +that “[a]udit documentation is the written record of the basis for the auditor’s conclusions +that provides the support for the auditor’s representations, whether those representations are +contained in the auditor’s report or otherwise.” (emphasis in original.) AS 3, ¶ 2. +Additionally, AS 3 states that: + +The auditor must document the procedures performed, evidence obtained, +and conclusions reached with respect to relevant financial statement +assertions. Audit documentation must clearly d emonstrate that the work +was in fact performed. This documentation requirement applies to the +work of all those who participate in the engagement as well as to the work +of specialists the auditor uses as evidential ma tter in evaluating relevant +financial statement assertions. Audit documentation must contain +sufficient information to enable an experienced auditor, having no +previous connection with the engagement: +a. To understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions +reached, and +b. To determine who performed the work and the date such work was +completed as well as the person who reviewed the work and the +date of such review. (emphasis added) AS 3, ¶ 6 +8. AS 3 states that an auditor must “identify all significant findings or issues in +an engagement completion document,” which includes either all information necessary to + +5 See Appendix attached herewith. + 5 +understand the significant findings, issues or provides references to other audit +documentation. AS 3, ¶ 13 (emphasis in original.) + +9. The Hall Group utilized standardized forms and checklists while +documenting its audit work. For example, The Hall Group used a “Supervision, Review +and Approval Form” to document, in part, (1) who performed the partner review and the +engagement quality review, (2) the dates of such reviews, (3) the partner’s approval for +issuance of the report, and (4) the engagement quality reviewer’s concurring approval for +issuance of the report. The Hall Group also used a standardized “Engagement Completion +Document Form” to assist in summarizing all significant findings or issues. + +10. Hall and Helterbran failed to comply with AS 3 on multiple audits because +their workpapers contained blank or incomplete Supervision, Review, and Approval Forms +and blank or incomplete Engagement Completion Document Forms for at least five audit +and twenty review engagements over multiple periods. + +11. The existence of blank or incomplete Engagement Completion Document +Forms further evidences Hall’s and Helterbran’s failure to prepare documentation in +accordance with AS 3 requirements and does not allow an experienced auditor, having no +previous connection with the engagement, to determine who reviewed the work and the +date of such review. + +b. Failure to Obtain Required Engagement Quality Reviews + +12. Auditing Standard No. 7, Engagement Quality Review (“AS 7”), requires an +auditor to obtain an EQR and concurring approval to issue the engagement report for each +audit and interim review engagement. +6 Additionally, AS 7 states, “[a]n engagement quality +reviewer from the firm that issues the engagement report (or communicates an engagement +conclusion, if no report is issued) must be a partner or another individual in an equivalent +position.” Among other things, an engagement quality reviewer must be competent, i.e., +must possess the level of knowledge and competence related to accounting, auditing and +financial reporting required to serve as the engagement partner on the engagement under +review. Additionally, an engagement quality reviewer must have competence, +independence, integrity, and objectivity. To maintain objectivity, the engagement quality +reviewer should not make decisions on behalf of the engagement team or assume any of the +responsibilities of the engagement team. AS 7, ¶¶ 3-7. An audit firm may grant permission +to the client to use the firm’s audit report only after the engagement quality reviewer +provides concurring approval of issuance, AS 7, ¶ 13. + +13. The PCAOB defines the engagement partner as the member of the +engagement team with primary responsibility for the audit. Auditing Standard No. 10, +Supervision of the Audit Engagement, (“AS 10”), Appendix, A2. The engagement partner +remains responsible for the engagement and its performance, notwithstanding the + +6 AS 7 is effective for audits and interim reviews for fiscal years beginning on or after +December 15, 2009. + + 6 +involvement of the engagement quality reviewer. AS 7, ¶7. Accordingly, the engagement +partner is responsible for, among other things, compliance with PCAOB standards. AS 10, +¶3. + +14. Audit firms’ quality control policies and procedures should include +provisions that provide the firm with reasonable assurance that the engagement quality +reviewer has sufficient competence, among other things, to perform the EQR in accordance +with PCAOB standards. AS 7, ¶4. Policies and procedures should be established to +provide the firm with reasonable assurance that “those hired possess the appropriate +characteristics to enable them to perform competently” and “[w]ork is assigned to +personnel having the degree of technical training and proficiency required in the +circumstances.” PCAOB Quality Control Standard QC Section 40, The Personnel +Management Element of a Firm's System of Quality Control-Competencies Required by a +Practitioner-in-Charge of an Attest Engagement, ¶ 02. + +15. Hall and The Hall Group failed to establish these required policies and +procedures. Moreover, on multiple occasions, Hall and Helterbran also failed to comply +with AS 7 by either failing to obtain any EQR or instructing an unqualified person, +including Cisneros, to perform engagement quality reviews for multiple audit and review +engagements from 2010 through 2013. For at least two audit engagements, Hall +improperly acted as both the engagement partner and the EQR partner. + +16. Hall and Helterbran knowingly or at least recklessly directed or permitted +Cisneros to perform an EQR on multiple audits and reviews despite knowing she was not a +partner or someone in an equivalent position. +7 Cisneros knowingly or at least recklessly +provided the engagement quality reviewer’s concurring approval of issuance of the report +despite knowing that she was not a partner or someone in an equivalent position at The +Hall Group and not qualified to conduct an EQR. Indeed, Cisneros acknowledged to +Commission staff that she lacked the knowledge and competence in accounting, auditing, +and financial reporting required to serve as engagement partner for an engagement +conducted under PCAOB standards. + +17. Cisneros performed the engagement quality reviews for at least eight issuer +audit engagements for seven issuers and 15 reviews of six issuers’ interim financial +information, and signed Supervision, Review, and Approval Forms, as the engagement +quality reviewer. In each instance, Hall and Helterbran failed to determine whether +Cisneros prepared required documentation in connection with the EQRs she performed. +AS 7, ¶¶ 9-11 and ¶ 21. + +18. Hall failed to comply with AS 7 even after confirming to the PCAOB that +he would do so. In connection the PCAOB’s 2013 inspection of The Hall Group, Hall + +7 Although AS 7 does not necessarily require that persons performing EQRs be licensed CPAs, +the standard states that the person “must be a partner or another individual in an equivalent +position.” Cisneros not being a CPA is relevant here because The Hall Group required anyone +holding the title of “Principal/Partner” must also be a licensed CPA in Texas. + + 7 +confirmed in writing to the PCAOB inspection team that Cisneros performed the EQR for +two issuers’ fiscal year 2012 audits and the EQRs for the first, second, and third quarter +reviews for a third issuer.8 Hall also told the inspection team during its fieldwork that +Cisneros was not a CPA. In August 2013, the PCAOB issued an inspection comment +stating that The Hall Group failed to comply with AS 7 and failed to ensure that EQRs +were performed by persons with sufficient qualifications. The inspection comment states +that Hall’s representations demonstrated that Cisneros did not meet the firm’s requirements +for a “Principal/Partner,” and, accordingly, she did not meet the AS 7 requirements for +serving as EQR. In an August 5, 2013 handwritten response to this inspection comment +form, Hall wrote, “[w]e agree with the issue noted above and are in the process for [sic] +negotiating with an outside firm (PCAOB registered) and +will not issue any more reports +until this is in place and have that firm perform the appropriate review process.” (emphasis +added). + +19. Contrary to Hall’s representation, he knowingly disregarded the PCAOB +standards when he failed to obtain an EQR by a qualified reviewer for any + of the firm’s +review and audit engagements for fiscal periods ended June 30 and September 30, 2013 – +engagements conducted after his written representation to the PCAOB. On at least one +2013 audit, Hall added a memo to the audit file stating, in part, “The Hall Group did not +have access to an Engagement Quality Reviewer for this audit” and “[t]herefore, Mr. Hall +acted as Eng. Quality Reviewer.” Hall then signed the supervision, review, and approval +checklist as +both the engagement and EQR partner. Subsequently, for the first quarter +fiscal year 2014 review for this same client, Hall did not sign off as EQR but added a +memo to the file reiterating that “The Hall Group did not have access to an Engagement +Quality Reviewer” and concluded by stating “[w]e stand by our work.” + +c. The Hall Group’s Independence Was Impaired + +20. Section 10A(j) of the Exchange Act, Audit Partner Rotation, states “it shall +be unlawful for a registered public accounting firm to provide audit services to an issuer if +the lead (or coordinating) audit partner (having primary responsibility for the audit) or the +partner responsible for reviewing the audit, has performed audit services for that issuer in +each of the previous five fiscal years of that issuer. The Commission’s independence rules +allow engagement and concurring partners to serve for five consecutive years, after which +they may not serve in either role for another period of five years. Rule 2-01(c)(6)(i)(A) of +Regulation S-X. Related PCAOB rules and standards require that a registered public +accounting firm and its associated persons be independent of the Firm’s issuer audit clients. + +21. Hall was The Hall Group’s sole partner prior to 2012 and therefore served +as the only engagement partner on each of The Hall Group’s engagements before 2012. In +a February 2012 response to the PCAOB addressing deficiencies noted in the PCAOB’s +2010 inspection, Hall acknowledged that he served as the lead engagement partner for one +issuer for five consecutive years and the firm’s review of the issuer’s first quarter of the + +8 Freestone Resources, Inc. for fiscal year ended June 30, 2012; Seven Arts Entertainment for +fiscal year ended June 30, 2012; and DynaResource for quarters ended March 31, June 30, and +Sept. 30, 2012. + 8 +sixth year. Hall explained that it was the last quarter the firm was engaged as the issuer’s +auditor, and that to remediate, he (1) named Helterbran as a partner in February 2012; and +(2) developed a log to ensure that appropriate partner rotation occurs. + +22. After Helterbran’s departure in early July 2013, Hall was once again The +Hall Group’s sole partner. Hall attempted to address the partner rotation issue by offering +to promote one of his audit staff to a non-equity partner but the individual rejected the +offer. As a result, Hall knowingly or at least recklessly served as the lead engagement +partner for at least three of The Hall Group’s reviews for quarters ended June 30, 2013 and +September 30, 2013, even though he had already served as the lead engagement partner for +five consecutive years and, accordingly, The Hall Group lacked independence under the +Commission’s rules with respect to these issuers. + +d. Reports on Audited Financial Statements + +23. Under AU § 508, Reports on Audited Financial Statements, an auditor may +only express an unqualified opinion on historical financial statements when he has formed +such an opinion on the basis of an audit performed in accordance with PCAOB standards. +AU § 508.07. + +24. 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.” +And “references in Commission rules and staff guidance and in the federal securities laws +to GAAS or to specific standards under GAAS, as they relate to issuers, should be +understood to mean the standards of the PCAOB plus any applicable rules of the +Commission.” See SEC Release No. 34-49708 (May 14, 2004). Thus, an auditor violates +Regulation S-X Rule 2-02(b)(1) if it issues a report stating it has conducted its audit in +accordance with PCAOB standards when it has not. + +25. The Hall Group issued and Hall and Helterbran approved the issuance of, at +least 16 audit reports, including at least eight for which Cisneros provided concurring +approval of issuance. Each of the firm’s audit reports states that “The Hall Group CPAs” +conducted its audits in accordance with PCAOB standards. As stated above, these +statements were false. As a result, The Hall Group willfully violated, and Hall, Helterbran, +and Cisneros willfully aided and abetted The Hall Group’s violations of, Rule 2-02(b)(1). + +ii. Hall, as CFO, Allowed DynaResource to File its 2014 Forms 10-Q Without +Reviews by an Independent Public Accountant + +26. Rule 10-01(d) of Regulation S-X states, in part, “[p]rior to filing, interim +financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must +be reviewed by an independent public accountant using professional standards and +procedures for conducting such reviews.” Rules 2-01(c)(1) and 2-01(c)(3) of Regulation S- +X state, in part, that an accountant is not independent when the accounting firm has any +loan to or from, or certain business relationships with, an audit client’s officers. + + 9 +27. After selling certain of his firm’s assets to Thakkar CPA, Hall assisted +Thakkar CPA in soliciting audit engagements from each of The Hall Group’s audit clients, +including DynaResource. DynaResource engaged Thakkar CPA in January 2014. On +April 15, 2014, Thakkar CPA issued an audit report on DynaResource’s 2013 financial +statements, which it signed as “The Hall Group CPAs.” The same day, DynaResource +named Hall as its CFO. Thereafter, Hall functioned as Thakkar CPA’s primary contact on +audit-related issues. Thakkar CPA continued as DynaResource’s external auditor until it +resigned on March 5, 2015. + +28. DynaResource filed its first, second, and third quarter 2014 Forms 10-Q +with the Commission after the included financial statements were reviewed by Thakkar +CPA. Hall signed management letters of representation in connection with each of +Thakkar CPA’s reviews, and made certifications required under Rule 13a-14 of the +Exchange Act for each of DynaResource’s first, second, and third quarter 2014 Forms +10-Q. + +29. Hall allowed Thakkar CPA to provide audit services to DynaResource even +though he knew that he was an officer of the company and that he had a direct financial +interest in and a business relationship with Thakkar, CPA. Specifically, the following +events impaired Thakkar CPA’s independence with respect to its reviews of interim +financial information DynaResource included in its Forms 10-Q filed with the Commission +in 2014: + +• Thakkar CPA delivered a note payable to David S. Hall, P.C., which remained +outstanding even after Hall became DynaResource’s CFO, as a result of the terms +of the asset purchase agreement, under which Thakkar paid Hall $450,000 in cash +and undertook 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 determining that future collections were likely to +be less than the amounts expected at the Closing Date. +30. Hall allowed Thakkar CPA to provide audit services to DynaResource even +though he knew he had a direct financial interest in and a business relationship with the +company’s audit firm and, despite this knowledge, executed the certifications required +under Rule 13a-14 of the Exchange Act and allowed DynaResource to file its 2014 Forms +10-Q with the Commission. + + 10 +E. VIOLATIONS + +31. As a result of the conduct described above, The Hall Group willfully +violated, and Hall willfully aided and abetted and caused The Hall Group’s violations of, +Section 10A(j), which makes it unlawful for a registered public accounting firm to provide +audit services to an issuer if the lead (or coordinating) audit partner (having primary +responsibility for the audit) or the partner responsible for reviewing the audit, has +performed audit services for that issuer in each of the previous five fiscal years of that +issuer. + +32. As a result of the conduct described above, The Hall Group willfully +violated, and Hall, Helterbran, and Cisneros willfully aided and abetted and caused The +Hall Group’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 PCAOB +Standards. + +33. As a result of the conduct described above, The Hall Group, Hall, +Helterbran, and Cisneros willfully aided and abetted and caused issuers to violate Section +13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +34. As a result of the conduct described above, Hall willfully aided and abetted +and caused DynaResource to violate Section 13(a) of the Exchange Act and Rule 13a-13 +thereunder. + +35. As a result of the conduct described above, Hall willfully 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.” + +36. As a result of the conduct described above, The Hall Group, Hall and +Helterbran 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). + +37. As a result of the conduct described above, Cisneros engaged in improper +professional conduct subject to Section 4C(a)(2) of the Exchange Act. + +38. As a result of the conduct described above, The Hall Group, Hall, +Helterbran, and Cisneros willfully violated and/or willfully aided and abetted and caused +violations of the federal securities laws, which constitutes conduct subject to Section +4C(a)(3) of the Exchange Act the Commission’s Rules of Practice 102(e)(1)(iii). + +F. FINDINGS + +Based on the foregoing, the Commission finds that: + + 11 +39. The Hall Group willfully violated,9 and Hall willfully aided and abetted and +caused The Hall Group’s violations of, Section 10A(j) of the Exchange Act; + +40. The Hall Group willfully violated, and Hall willfully aided and abetted and +caused The Hall Group’s violations of, Rule 2-02(b)(1) of Regulation S-X; + +41. The Hall Group and Hall willfully aided and abetted and caused issuers to +violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; + +42. Hall willfully aided and abetted and caused DynaResource to violate +Section 13(a) of the Exchange Act and Rule 13a-13 thereunder; + +43. Hall willfully violated Rule 13a-14 of the Exchange Act; + +44. The Hall Group and Hall engaged in improper professional conduct subject +to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice. + +45. The Hall Group and Hall willfully violated and/or willfully aided and +abetted and caused violations of the federal securities laws, which constitutes conduct +subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) the Commission’s +Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in the Hall Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. The Hall Group and David S. Hall shall cease and desist from committing or +causing any violations and any future violations of Sections 10A(j) and Rules 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 promulgated thereunder and Rule 2-02(b)(1) +of Regulation S-X. + +B. David S. Hall shall cease and desist from committing or causing any +violations and any future violations of Rule 13a-14 of the Exchange Act. + + +9 As used herein, the term “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)).” + 12 +C. The Hall Group and David S. Hall are denied the privilege of appearing or +practicing before the Commission as accountants. + +D. David S. Hall shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. §3717. + +E. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; + +(2) Respondent may make direct payment from a bank account via +Pay.gov through the SEC website +at http://www.sec.gov/about/offices/ofm.htm +; or + +(3) Respondent may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities +and Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +F. Payments by check or money order must be accompanied by a cover letter +identifying David S. 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 +David Peavler, Division of Enforcement, Securities and Exchange Commission, 801 +Cherry Street, Suite 1900, Fort Worth, Texas 76102. + +G. Amounts ordered to be paid as civil money penalties pursuant to this +Order shall be treated as penalties paid to the government for all purposes, including all +tax purposes. To preserve the deterrent effect of the civil penalty, Respondents agree that +in any Related Investor Action, they shall not argue that they are entitled to, nor shall +they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action ("Penalty +Offset"). If the court in any Related Investor Action grants such a Penalty Offset, +Respondents agree that they shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the +civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related + 13 +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, 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 David S. Hall, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Hall 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 Hall 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 + + + 14 +Appendix +David S. Hall, P.C. d/b/a The Hall Group CPAs +Audits Not Performed in Accordance with PCAOB Standards + + +Issuer +Fiscal Year +Ended +Engagement +Partner EQR +1. Freestone Resources, Inc. 6/30/12 Hall Cisneros +2. Kingdom Koncrete, Inc. 12/31/10 Hall Cisneros +3. Seven Arts Entertainment, Inc. 6/30/12 Hall Cisneros +4. Surface Coatings, Inc. 12/31/10 Hall Cisneros +5. Surface Coatings, Inc. 12/31/12 Hall Not Obtained or Not Documented +6. Medient Studios, Inc. 12/31/12 Hall Hall +7. Kingdom Koncrete, Inc. 6/30/13 Hall Hall +8. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/10 Helterbran Cisneros +9. Dyna Resource, Inc. 12/31/10 Helterbran Cisneros +10. Kingdom Koncrete, Inc. 12/31/11 Helterbran Cisneros +11. Premier Oil Field Service 12/31/12 Helterbran Cisneros +12. Kingdom Koncrete, Inc. 12/31/12 Helterbran Performed by other staff below +partner or equivalent level +13. Surface Coatings, Inc. 12/31/11 Helterbran Not Obtained or Not Documented +14. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/11 +Helterbran Not Obtained or Not Documented +15. 360 Global Investments, Inc. +f/k/a 360 Global Wine, Inc. +12/31/12 +Helterbran Not Obtained or Not Documented +16. Dyna Resource, Inc. 12/31/11 Helterbran Not Obtained or Not Documented + + + + 15 +David S. Hall, P.C. d/b/a The Hall Group CPAs +Reviews Not Performed in Accordance with PCAOB Standards + + +Issuer +Quarter +Ended +Engagement +Partner EQR +1. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 3/31/12 Helterbran + Cisneros +2. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 6/30/12 Helterbran Cisneros +3. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 9/30/12 Helterbran Cisneros +4. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 3/31/13 Helterbran Not Obtained or Not Documented +5. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 6/30/13 Hall Not Obtained or Not Documented +6. 360 Global Investments, Inc. + f/k/a 360 Global Wine, Inc. 9/30/13 Hall Not Obtained or Not Documented +7. Dyna Resource, Inc. 3/31/12 Helterbran Cisneros +8. Dyna Resource, Inc. 6/30/12 Helterbran Cisneros +9. Dyna Resource, Inc. 9/30/12 Helterbran Cisneros +10. Dyna Resource, Inc. 3/31/13 Helterbran Not Obtained or Not Documented +11. Dyna Resource, Inc. 6/30/13 Hall Not Obtained or Not Documented +12. Dyna Resource, Inc. 9/30/13 Hall Not Obtained or Not Documented +13. Freestone Resources, Inc. +(FYE 6/30) 9/30/11 ** Blank **10 Not Obtained or Not Documented +14. Freestone Resources, Inc. +(FYE 6/30) 12/31/11 ** Blank ** Not Obtained or Not Documented +15. Freestone Resources, Inc. +(FYE 6/30) 3/31/12 Hall Not Obtained or Not Documented +16. Freestone Resources, Inc. +(FYE 6/30) 9/30/12 Hall Not Obtained or Not Documented +17. Freestone Resources, Inc. +(FYE 6/30) 12/31/12 Hall Not Obtained or Not Documented +18. Kingdom Koncrete, Inc. 3/31/12 Helterbran Cisneros +19. Kingdom Koncrete, Inc. 6/30/12 Helterbran + Cisneros + +10 **Blank** references instances in which neither the Supervision, Review, and Approval Forms +nor the Engagement Completion Forms identify the lead engagement partner. + 16 +Issuer +Quarter +Ended +Engagement +Partner EQR +20. Kingdom Koncrete, Inc. 9/30/12 Helterbran Cisneros +21. Kingdom Koncrete, Inc. 3/31/13 ** Blank ** Not Obtained or Not Documented +22. Kingdom Koncrete, Inc. 6/30/13 Hall Not Obtained or Not Documented +23. Premier Oil Field Service 3/31/12 Helterbran Not Obtained or Not Documented +24. Premier Oil Field Service 6/30/12 Helterbran Not Obtained or Not Documented +25. Premier Oil Field Service 9/30/12 Helterbran Cisneros +26. Premier Oil Field Service 3/31/13 ** Blank ** Not Obtained or Not Documented +27. Premier Oil Field Service 6/30/13 Hall Not Obtained or Not Documented +28. Seven Arts Entertainment, Inc. +(FYE 6/30) 9/30/12 Hall Cisneros +29. Seven Arts Entertainment, Inc. +(FYE 6/30) 12/31/12 ** Blank ** Not Obtained or Not Documented +30. Seven Arts Entertainment, Inc. +(FYE 6/30) 9/30/13 Hall Not Obtained or Not Documented +31. Surface Coatings, Inc. 3/31/12 Helterbran Cisneros +32. Surface Coatings, Inc. 6/30/12 Helterbran Cisneros +33. Surface Coatings, Inc. 9/30/12 Helterbran Cisneros +34. Surface Coatings, Inc. 3/31/13 Helterbran Cisneros +35. Surface Coatings, Inc. 6/30/13 Hall Not Obtained or Not Documented + + +Engagement Partner Cisneros Not Obtained or Not Documented Total +Hall 1 7 8 +Helterbran 14 4 18 +Blank -- 9 9 +Totals 15 20 35 + + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3819.txt b/raw/aaer/2016/AAER-3819.txt new file mode 100644 index 0000000000000000000000000000000000000000..822d196f7a2627df9c74b6c87d30bb7109166a05 --- /dev/null +++ b/raw/aaer/2016/AAER-3819.txt @@ -0,0 +1,294 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79176 / October 27, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3819 / October 27, 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 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 AS TO +ROBERT P. BEDWELL, CPA + +I. + + On February 5, 2016, the Securities and Exchange Commission (“Commission”) instituted +proceedings against Robert P. Bedwell, CPA (“Respondent” or “Bedwell”) pursuant to Section 4C +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s +Rules of Practice. + +II. + + Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +this Order 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 as to Robert +P. Bedwell, CPA (“Order”), as set forth below. + + +2 + +III. + + On the basis of this Order and Bedwell’s Offer, the Commission finds1 that: + +Summary + +1. The proceedings in this matter as to Bedwell concern his failures as a Certified Public +Accountant in connection with his audit of Respondent BioElectronics Corp. (“BIEL”). Bedwell +was the audit engagement partner who audited the financial statements included in BIEL’s 2009 +10-K, filed with the Commission on March 31, 2010, in which BIEL recorded revenue from two +invalid “bill and hold” transactions. Bedwell engaged in improper professional conduct under +Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. + +Respondent + +2. Respondent Robert P. Bedwell, CPA, age 58, is a resident of Coral Springs, Florida. +Bedwell is currently licensed as a CPA in Florida and is a partner in a Florida accounting firm. He +was the audit engagement partner for BIEL’s 2009 10-K. + +Related Party + +3. 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. During the relevant period, BIEL shares were a penny stock +as that term is defined in Section 3(a)(51) of the Exchange Act and Rule 3a51-1 thereunder. 15 +U.S.C. § 78c(a)(51) and 17 C.F.R. § 240.3a51-1. + +Background + +4. On a Form 10-K filed with the Commission on March 31, 2010 (“2009 10-K”), BIEL +recorded revenue from two “bill and hold” 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. + +5. 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.” + + +1 The findings herein are made pursuant to Bedwell's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +6. 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 and/or fixed payment dates be agreed with the customer +pursuant to which the risk of collection is reduced to a minimal level.” + +7. Contrary to its disclosures and Generally Accepted Accounting Principles (“GAAP”), +BIEL improperly recognized revenue on the two bill and hold transactions. + +8. BIEL made the first of the two bill and hold transactions pursuant to a distribution +agreement between BIEL and YesDTC Holdings, Inc. (“YesDTC”), a company owned by an +individual who had performed strategic consulting services for BIEL. 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. + +9. The second bill and hold transaction that failed to meet revenue recognition criteria +involved BIEL and eMarkets Group, LLC (“eMarkets”), a distributor of BIEL products owned by +the sister of BIEL’s CEO, a related party. The agreement between BIEL and eMarkets also +contained no fixed schedule for delivery of the goods. 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. + +10. Bedwell was the audit engagement partner responsible for the audit of BIEL’s +financial statements included in its 2009 10-K. + +11. Public Company Accounting Oversight Board (“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 +4 + +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: “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.” + +12. 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 the +counterparties to BIEL in these transactions were 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. + +13. 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.” + +14. 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. + +15. 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 +5 + +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 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.” + +16. 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. + +17. 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.” + +18. 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. + +19. 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, executed 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.” + +20. Bedwell failed to follow the PCAOB guidance described in paragraph 19 and to +properly audit the eMarkets transaction as 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. + + +6 + +Findings + +21. Based on the foregoing, the Commission finds that Bedwell engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bedwell’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Robert P. Bedwell is denied the privilege of appearing or practicing before the +Commission as an accountant. + + B. After two years from the date of this order, Bedwell 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 Bedwell’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) Bedwell, 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) Bedwell, 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) Bedwell 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) Bedwell acknowledges his responsibility, as long as Respondent appears or +practices before the Commission as an independent accountant, to comply +7 + +with all requirements of the Commission and the Board, including, but not +limited to, all requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + + C. The Commission will consider an application by Bedwell 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 Bedwell’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + + + By the Commission. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3821.txt b/raw/aaer/2016/AAER-3821.txt new file mode 100644 index 0000000000000000000000000000000000000000..97b809cfbd5bb4196f1bbe6fc564ed45618e925e --- /dev/null +++ b/raw/aaer/2016/AAER-3821.txt @@ -0,0 +1,782 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10242 / October 31, 2016 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79196 / October 31, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3821 / October 31, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17654 + +In the Matter of + +DOMENICK F. CONSOLO, CPA +AND PKF O’CONNOR DAVIES, +LLP, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE +SECURITIES ACT OF 1933 AND +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE AND DESIST ORDER + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Domenick F. Consolo (“Consolo”) and PKF O’Connor Davies, LLP (“O’Connor +Davies”) (collectively “Respondents”) pursuant to Sections 8A of the Securities Act of 1933 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and Rule 102(e)(1)(ii) of the Commission’s Rules of 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 + +2 + +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order, as set forth +below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +A. SUMMARY +1. O’Connor Davies was the independent auditor for the Town of Ramapo, New York +(the “Town”) and the Ramapo Local Development Corporation (the “RLDC,” and collectively +with the Town, “Ramapo”) for fiscal years ended December 31, 2009 through December 31, 2014. +Consolo was the audit partner responsible for the audits during that period. In that capacity, +Respondents issued audit reports for these fiscal years stating that the Town’s and the RLDC’s +financial statements were presented fairly, in all material respects, in conformity with generally +accepted accounting principles (“GAAP”)4 and that the audits were performed in accordance with +generally accepted auditing standards (“GAAS”). These statements were false in that the financial +statements were not fairly presented in all material respects in accordance with GAAP and the +audits were not performed in accordance with GAAS. +2. Respondents knew or should have known that the audit reports were or would be +incorporated in municipal securities offering documents by the Town and the RLDC. Between + +aided and abetted the violation of, any provision of the securities laws or the rules and +regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. +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 As disclosed in Ramapo’s financial statements, the Governmental Accounting Standards Board +(“GASB”) is the accepted standard setting board for establishing governmental accounting and financial +reporting principles. +3 + +2010 and 2015, Ramapo raised approximately $300 million from investors (including about $85 +million in “new money” issuances and the balance in refundings of existing debt) pursuant to 16 +securities offerings, the official statements for which contained Respondents’ then most recent +audit reports. +3. Between 2010 and 2011, four official statements contained the Town’s fiscal year +(“FY”) 2009 financial statements. These financial statements included a $3,080,000 receivable in +the Town’s primary operating fund, called the General Fund, purportedly for a sale of land known +as the “Hamlets” to the RLDC. While auditing the financial statements, Consolo learned that the +alleged sale had not been completed. Nevertheless, as discussed below, following an inquiry from +a Town finance department employee as to whether to book the receivable, Consolo allowed it to +be recorded. The receivable represented approximately 75% of the Town’s FY 2009 General Fund +balance. +4. While auditing the Town’s FY 2010 financial statements in or around April 2011, +Consolo learned that the sale of the Hamlets, which he had previously been told would take place +by December 2010, did not occur. Nevertheless, Respondents issued unmodified audit reports for +the Town’s and the RLDC’s FY 2010 – FY 2014 financial statements, which continued to +improperly reflect the receivable for the Hamlets sale as an asset in the Town’s General Fund and +the Hamlets land as an asset of the RLDC. Without the receivable, the General Fund would have +had a negative balance in each of these fiscal years. +5. Consolo violated applicable professional standards by failing to exercise due +professional care and skepticism and to obtain sufficient appropriate audit evidence in connection +with auditing the $3,080,000 receivable as well as various other receivables, interfund transfers, +and liabilities reported by the Town and the RLDC for FY 2009 – FY 2014. +6. Additionally, while auditing the Town’s FY 2011 – FY 2013 financial statements, +Consolo failed to appropriately respond when employees in the Town’s finance department either +expressed concerns concerning the propriety of the financial statements or declined to complete a +fraud questionnaire. +7. Beginning in May 2013, senior management at O’Connor Davies learned that +Ramapo’s financial statements were the subject of investigations by the Federal Bureau of +Investigation, the United States Attorney for the Southern of District of New York, and the +Commission and that the $3,080,000 receivable was a focus of their respective inquiries. +However, O’Connor Davies failed to appropriately respond to the revelation that the Ramapo +engagements presented a heightened risk of fraud. Subsequent to that revelation, the firm issued +unmodified audit reports for the Town’s FY 2012 – FY 2014 financial statements, which reflected +inflated General Fund balances as a result, among other things, of continued recognition of the +$3,080,000 receivable. The firm also issued unmodified audit reports for the RLDC’s FY 2012 – +FY 2014 financial statements, which continued to improperly reflect the Hamlets property as an +RLDC asset. +4 + +B. RESPONDENTS +8. Consolo, age 61, of Yorktown Heights, New York, is a Certified Public Accountant +(“CPA”) licensed to practice in New York. Consolo has served as an accountant of O’Connor +Davies and its predecessors since 1979. Consolo served as the O’Connor Davies engagement +partner on, and had final audit responsibility over, the Town and RLDC engagements from FY +2009 through FY 2014. He has also acted as a quality control reviewer for O’Connor Davies on +other municipal audits. +9. O’Connor Davies is a PCAOB-registered public accounting firm with its +headquarters in Harrison, New York. The conduct at issue occurred in the course of audits of the +Town and the RLDC, clients of the firm’s municipal practice. +C. OTHER RELEVANT ENTITIES +10. The Town is an incorporated municipal government in Rockland County, New +York. The Town is governed by an elected five member board, including a supervisor whose +function is akin to a mayor. +11. The RLDC is a not-for-profit corporation established in 2008 for the purpose of +engaging in development projects within the Town. The RLDC is a component unit of the Town, +but operates independently of the Town. During the relevant period, the president of the RLDC was +the Town’s supervisor. +D. FACTS + The Securities Offerings and the Audit Reports +12. Between September 2010 and September 2015, the Town conducted 14 municipal +securities offerings. During the same period, the RLDC conducted two securities offerings, which +were guaranteed by the Town. +13. The official statements for the Town’s offerings contained unmodified audit reports +accompanying the Town’s financial statements. The official statements for the RLDC’s offerings +contained unmodified audit reports accompanying both the Town’s and the RLDC’s financial +statements. +14. Although these official statements disclosed that O’Connor Davies was “not +associated” with their preparation, Consolo knew or should have known that the official statements +would include O’Connor Davies’ audit reports. Consolo agreed, when possible, to complete the +audits on a timetable that would permit the use of the audited financial statements in connection +with Ramapo’s offerings. Consolo, on behalf of the firm, also effectively consented to inclusion of +the FY 2010 and FY 2012 audit reports in certain of Ramapo’s offering documents. +15. The audit reports stated in pertinent part, “We conducted our audit in accordance +with auditing standards generally accepted in the United States of America . . . . In our opinion, the +5 + +financial statements . . . present fairly, in all material respects, the respective financial position [of +the Town/ the RLDC] in conformity with accounting principles generally accepted in the United +States of America.” +16. A summary of the relevant offerings and the audit reports contained therein is set out +below: +Issuer Official Statement Date Issue Size (in millions) Audit Report +Town 09/21/10 $12.0 FY 09 +Town 10/27/10 $06.7 FY 09 +Town 12/07/10 $20.4 FY 09 +RLDC 04/15/11 $25.0 FY 09 +Town 06/01/11 $15.0 FY 10 +Town 09/27/11 $14.2 FY 10 +Town 11/30/11 $19.9 FY 10 +Town 05/24/12 $15.0 FY 10 +Town 09/21/12 $22.0 FY 11 +Town 11/28/12 $19.3 FY 11 +RLDC 02/07/13 $25.0 FY 11 +Town 04/05/13 $12.2 FY 11 +Town 05/24/13 $31.2 FY 11 +Town 05/21/14 $35.7 FY 12 +Town 05/19/15 $33.3 FY 14 +Town 09/11/15 $13.4 FY 14 + +17. The audit reports contained in the offering documents were signed by O’Connor +Davies. As engagement partner, Consolo approved issuance of the audit reports. +18. The FY 2009 – FY 2014 audit reports were also publicly available pursuant to +continuing disclosure agreements. + The General Fund +19. The General Fund is the Town’s primary operating fund. Tax revenues and other +receipts that are not allocated by law or contractual agreement to another fund are accounted for in +the General Fund. + +20. Financial statements for governmental funds, including the General Fund, focus on +near-term inflows and outflows of spendable resources. As explained in the Town’s financial +statements, governmental fund financial statements were reported using a current financial +resources measurement focus and a modified accrual basis of accounting, under which revenues +were recognized as soon as they were both “measurable” and “available”; i.e., collectible within +the current period or soon enough thereafter to pay liabilities of the current period. According to +6 + +the Town’s financial statements, a 90 day availability period was used for recognition of most +governmental fund revenues. + +21. Consolo believed that a decline in the reported General Fund balance may have +resulted in a credit rating downgrade on Ramapo’s bonds, leading investors to demand higher +interest rates on the bonds. + +22. As of fiscal year-end 2008, the Town reported a General Fund balance of +$4,501,666. However, revenues declined following the onset of the financial crisis, resulting in a +decrease in the General Fund balance. Beginning in FY 2009, pressure on the Town’s finances +also resulted from increased debt service payments stemming from bonds issued to finance various +projects, including the purchase of land for the construction of a minor league baseball stadium. + +$3,080,000 Receivable + +23. In FY 2009, the Town recorded a $3,080,000 receivable as an asset in the General +Fund, which was purportedly for a sale by the Town of the Hamlets property, a 13.7-acre parcel of +land, to the RLDC. The receivable represented approximately 75% of the Town reported General +Fund balance for FY 2009. + +24. While auditing the FY 2009 financial statements in April 2010, Consolo learned +that the sale of the Hamlets was not expected to take place until sometime later in FY 2010. As he +acknowledged to a colleague, “This is going to be a real problem. It’s not even close to a sale by +December 31, 2009.” +25. Nevertheless, Consolo allowed the recording of the $3,080,000 receivable in the +Town’s General Fund and the inclusion of the Hamlets property as an asset of the RLDC in the FY +2009 financial statements. The audit co-manager wrote in a contemporaneous email to a +colleague, “No one wants to give the ok for this, but Dom [Consolo] said go ahead and book it.” +26. At the time of the FY 2009 audit, O’Connor Davies’ quality control policies and +procedures required an independent preissuance review of the Town’s financial statements. +However, the audit workpapers do not contain evidence that such a review was conducted of the +Town’s FY 2009 audited financial statements. +27. While auditing the Town’s FY 2010 financial statements, Consolo learned that the +sale of the Hamlets still had not occurred because a habitat for timber rattlesnakes, a threatened +species, was located on the land. That habitat called into question the potential to develop the +Hamlets. Therefore, the Hamlets sale would not go forward. +28. Nevertheless, for FY 2010 – FY 2014, the audit workpapers reflected the continued +recognition in the financial statements of a receivable in the General Fund for sale of the Hamlets +7 + +to the RLDC and inclusion of the Hamlets property as an asset of the RLDC.5 In each such fiscal +year, inclusion of the receivable represented the difference between the Town reporting a positive +or a negative General Fund balance. +29. During the FY 2010 audit, Consolo received false representations from Town +officials that the Town would receive an identical $3,080,000 from the RLDC during the 2011 +calendar year pursuant to a reimbursement agreement executed in connection with the transfer of +an unrelated parcel of land that was to be the site of a housing project (the “Housing Project +Land”). +30. In relying on the Town’s false representations concerning the RLDC’s intention +and ability to pay $3,080,000 and the Town’s continued recognition of the $3,080,000 receivable, +Consolo ignored red flags. For example, Consolo knew that the Town’s FY 2009 financial +statements had reported the Housing Project Land as a donation to the RLDC. Consolo also knew +that, on its face, the reimbursement agreement relating to the Housing Project Land contained no +reference to a $3,080,000 payment. +31. Furthermore, Consolo was aware based on the terms of the reimbursement +agreement that any amount possibly to be paid by the RLDC in connection with the Housing +Project Land was undetermined and contingent on numerous events, including completion of the +Housing Project, the repayment of construction loans, and the RLDC’s ability to pay. According +to an audit workpaper prepared in connection with the RLDC’s FY 2010 financial statements, the +RLDC had “no intention” of paying $3,080,000 to the Town in the near future. +32. It was improper to include a receivable based on the Housing Project +reimbursement agreement in the Town’s General Fund financial statement, the focus of which was +to provide information on near-term inflows, outflows and balances of spendable resources. +33. While O’Connor Davies required that the receivable be classified as +“nonspendable” on the Town’s FY 2012 through FY 2014 financial statements, Consolo’s failure +to consider the need for a restatement resulted in a continued overstatement of the total balance of +the Town’s General Fund. +$314,000 Receivable + +34. While auditing the Town’s FY 2010 financial statements, Consolo learned that a +new, $314,000 receivable in the General Fund was recorded for a contemplated – but +unconsummated – sale of property to a third-party also controlled by the Town’s supervisor. +Consolo did not obtain sufficient audit evidence to support inclusion of the receivable, which +increased the General Fund balance by $314,000 as if the sale had taken place. + + +5 In FY 2014, the receivable was reduced to $2,500,000. +8 + +$743,338 Receivable + +35. While auditing the Town’s FY 2012 financial statements, Consolo learned that the +General Fund included a $743,338 receivable for federal reimbursement aid relating to Hurricane +Sandy. +36. Under GASB Statement No. 33, municipalities that receive expenditure-driven +grants, such as federal reimbursement aid, “should recognize revenues in the period when all +applicable eligibility requirements have been met and the resources are available.” (Emphasis in +original). According to the GASB Comprehensive Implementation Guide applicable to the +Town’s FY 2012 financial statements, the criterion that revenues from expenditure-driven grants +“should be recognized when the expenditure is made” is an “additional requirement” that does not +substitute for consideration of whether or not the resources are available. +37. Consolo verified that the expenditures associated with the $743,338 receivable were +made in FY 2012, such that the eligibility requirement had been satisfied. Consolo also required +documentation that the $743,338 claim had been approved by the federal government. However, +Consolo failed to take sufficient steps to assess the availability of the $743,338. In particular, +while the Town’s FY 2012 financial statements disclosed, consistent with GASB Statement No. +33, that “revenues from [expenditure-driven] Federal and State grants are accrued when the +expenditure is made,” the $743,338 was not collected within the ninety day availability period that +the Town disclosed was “used for revenue recognition for all . . . governmental fund revenues” +other than property taxes. Further, the audit workpapers did not document consideration of an +alternative availability period for expenditure-driven grants. +Transfers from the Ambulance Fund to the General Fund + +38. Between FY 2009 and FY 2014, the Town used transfers from the Ambulance +Fund to overstate the balance of the General Fund. These interfund transfers ranged between +$1,280,000 and $2,410,960 each year, with a cumulative impact on the General Fund balance of +more than $12 million. During the audits, Consolo relied on a false representation from Town +management that the Town’s Ambulance Fund shared the same tax base with the General Fund. +39. Beginning during the FY 2011 audit, employees in the Town’s finance department +raised concerns to the audit engagement team relating to the propriety of such interfund transfers. +Nevertheless, Consolo continued to rely on the Town official’s representations without +corroborating the composition of the tax bases for the Ambulance Fund and the General Fund, and +O’Connor Davies’ workpapers do not include documentation of the auditor’s consideration of that +matter. +40. In fact, the tax base from which the General Fund monies were raised excluded +clergy residences owned by religious corporations, whereas the tax base from which the +Ambulance Fund monies were raised included such properties. Therefore, the Ambulance Fund +had a different tax base from the General Fund, and consistent with the state’s general municipal +law, consideration should have been given by the auditors whether to require the Town to record +9 + +these advances from the Ambulance Fund to the General Fund as loans (which require repayment +with interest) rather than interfund transfers (which may be made without repayment). +41. Additionally, between FY 2010 and FY 2014, interfund receivables recorded in the +General Fund as “due from” the Ambulance Fund increased the reported fund balance of the +General Fund by amounts ranging between $450,000 and $1,424,609 each year. The interfund +receivables were recorded because the transfers to the General Fund were in excess of the cash +available in the Ambulance Fund. Consolo improperly did not obtain documentation to support +these interfund receivables. + Unrecorded Liabilities +42. Consolo failed to identify certain significant liabilities omitted from Ramapo’s FY +2010 – FY 2014 financial statements by failing to perform appropriate audit procedures. +43. In particular, while auditing the RLDC’s FY 2010 financial statements, the audit +engagement team sent out a third-party confirmation request to attempt to obtain evidence +regarding the amount owed by the RLDC to its outside legal counsel. The audit team did not +receive a response and, in the absence of obtaining the third party confirmation, failed to perform +alternative procedures to obtain sufficient appropriate audit evidence for the amount of liabilities +reported by the RLDC. +44. In fact, the RLDC’s FY 2010 financial statements, which were also incorporated +into the Town’s financial statements in summary form, omitted a liability in excess of $700,000 for +fees owed to the outside legal counsel. Although such fees would likely have been capitalized as +construction in progress such that reporting the liability would not have had an impact on the +RLDC’s reported net assets, the omission resulted in a misrepresentation of the RLDC’s liquidity +and overall financial condition. +45. In addition, from at least FY 2011 through FY 2014, the Town’s financial +statements failed to reflect a payable of at least $767,224, which was owed by the Town to an +engineer involved in the construction of a minor league baseball stadium. Consolo failed to obtain +sufficient audit evidence regarding the completeness of liabilities reported in the Town’s financial +statements. + Fraud Concerns + +46. On multiple occasions, Consolo failed to adequately investigate concerns regarding +the propriety of the Town’s accounting expressed by employees in the Town’s finance department +as well as other O’Connor Davies professionals. For example: +a. In connection with the FY 2011 audit, an accountant in the Town’s finance +department complained to the audit engagement team about fraud involving the +Town’s financial statements, specifically citing the reporting of a sale of land +from the Town to the RLDC. The employee also expressed concern regarding +10 + +fraud risk stemming from “inappropriate transactions involving [the Town’s +governmental] funds.” Consolo did not adequately investigate the employee’s +concerns. +b. In connection with the FY 2012 audit, an audit manager informed Consolo that +another accountant employed in the Town’s finance department refused to sign +a fraud questionnaire. Consolo failed to discuss the concerns with the +accountant or adequately investigate her concerns. +c. In connection with the FY 2013 audit, the same accountant disclosed in a fraud +questionnaire that she had concerns regarding interfund transfers and an +outstanding receivable. Consolo failed to discuss the concerns with the +accountant or adequately investigate her concerns. + O’Connor Davies Executive Committee +47. In May 2013, O’Connor Davies senior management, consisting of a five-member +executive committee, learned that the FBI executed a search warrant at Ramapo Town Hall and +seized documents from the finance d epartment, including correspondence with O’Connor Davies, +relating to the Town’s and the RLDC’s financial statements. +48. Senior management was further informed that, in May 2013, the Commission +requested that O’Connor Davies provide information relating to audits of the Town’s financial +statements, including documentation relating to the $3,080,000 receivable and to the calculation +and reporting of deferred revenue. +49. O’Connor Davies also notified the Commission staff that it received a grand jury +subpoena, dated May 14, 2013, requesting documents relating to its audits of the Town’s and +RLDC’s financial statements since FY 2009. +50. In response to the revelation of a heightened fraud risk in connection with +Ramapo’s financial statements and the $3,080,000 receivable in particular, O’Connor Davies failed +to take sufficient and appropriate steps to mitigate the risk of material misstatements in its audit +reports. In particular, the Executive Committee determined, following a meeting with the Ramapo +audit team, that O’Connor Davies would require the Town to classify the $3,080,000 receivable as +“nonspendable.” However, permitting continued recognition of the receivable resulted in an +overstatement of the total balance of the General Fund. O’Connor Davies also did not implement +enhanced quality control procedures for the Ramapo engagements and permitted Consolo to +continue as engagement partner without additional supervisory procedures or oversight. +51. After O’Connor Davies senior management became aware of the law enforcement +investigations relating to Ramapo’s financial statements, the firm issued unmodified audit reports +for the Town’s and the RLDC’s FY 2012 – FY 2014 financial statements, which reported inflated +General Fund balances and continued to improperly reflect the Hamlets as an asset of the RLDC. + +11 + +E. VIOLATIONS +52. As a result of the conduct described above, Consolo violated Section 17(a)(1) of the +Securities Act, which prohibits any person from employing any device, scheme, or artifice to +defraud in the offer or sale of securities. +53. As a result of the conduct described above, Consolo and O’Connor Davies violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit any person in the offer or sale +of securities from obtaining money or property by means of any misstatement or omission of +material fact and engaging in any transaction, practice, or course of business which operates or +would operate as a fraud or deceit upon the purchaser of such securities. +54. As a result of the conduct described above, Consolo violated Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with +the purchase or sale of any security involving: a) the use of any device, scheme, or artifice to +defraud; b) the making of material misrepresentations or omissions; and c) any act, practice, or +course of business which operates or would operate as a fraud or deceit upon any person. +55. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Section 4C(b)(1) of +the Exchange Act and Rule 102(e)(1)(iv)(A) define improper professional conduct” to include +“intentional or knowing conduct, including reckless conduct, that results in a violation of +applicable professional standards.” Section 4C(b)(2) and Rule 102(e)(1)(iv)(B) define improper +professional conduct 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. Respondents’ conduct failed to comply with the applicable professional auditing +standards: +a. GAAS requires an auditor to “obtain sufficient appropriate audit evidence . . . +on which to base the auditor’s opinion” (AU-C § 500.04/ AU § 326.01)6 and to +“design and perform audit procedures that are appropriate in the circumstances +for the purpose of obtaining sufficient appropriate audit evidence.” (AU-C § +500.06). Respondents failed to obtain sufficient appropriate audit evidence for +certain assets reported in the General Fund’s FY 2009 – FY 2014 financial +statements, including a $3,080,000 receivable (FY 2009 – FY 2013), a + +6 AU-C § 500 became effective for audits of fiscal years ending on or after December 15, 2012, +superseding, but not changing in any significant respect, AU § 326. + +12 + +$314,000 receivable (FY 2010), a $743,338 receivable (FY 2012), and +interfund balances between $450,000 and $1,424,609 reported as “due from” +the Ambulance Fund (FY 2010 – FY 2014). Respondents similarly failed to +obtain sufficient appropriate audit evidence for certain assets and liabilities +reported in the RLDC’s FY 2009 – FY 2014 financial statements. +b. Under GAAS, auditors must also exercise appropriate professional judgment +and professional skepticism. (AU-C § 200.08/ AU § 230.08).7 Professional +skepticism is defined as an attitude that includes a questioning mind and a +critical assessment of audit evidence. (AU-C § 200.14/ AU § 230.07). In +addition, AU-C § 200.17 requires auditors to “plan and perform an audit with +professional skepticism, recognizing that circumstances may exist that cause the +financial statements to be materially misstated.” As discussed above, +Respondents did not exercise the appropriate professional judgment when +conducting the audit and issuing an opinion on the Town’s and RLDC’s +financial statements for FY 2009 – FY 2014. The expressions of concern by +Town accounting personnel, coupled with Respondents’ knowledge of the +criminal and civil investigations relating to the Town’s financial statements, +should have caused Respondents to place greater emphasis on obtaining +sufficient appropriate audit evidence regarding General Fund assets. +Respondents failed to perform additional audit procedures sufficient to address +those risks. +c. GAAS requires that an auditor should modify its opinion when it concludes that +the financial statements as a whole are materially misstated or is unable to +obtain sufficient appropriate audit evidence to conclude that they are free from +material misstatement. (AU-C § 705.07).8 Consolo approved the issuance of +audit reports for FY 2009 – FY 2014 containing unmodified opinions. +However, the Town’s financial misstatements materially overstated the balance +of its General Fund, and Respondents failed to obtain sufficient appropriate +audit evidence for such balances. As such, Respondents should not have issued +an audit report containing an unmodified opinion. +d. GAAS requires that, in auditing financial statements, a firm must “establish and +maintain effective quality control procedures to provide it with reasonable +assurances that the firm and its personnel comply with professional standards +and applicable legal and regulatory requirements and that reports issued by the + +7 AU-C § 200 became effective for audits of fiscal years ending on or after December 15, 2012, +superseding, but not substantially changing in pertinent part, AU § 230. + +8 AU-C § 705 became effective for audits of fiscal years ending on or after December 15, 2012, +superseding, but not changing in any significant respect, AU § 508. + +13 + +firm are appropriate in the circumstances. (AU-C §§ 220.03; 220.24).9 +Although O’Connor Davies established a system of quality controls, as +discussed above, the system failed to detect that the firm’s personnel did not +comply with certain professional standards in conducting the FY 2012 –FY +2014 audits of the Town and the RLDC. +56. As a result of the conduct described above, Consolo engaged in improper +professional conduct under Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) as defined +in Rule 102(e)(1)(iv)(A) and Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice. +57. As a result of the conduct described above, O’Connor Davies engaged in improper +professional conduct under Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) as defined +in Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice. +F. UNDERTAKINGS + +Consolo + +58. Municipal Audit Partner Ban. Consolo undertakes that he shall not serve as the +engagement partner or engagement quality control reviewer in connection with any municipal audit +engagement for a period of five years from the entry of this Order. +59. Consolo undertakes that he shall certify annually on October 15, in writing, +compliance with the undertaking set forth in paragraph 58 above. The certifications shall identify +the undertaking and provide written evidence of compliance in the form of a narrative. The +Commission staff may make reasonable requests for further evidence of compliance, and Consolo +agrees to provide such evidence. The certifications and supporting material shall be submitted to +Sanjay Wadhwa, Senior Associate Regional Director, Division of Enforcement, Securities and +Exchange Commission, Brookfield Place, 200 Vesey Street, New York, NY 10281, with a copy to +the Office of Chief Counsel of the Enforcement Division, by December 31 of each year through +2021. +60. Cooperation. Consolo undertakes that he shall cooperate fully with the Commission +in any and all investigations, litigations, administrative or other proceedings relating to or arising +from the matters described in this Order. In connection with such investigations, litigation, +administrative or other proceedings, Consolo agrees to the following: (i) to produce, without service +of a notice or subpoena, any and all documents and other materials or information as requested; (ii) +to appear and testify without service of a notice or subpoena in such investigations, interviews, +depositions, hearings and trials, at such times and places as reasonably requested; and (iii) to +respond promptly to all inquiries. + + +9 AU-C § 220 became effective for audits of fiscal years ending on or after December 15, 2012. +14 + + O’Connor Davies +61. O’Connor Davies Review. Within 90 days after the entry of this Order, O’Connor +Davies shall perform and complete a review and evaluation (“O’Connor Davies Review”) of the +sufficiency and adequacy of O’Connor Davies’ quality controls regarding the following +(hereinafter referred to as “O’Connor Davies’ Policies”): +a. the exercise of due professional care and professional skepticism; + +b. assessing the risk of fraud, including appropriately responding to identified +fraud risks; + +c. evaluation of evidence obtained concerning matters that are the subject of +written representations from management in order to consider the reliability of +the representations made and whether reliance on management’s +representations is appropriate and justified; + +d. obtaining sufficient appropriate audit evidence; + +e. effective supervision by engagement partners and managers, including review +of work performed by the engagement team; + +f. audit documentation, including risk assessment procedures and responses, +significant findings and resulting actions, work paper sign-off, archiving, and +dating; + +g. obtaining reasonable assurance that i) the engagement partner and other +individuals assisting the engagement partner in supervising the engagement +possess the competencies that are necessary and appropriate in the individual +circumstances, and ii) work is assigned to personnel having the degree of +technical training and proficiency required in the circumstances; and + +h. the effect of laws and regulations in an audit of financial statements. +The O’Connor Davies Review shall assess the foregoing areas to determine whether O’Connor +Davies’ Policies are adequate and sufficient to provide reasonable assurance of compliance with all +relevant professional standards. + +62. O’Connor Davies Report. Within 60 days of completing the O’Connor Davies +Review, O’Connor Davies shall deliver to the Commission staff a detailed written report +(“O’Connor Davies Report”) summarizing its review and changes to O’Connor Davies’ Policies, if +any, to provide reasonable assurance of compliance with all relevant professional standards. The +O’Connor Davies Report shall identify the undertaking, provide written evidence of compliance in +the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +15 + +Commission staff may make reasonable requests for further evidence of compliance, and +O’Connor Davies agrees to provide such evidence. +63. Independent Consultant’s Review. O’Connor Davies has undertaken to retain, +within 150 days after entry of this Order, an independent consultant (“Independent Consultant”), +not unacceptable to the Commission staff. O’Connor Davies shall provide to the Commission staff +a copy of the engagement letter detailing the scope of the Independent Consultant’s +responsibilities. The Independent Consultant’s compensation and expenses shall be borne +exclusively by O’Connor Davies. O’Connor Davies shall deliver to the Independent Consultant +the O’Connor Davies Report at the same time as O’Connor Davies provides such report to the +Commission staff as specified in paragraph 62 above. O’Connor Davies shall require that the +Independent Consultant perform a review (the “IC Review”) of O’Connor Davies’ Policies to +determine whether O’Connor Davies’ Policies are adequate and sufficient to provide reasonable +assurance of compliance with all relevant professional standards. O’Connor Davies shall +cooperate fully with the Independent Consultant and shall provide reasonable access to firm +personnel, information, and records as the Independent Consultant may reasonably request for the +IC Review, subject to O’Connor Davies’ right to withhold from disclosure any information or +records protected by any applicable protection or privilege such as the attorney-client privilege or +the attorney work product doctrine. +64. Independent Consultant’s Report. After the IC Review is completed, but no later +than ninety days after receiving the O’Connor Davies Report, the Independent Consultant shall +issue a detailed written report (the “IC Report”) to O’Connor Davies: (a) summarizing the IC +Review; and (b) making recommendations, where appropriate, reasonably designed to ensure that +O’Connor Davies’ Policies are adequate and sufficient t o provide reasonable assurance of +compliance with all relevant professional standards. O’Connor Davies shall require the +Independent Consultant to provide a copy of the IC Report to the Commission staff when the IC +Report is issued. +65. O’Connor Davies shall adopt, as soon as practicable, all recommendations of the +Independent Consultant in the IC Report. +66. Certification by O’Connor Davies’ Managing Partner. Within sixty days of +issuance of the IC Report, but no sooner than thirty days after a copy of the IC Report is provided +to the Commission staff, O’Connor Davies’ managing partner must certify to the Commission staff +in writing that (i) O’Connor Davies has adopted and has implemented or will implement all +recommendations of the Independent Consultant, if any; and (ii) the Independent Consultant agrees +with O’Connor Davies’ adoption and implementation of the recommendations. To the extent that +O’Connor Davies has not implemented all recommendations of the Independent Consultant within +sixty days of issuance of the IC Report, O’Connor Davies’ managing partner must certify to the +Commission staff in writing, no later than thirty days after their implementation, that (i) O’Connor +Davies has adopted and has implemented all recommendations of the Independent Consultant; and +(ii) the Independent Consultant agrees that the recommendations have been adequately adopted +and implemented by O’Connor Davies. The certifications by O’Connor Davies’ managing partner +shall identify the undertakings, provide written evidence of compliance in the form of a narrative, +16 + +and be supported by exhibits sufficient to demonstrate compliance. The Commission staff may +make reasonable requests for further evidence of compliance, and O’Connor Davies agrees to +provide such evidence. +67. To ensure the independence of the Independent Consultant, O’Connor Davies: (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. +68. O’Connor Davies 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 O’Connor Davies, or any +of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as +such. The agreement shall also provide that the Independent Consultant will require that any firm +with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Division of Enforcement, enter into any employment, consultant, attorney- +client, auditing or other professional relationship with O’Connor Davies, 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. +69. O’Connor Davies shall not be in, and shall not have an attorney-client relationship +with the Independent Consultant and shall not seek to invoke the attorney-client privilege or any +other doctrine or privilege to prevent the Independent Consultant from transmitting any information, +reports, or documents to Commission staff. +70. Training. By September 30, 2017, O’Connor Davies shall require each audit +professional then employed and that has been employed by O’Connor Davies for at least one year +as of March 31, 2017 to complete successfully a minimum of 32 hours of audit-related training. At +least 16 such hours shall be devoted, collectively, to the topics of (a) the importance of exercising +due care and professional skepticism in evaluating audit evidence and (b) fraud prevention and +detection training. In addition, a t least 4 such hours shall be devoted to ethics and independence +training. + +71. Notice of Order. Within five (5) days of the entry of this Order, O’Connor Davies +shall post prominently on the “Government Entity Audits and Compliance” and “Government and +Public Sector Government Contracting” sections of its website a summary of this Order in a form +and location acceptable to the Commission’s staff, with hyperlinks to the entire Order. O’Connor +Davies shall maintain these postings and hyperlinks on its website until the earlier of twelve (12) +months from entry of this Order or the date of certification by O’Connor Davies’ managing +partner, pursuant to paragraph 66, that O’Connor Davies has adopted and has implemented all +recommendations of the Independent Consultant. +17 + +72. By October 31, 2017, O’Connor Davies’ managing partner shall certify, in writing, +compliance with the undertakings set forth in paragraphs 67 – 71. 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 O’Connor Davies agrees to provide +such evidence. +73. For a period of five years from the date of this Order, O’Connor Davies shall not +assign Consolo to serve as the engagement partner or engagement quality control reviewer on any +municipal audit and shall ensure that any work performed by Consolo regarding a municipal audit is +overseen by an engagement partner or engagement quality control reviewer. +74. All reports and certifications mentioned in these undertakings shall be submitted to +Sanjay Wadhwa, Senior Associate Regional Director, Division of Enforcement, Securities and +Exchange Commission, Brookfield Place, 200 Vesey Street, New York, NY 10281, with a copy to +the Office of Chief Counsel of the Enforcement Division. +75. For good cause shown, the Commission staff may extend any of the procedural +dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar days, +except that if the last day falls on a weekend or federal holiday, the next business day shall be +considered to be the last day. +76. Cooperation. O’Connor Davies undertakes that it shall cooperate fully with the +Commission in any and all investigations, litigations, administrative or other proceedings relating to +or arising from the matters described in this Order. In connection with such cooperation, O’Connor +Davies shall: (i) produce, without service of a notice or subpoena, any and all documents and other +materials information as requested; (ii) use its best efforts to cause its present and former employees +to appear and testify without service of a notice or subpoena in such investigations, depositions, +hearings or trials as may be requested; (iii) use its best efforts to cause its present and former +employees to be interviewed at such times and places as reasonably requested; and (iv) respond +promptly to all inquiries. +77. In determining whether to accept the Offers, the Commission has considered +Respondents’ undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + + + + +18 + + Consolo + + A. Consolo shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder; and +Section 17(a) of the Securities Act. + +B. Consolo is denied the privilege of appearing or practicing before the Commission +as an accountant. +C. Consolo shall comply with the undertaking enumerated in paragraph 58 above. +D. Consolo shall, within 14 days of the entry of this Order, pay a civil mone y penalty +of $75,000 to the Securities and Exchange Commission for transfer to the general fund of the +United States Treasury in accordance with Exchange Act Section 21F(g)(3). If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made +in one of the following ways: +(1) 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 Domenick Consolo as a Respondent in these proceedings, and +the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to Sanjay Wadhwa, Senior Associate Regional +Director, Securities and Exchange Commission, Brookfield Place, 200 +Vesey Street, Suite 400, New York, New York 10281. + + O’Connor Davies + E. O’Connor Davies 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. +19 + +F. O’Connor Davies is censured. +G. O’Connor Davies shall comply with the undertakings enumerated in paragraphs +61 – 75 above. +H. O’Connor Davies shall pay disgorgement of $355,600, plus prejudgment interest +thereon of $24,265. +I. O’Connor Davies shall pay a civil money penalty of $100,000. +J. O’Connor Davies shall make the payments required by Sections IV.H and IV.I to +the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury in accordance with Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717 and SEC Rule of Practice 600. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying O’Connor +Davies as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate +Regional Director, Securities and Exchange Commission, Brookfield Place, 200 Vesey Street, +Suite 400, New York, New York 10281. + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3822.txt b/raw/aaer/2016/AAER-3822.txt new file mode 100644 index 0000000000000000000000000000000000000000..7212b632d7018458f0e973765439274f1ede9f37 --- /dev/null +++ b/raw/aaer/2016/AAER-3822.txt @@ -0,0 +1,404 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79256 / November 7, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3822 / November 7, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17670 + + +In the Matter of + +POWERSECURE +INTERNATIONAL, 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 PowerSecure International, Inc. (“PowerSecure” +or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This is a case of financial reporting, books and records, and internal control +violations by PowerSecure related to its segment reporting. From 2012 to 2014, PowerSecure failed +to accurately identify and report its segments as required by Generally Accepted Accounting +Principles (“GAAP”). Segment disclosures help users of financial statements better understand the +public entity's performance, better assess its prospects for future net cash flows, and make more +informed judgments about the public entity as a whole. + +2. In Accounting Standards Codification Topic 280, Segment Reporting (“ASC 280”), +the method for determining an entity’s operating segments is referred to as the management +approach. The management approach is based on the way management organizes its business +components to make operating decisions and assess performance. Consequently, the segments are +evident from the structure of the company’s internal organization. By not properly applying the +management approach articulated in ASC 280, PowerSecure failed to disclose segment level +financial results at a sufficiently disaggregated level of the organization. + +3. After discussions with the Commission staff, in its Form 10-K for the year ended +December 31, 2015, PowerSecure outlined errors in prior period disclosures and revised its segment +reporting disclosure to reflect information for the years ended 2012 to 2014 on a basis consistent +with its 2015 reportable segments. In its 2015 filing, PowerSecure also concluded that its disclosure +controls and procedures for that three year period were not effective due to a material weakness in +its internal control over financial reporting that it identified in 2015 related to its misapplication of +GAAP related to segment reporting. + +Respondent + +4. PowerSecure is a Delaware corporation headquartered in Wake Forest, North +Carolina that provides energy management and conservation solutions to electric utilities and their +commercial, institutional, and industrial customers. During the relevant period, PowerSecure’s +securities were registered with the Commission pursuant to Section 12(b) of the Exchange Act and +were listed on public exchanges. PowerSecure’s common stock traded on NASDAQ until August +2013 when PowerSecure moved its listing to the New York Stock Exchange (Ticker: POWR). On +May 9, 2016, Atlanta-based energy company Southern Company acquired PowerSecure and it +became Southern Company’s wholly owned subsidiary. PowerSecure’s common stock ceased to +trade on the NYSE immediately before the merger completion. Southern Company trades on the +NYSE under the ticker symbol SO. + +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. + + + + +Factual Findings and Conclusions +PowerSecure Disclosed its Segment Reporting was Incorrect from 2012-2014 + +5. On March 14, 2016, PowerSecure filed its Form 10-K for the year ended December +31, 2015. In that filing, PowerSecure outlined prior period errors arising from a misapplication of +GAAP and revised its segment reporting disclosure to reflect information for the years ended 2012 +to 2014 on a basis consistent with its 2015 reportable segments. For that three year period, the +segment disclosure in PowerSecure’s Forms 10-K and Forms 10-Q had not been in compliance +with ASC 280. + +ASC 280 Provides Authoritative Guidance on Segment Reporting Requirements + +6. ASC 280 is the authoritative standard under U.S. GAAP for segment reporting. As +stated in ASC 280-10-10-1, the objective of providing disclosures about segments is to provide +information about the different types of business activities in which a public entity engages and the +different economic environments in which it operates in order to help users of financial statements +better understand the public entity's performance, better assess its prospects for future net cash +flows, and make more informed judgments about the public entity as a whole. + +7. Whether a particular component of a public entity is an operating segment turns on +the manner in which management makes operating decisions and assesses performance. ASC 280- +10-05-3 refers to this as the “management approach” and ASC 280-10-50-1 defines an operating +segment as a component of a public entity that has all of the following characteristics: + +a. It engages in business activities from which it may earn revenues and incur +expenses. + +b. Its operating results are regularly reviewed by the Chief Operating Decision Maker +(“CODM”) to make decisions about resources to be allocated to the segment and +assess its performance. + +c. Its discrete financial information is available. + +8. As explained in ASC 280, the term CODM refers not to a specific title within the +organization but rather to the function of allocating resources to and assessing performance of the +segments of a public entity. Further, an operating segment generally has a segment manager, who is +directly accountable to and maintains regular contact with the CODM to discuss operating activities, +financial results, forecasts, or plans for the segment. In instances where the CODM uses more than +one set of operating segment information, other factors can be used to determine a public entity’s +operating segments, including the nature of the business activities of each component, the existence +of management responsible for them, and information provided to the board of directors. + + + +9. Per paragraphs 50-10 to 50-12 of ASC 280-10, a public entity must disclose +information about each reportable segment. A reportable segment consists of each separate +operating segment that it identifies or that results from aggregating two or more of those segments +in accordance with specified aggregation criteria. However, an entity need not aggregate similar +segments and it may present segments that fall below the quantitative thresholds. + +PowerSecure’s Historical Segment Reporting + +10. PowerSecure disclosed two reportable segments from 2007 to 2012: (1) Utility & +Energy Technologies and (2) Energy Services.2 The businesses in the Energy Services segment +were divested in 2011, but PowerSecure continued to report it as a stand-alone segment for an +additional year. From Q1 2013 to Q1 2014, PowerSecure disclosed only one reportable business +segment: the Utility & Energy Technologies segment. Starting in Q2 2014, PowerSecure +disclosed three reportable segments that had previously been reported on a combined basis within +the Utility & Energy Technologies segment. These three new segments had been described in +PowerSecure’s Form 10-K disclosures, dating back to 2007, as primary product/service lines +within the Utility & Energy Technologies segment and were: (1) Distributed Generation, (2) +Utility Infrastructure, and (3) Energy Efficiency. In 2015, PowerSecure began reporting a fourth +segment: Solar Energy. + +PowerSecure Should Have Reported More than One Segment from 2012 to First Quarter 2014 + +11. From 2012 to the first quarter of 2014, PowerSecure incorrectly presented its +continuing operations as one reportable segment3 when it should have identified and reported +multiple segments. During this period, PowerSecure erroneously determined it only had one +operating segment, because it incorrectly concluded: (1) that there was no discrete financial +information available below the Utility & Energy Technologies level and (2) that the CODM did +not regularly review operating results below this level to assess performance and make resource +allocations. + +12. PowerSecure misapplied ASC 280 in claiming the discrete financial information +criterion was not met since certain operating expenses were not allocated amongst its business units +with precision below gross profit. However, to meet this criterion, a business component need only +have a measure of profit or loss available and gross profit is sufficient for this purpose. Additionally, +ASC 280 contains no provisions regarding the level of precision at which costs are allocated within a +company. + + +2 The Utility and Energy Technologies segment was referred to as PowerSecure in 2007 and Energy & Smart Grid +Solutions from 2008 to 2010. The Energy Services segment was referred to as Natural Gas Measurement Services +(“Southern Flow”) in 2007 and as Oil an d Gas Services in 2012. + +3 All of PowerSecure’s continuing operations from 2012 forward were in its Utility and Energy Technologies +business. The Oil and Gas Services segment only represented residual activity in connection with PowerSecure’s +2011 disposa l of its WaterSecure operations. + + +13. PowerSecure also misapplied ASC 280 by concluding that its CODM – who was +determined to be the Chief Executive Officer (“CEO”) - did not regularly review operating results +below the consolidated level to make decisions about resource allocations and to assess +performance. This was inconsistent with the way in which the CEO regularly received, reviewed, +and reported on the results of the business and how the company was structured. On a monthly +basis, the CEO received financial results that reflected a measure of profitability on a more +disaggregated level than the consolidated entity. Further, on a quarterly basis, the CEO met with +each business unit leader4 to discuss operational issues, sales forecasts, and financial performance. +In 2012 and 2013, some of the business unit leaders had business unit level budgets and forecasts +and received incentive compensation based, at least in part, upon the results of their business unit. +Moreover, each quarter, the board of directors received discrete financial information below the +consolidated level, which was presented by the Chief Financial Officer (“CFO”), along with +commentary provided by the CEO. + +Division of Corporation Finance Comments on PowerSecure’s Segment Reporting during 2013 +and PowerSecure Incurs an Unexpected First Quarter 2014 Loss + +14. During the 2012 Form 10-K review process, the Commission’s Division of +Corporation Finance (“Corporation Finance”) questioned PowerSecure’s segment reporting +disclosures. In response to Corporation Finance’s comments, PowerSecure maintained it had been +correct in reporting only one segment in 2012. PowerSecure focused its responses as to whether its +three primary product/service lines (Distributed Generation, Utility Infrastructure, and Energy +Efficiency) should be considered operating segments, without addressing whether any other +business components met the definition of an operating segment under GAAP. + +15. On May 7, 2014, PowerSecure unexpectedly reported a first quarter 2014 loss of +$(4.3) million or $(0.19) per share loss compared to analyst estimates of earnings of $0.02 per +share. The Company disclosed its gross profit margin declined from 30.6% in the first quarter +2013 to 20.9% in first quarter 2014 primarily due to “inefficiencies in the Utility Services group,” +which was a business unit within the Utility Infrastructure product/service line. + +16. Because PowerSecure only reported one segment in 2012 through the first quarter +of 2014, investors did not have the benefit of reviewing profitability metrics for its various +business units and service lines. That information was available internally to PowerSecure’s +management and to its board of directors. + + + + + + +4 While PowerSecure did not have a leader, other than the CEO, for each of what it characterized as its three primary +product/service lines in 2012-2014, the Company did have leaders of several business units within those +product/service lines . + + +PowerSecure Changes its Segment Reporting in the Second Quarter of 2014 but Fails to +Appropriately Identify its Operating and Reportable Segments + +17. In its second quarter 2014 Form 10-Q, issued on August 6, 2014, PowerSecure +changed its segment reporting disclosure to include three segments: (1) Distributed Generation, (2) +Utility Infrastructure, and (3) Energy Efficiency. In revising its reporting segments, PowerSecure +indicated in its filing that its CODM had begun reviewing results and allocating resources among +these three strategic business groupings and had started budgeting using these business segments. +There did not, however, appear to be any substantive changes in the reports regularly received and +reviewed by PowerSecure’s CEO. Similarily, there was no substantive change to the information +provided to business unit leaders or PowerSecure’s board of directors. + +18. Even though PowerSecure changed its segment reporting disclosure in the second +quarter of 2014 to disclose three operating segments, its disclosure still was not in accordance with +GAAP. PowerSecure failed to contemporaneously identify which of its business units met the ASC +280 definition of an operating segment, which should have resulted in the identification of seven - +rather than three - operating segments in 2014: Distributed Generation, Utility Services, +PowerServices/Utility Engineering, Encari, Energy Efficiency Services, LED Lighting, and Solar. + +19. ASC 280 permits operating segments to be aggregated into a single reportable +segment if aggregation is consistent with the objective and basic principles of the standard, if the +segments have similar economic characteristics, and if the segments are similar in terms of the +nature of their products/services, production process, customer type, distribution methods, and +regulatory environment. Even though PowerSecure did not contemporaneously conclude upon its +ability to aggregate segments in 2014, in its revised segment presentation in the 2015 Form 10-K, it +concluded that certain of its operating segments met the criteria for aggregation under ASC 280, +resulting in four reportable segments: Distributed Generation, Utility Infrastructure, Energy +Efficiency, and Solar. + +20. As a result of PowerSecure’s misapplication of ASC 280 in the second quarter of +2014, its segment disclosure was not in accordance with GAAP. + +Failure to Properly Identify Reporting Units for Purposes of Goodwill Impairment Testing + +21. The failure to properly identify its operating segments was a contributing factor that +led PowerSecure to erroneously identify fewer reporting units for purposes of testing for goodwill +impairment than required in ASC Topic 350, Intangibles – Goodwill and Other (“ASC 350”). Per +ASC 350-20-35-34, a component of an operating segment is a reporting unit if the component +constitutes a business for which discrete financial information is available, and segment +management regularly reviews the operating results of that component. An operating segment shall +be deemed to be a reporting unit if all of its components are similar, if none of its components is a +reporting unit, or if it comprises only a single component. + + + +22. Under GAAP, at a minimum, each of PowerSecure’s operating segments should +have been considered a reporting unit. Contrary to GAAP, PowerSecure failed to identify the +proper reporting units in 2012 through 2014. As a result, goodwill impairment was tested at a +higher level in the organization than required by ASC 350, which could have resulted in +PowerSecure’s failure to recognize a goodwill impairment loss. + +PowerSecure’s Insufficient Internal Accounting Controls + +23. In each of PowerSecure’s Forms 10-K for the years ended December 31, 2012 +through 2014, PowerSecure disclosed management’s conclusion that it had both effective +disclosure controls and procedures and effective internal control over financial reporting. As +subsequently disclosed in PowerSecure’s Form 10-K for the year ended December 31, 2015, +management reassessed its disclosure controls and procedures for that three year period and +concluded they were not effective due to a material weakness in its internal control over financial +reporting that it identified in 2015 related to its misapplication of GAAP related to segment +reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control +over financial reporting, such that there is a reasonable possibility that a material misstatement of +the company’s annual or interim financial statements will not be prevented or detected on a timely +basis. PowerSecure concluded that it remediated its material weakness in 2015. + +24. During 2012, 2013, and 2014, PowerSecure failed to properly interpret and apply +GAAP requirements in ASC 280 and paragraphs 35-33 through 35-46 of ASC 350-20. +PowerSecure lacked sufficient internal accounting controls to adequately monitor its compliance +with the segment reporting requirements under GAAP. PowerSecure did not have a segment +reporting policy, and there was limited documentation of its application of the segment reporting +requirements. In Q2 2014, when PowerSecure revised its segment disclosure to include the results +of three segments, a memo was drafted to document the change in segment reporting. However, +the analysis and the memo failed to adequately assess the segment reporting requirements and also +lacked clarity with regard to specific conclusions reached in the application of ASC 280. +Additionally, PowerSecure failed to properly apply the provisions of ASC 350 that dealt with the +identification of reporting units for purposes of goodwill impairment testing. In PowerSecure’s +documentation of its annual goodwill impairment testing, it did not sufficiently address and +document its identification of reporting units. + +Violations + +25. As a result of the conduct described above, PowerSecure 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 +mandate that periodic reports contain such further material information as may be necessary to +make the required statements not misleading. + + + + + +26. As a result of the conduct described above, PowerSecure violated +Section13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +27. As a result of the conduct described above, PowerSecure violated Section +13(b)(2)(B) of the Exchange Act which requires all reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent PowerSecure’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent PowerSecure 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, and 12b-20 thereunder. + + B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $470,000 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 +PowerSecure 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 Stephanie Avakian, Deputy +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St ., NE, +Washington, DC 20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3823.txt b/raw/aaer/2016/AAER-3823.txt new file mode 100644 index 0000000000000000000000000000000000000000..c105e0c6b219a8a0cef9509bd3c7eaf5dff04f95 --- /dev/null +++ b/raw/aaer/2016/AAER-3823.txt @@ -0,0 +1,398 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10256 / November 15, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3823 / November 15, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17678 + + + +In the Matter of + +Christopher Egan, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT, +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 Christopher Egan (“Egan” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Egan has submitted an Offer of +Settlement (“Offer”), which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted and except as provided herein in Section V., Egan consents 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 Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This proceeding arises out of a financial fraud at Autonomy Corporation plc +(“Autonomy”), a Cambridge, England-based software company. Approximately 40 percent of +Autonomy’s stock was owned by U.S. investors. Over 10 consecutive quarters from the beginning +of 2009, Autonomy issued materially false and misleading financial reports that overstated +revenues, among other misstatements. In October 2011, Autonomy was acquired by Hewlett- +Packard Company (“HP”). Autonomy executives repeatedly directed HP’s due diligence team to +rely on these false filings in connection with the acquisition. + +2. Autonomy’s fraud was orchestrated by Autonomy’s UK-based senior-most +executives, who used a series of accounting schemes to meet internal sales targets and analyst +revenue expectations. The primary devices used in the scheme included the acceleration of +revenue through so-called value-added resellers, backdated purchase orders, and round trip +transactions. As detailed below, actions taken by Christopher Egan, the Chief Executive Officer of +Autonomy’s U.S.-based subsidiary, contributed to the success of the scheme. + +3. In October 2011, HP acquired Autonomy for $11.1 billion in cash. Just one year +later, in November 2012, HP announced that it was recording an $8.8 billion impairment charge, +claiming that a majority of the charge was due to accounting improprieties, misrepresentation and +disclosure failures at Autonomy. HP’s stock declined by 12 percent on the day of the +announcement, and the company suffered a market capitalization loss of $78 billion. + +4. This proceeding concerns the actions of Egan, who was employed at Autonomy +from 2001 to November 2012. At the explicit direction of Autonomy’s senior-most finance +executive, Egan placed sales to particular resellers that allowed Autonomy to prematurely +recognize millions of dollars of revenue in an effort to meet market expectations. Egan also aided +in the execution of the scheme when, at the request of Autonomy’s senior-most finance executive, +he backdated paperwork for at least four transactions with various resellers that allowed Autonomy +to falsely recognize revenue after the quarter had already ended. Although Egan is not an +accountant, and had no responsibility for preparing Autonomy’s financial statements, by virtue of +his failure to exercise reasonable care, Egan violated Section 17(a)(2) and 17(a)(3) of the Securities +Act of 1933 (“Securities 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 +Respondent + +5. Egan, age 48, is a resident of San Francisco, California. Egan joined Autonomy in +2001 and served as Head of Sales and CEO of Autonomy’s U.S. subsidiary, Autonomy, Inc. Sales +through Autonomy Inc., which Egan supervised, comprised over 70 percent of Autonomy’s total +revenues. Egan left the company in November 2012. + +Other Relevant Entities + +6. Hewlett-Packard Company was a technology company headquartered in Palo +Alto, California. From at least 2009 to October 2011, HP manufactured and sold computer +hardware, including laptops, servers, and printers, as well as software and services supporting these +products. HP acquired Autonomy in an all-cash transaction in October 2011 for $11.1 billion. In +November 2015, HP split into two companies, HP Inc. and Hewlett Packard Enterprise. Both +companies trade on the New York Stock Exchange under the tickers “HPQ” and “HPE,” +respectively. + +7. HP Autonomy, formerly Autonomy Corporation plc, is a software company dually +headquartered in Cambridge, England and San Francisco, California. The company formerly +traded on the London Stock Exchange until being acquired by HP in October 2011. From at least +2009 to October 2011, Autonomy’s financial statements were prepared in accordance with +International Financial Reporting Standards and were audited by Deloitte LLP in England. +Following the split of HP, Autonomy’s legacy products and operations were largely transferred to +Hewlett Packard Enterprise. + +Facts + +A. Background + +8. From at least 2009 to October 2011, Autonomy provided enterprise software +designed to search and manage “unstructured data,” or data such as emails, video, and voice +messages that exists outside of databases. + +9. Autonomy promoted itself to investors and potential suitors through its reported +filings and quarterly earnings releases as a high-growth, high-margin company with reported +revenues that reached nearly $1 billion annually in 2010. Autonomy’s executive team, including +the UK-based senior executives referenced above, was intensely focused on meeting quarterly +analyst consensus numbers, and Autonomy’s quarterly earnings releases continually hyped the +company’s record revenues and profits. Over the 10-quarter period from 2009 until HP’s +acquisition of Autonomy in 2011, Autonomy’s reported revenues were within four percent of +analyst expectations in each quarter. + +10. Autonomy’s financial statements were prepared according to International +Financial Reporting Standards (“IFRS”). Under International Accounting Standard (“IAS”) 18, +Autonomy was required to meet the following five criteria in order to recognize revenue from the + 4 +sale of goods: (1) Autonomy transferred to the buyer the significant risks and rewards and +ownership of the goods; (2) Autonomy retained neither continuing managerial involvement to the +degree normally associated with ownership nor effective control over the goods sold; (3) +Autonomy could measure reliably the amount of revenue; (4) it was probable that the economic +benefits associated with the transaction would flow to Autonomy; and (5) Autonomy could +measure reliably the costs to be incurred in respect of the transaction. + +B. Autonomy’s Scheme to Inflate Revenues Through Resellers + +11. From the first quarter of 2009 through the second quarter of 2011, Autonomy’s +UK-based senior-most executives orchestrated a scheme to inflate Autonomy’s revenues through +more than 30 transactions totaling nearly $200 million with five U.S.-based companies that +purported to act as resellers of Autonomy software to end users. + +12. Autonomy sold its software through so-called value-added resellers, or companies +who acted as intermediaries between Autonomy and third parties who were the ultimate end users +of the software. These resellers often provided additional services and support to the end users of +the product in addition to marketing and selling Autonomy’s software. + +13. Generally, the sales to the resellers at issue here occurred when Autonomy was in +the process of negotiating a sale to an end user but had failed to close the sale by quarter-end. +Egan, at the direction of Autonomy’s senior-most finance executive, typically approached the +resellers on or near the last day of the quarter and represented that the end user sale was nearly +done and would close imminently. Despite the fact that the resellers had no relationship or contact +with, or any purchase order from, the end users, Egan negotiated with the resellers to buy software +from Autonomy through the payment of commissions amounting to 10 percent of the reseller’s +purchase order to Autonomy. Ostensibly, the resellers could then in turn sell to the already- +identified end user, but in reality, Autonomy maintained managerial control of the deals and +handled negotiations with the end user without the involvement of the resellers, even after the sales +to the resellers. Based on these purported “sales” to the resellers, Autonomy improperly recorded +revenue in its books and records. + +14. In fact, these transactions required the continued efforts of Autonomy to complete +the sale to the end user while the reseller made no selling efforts. Indeed, the resellers’ sole +purpose was to allow Autonomy to create the fiction of a completed sale so that Autonomy could +accelerate revenue recognition in violation of IFRS accounting standards. Egan, at Autonomy’s +senior-most finance executive’s direction, often instructed the resellers to not get involved in the +selling effort, as it would increase the risk of the end user rejecting the deal entirely. + +15. In addition, the fact that the resellers were not truly at risk of incurring any loss for +the product they purchased from Autonomy was also evident. For example, the resellers generally +did not return payment to Autonomy for the product purchased until after Autonomy had +completed negotiations with the end user, or, as discussed below, until Autonomy management put +some other mechanism into place if the end user sale collapsed. The resellers usually did not +download the software they were purportedly purchasing from Autonomy, and in some cases did + 5 +not record the transactions on their books. And the resellers were always dependent on Autonomy +for information regarding the status of a particular deal they were purporting to sell on to the end +users. + +16. As a result of these “sales,” Autonomy’s revenues were materially inflated, in some +periods by as much as 15 percent. These “sales” were also critical to Autonomy, as they provided +the last dollars of revenue necessary to enable it to report financial results at or near analyst +expectations. In many cases, Autonomy accelerated revenue recognition as it was ultimately able +to close deals directly with the end user after the purported sale to the reseller; however, in some +cases, the revenue was completely fabricated as Autonomy was not successful in executing the end +user deal. + +17. These transactions violated several revenue recognition criteria under IFRS. First, +Autonomy never truly passed the risks and rewards of ownership to the resellers, nor was it +probable that the economic benefits would flow to Autonomy, as payment was contingent upon +sell-through or via a mechanism to get funds to the reseller to pay Autonomy. Further, +Autonomy’s ongoing efforts to sell to end users even after the software had been sold to resellers +constituted continuing managerial involvement. + +18. Autonomy’s senior-most finance executive deployed Egan as the intermediary with +the resellers willing to take these deals. These relationships with resellers allowed Autonomy to +carry out its scheme to accelerate revenue. Autonomy’s senior-most finance executive referred to +the transactions as “acceleration deals.” He instructed Egan on precisely which deals to place +through resellers and chose the particular reseller based on the size of the underlying deal +Autonomy was negotiating with the end user, the revenue needed in the quarter, and the reseller’s +then-outstanding balance with Autonomy. + +19. Although Egan was acting at the direction of Autonomy’s highest-ranking +accountant, Egan nevertheless took actions that contributed to the success of Autonomy’s revenue +recognition scheme. In particular, Egan knew, or should have known, that the purpose of the +reseller deals was to allow Autonomy to accelerate revenue. And as the primary point of contact +with the five U.S.-based resellers in question, Egan knew, or should have known, that Autonomy +was using the resellers as an artificial means to accelerate revenue, as he directly communicated to +the resellers to not interfere with Autonomy’s selling efforts with the end users. + +C. Autonomy Backdated At Least Five Reseller Transactions to Hit Revenues + +20. In addition to improperly recognizing revenue on purported sales through resellers, +Autonomy executives also backdated purchase orders and agreements from the resellers to allow +Autonomy to prematurely recognize revenue in an effort to hit quarterly revenue targets. + +21. On at least five occasions, spread across four different quarters from 2009 to 2011, +Autonomy’s senior-most finance executive obtained, or directed Egan to obtain, backdated +purchase orders from the resellers after quarter-end. Some of the transactions constituted the last +dollars of revenue Autonomy needed to hit its expected target. + 6 + +22. Acting at the executive’s direction, Egan obtained four of the five backdated +agreements, thereby allowing Autonomy to recognize revenue it was not entitled to record. On +those occasions, Egan contacted representatives at each of the resellers after quarter-end, asked if +the reseller would take the deal, and caused certain documents that reflected an agreement date +prior to quarter-end to be issued to the reseller and requested that the reseller execute such +documents. In some cases, as instructed by his superior, Egan directed a reseller to backdate a +purchase order so as to falsely reflect an agreement date prior to quarter-end. + +23. The backdating of purchase orders violated multiple revenue recognition criteria +under IFRS. First, as of quarter-end, Autonomy had not transferred to the buyer the significant risk +and rewards of ownership to the software despite what was reflected under the terms of the +backdated purchase order. Second, as of quarter-end, it was not probable that any economic +benefits associated with the transaction would flow to Autonomy, despite what was reflected in the +backdated purchase order. + +24. Egan knew, or should have known, that the actual agreement date was not the date +set forth in the executed purchase orders and agreements. Further, Egan knew, or should have +known, that Autonomy was using the backdated agreements with the resellers to prematurely +recognize revenue. + +D. Autonomy Engaged In Round-Trip Transactions to Enable the Resellers to +Pay Autonomy + +25. Although Autonomy was sometimes able to finalize sales directly to end users +(after it had already recognized revenue via a “sale” to a reseller), it was unsuccessful in other +deals, leading to the resellers’ increasing debt to Autonomy. Because the purchase orders between +Autonomy and the resellers did not truly reflect the understood arrangement between Autonomy +and the resellers, Autonomy needed to get funds to the resellers, for two reasons. First, such +payments allowed the resellers to pay Autonomy. Second, the payments by the resellers to +Autonomy created financial records Autonomy could use in subsequent transactions in later +periods to demonstrate to Autonomy’s auditors that the resellers had the ability to pay for the +software they had supposedly purchased. + +26. The primary mechanism Autonomy used to send cash to the resellers was to enter +into round-trip transactions or reciprocal deals with the resellers, whereby Autonomy purchased +unwanted, unused, or overpriced products from the resellers. In some cases, these purchases were +explicitly linked in communications by Autonomy’s UK-based senior-most executives to the +reseller paying down debt on a previously-recognized transaction, and in all cases resulted in near- +instantaneous payment by the reseller back to Autonomy to pay down outstanding debt. + +27. These mechanisms were devised by Autonomy’s senior-most finance executive and +known within Autonomy as “fixes.” During the relevant period, Autonomy engaged in at least $45 +million of fixes to create the façade that the resellers had a standalone ability to pay, and had +actually paid, Autonomy. + 7 + +28. Acting at the executive’s direction, Egan was involved in some of the round-trip +transactions by serving as the conduit between Autonomy and the resellers. Egan knew, or should +have known, that the transactions were not legitimate purchases by Autonomy, as he knew +Autonomy did not price the cost of such purchases with other vendors of the products in question, +and did not negotiate with the reseller on the price or any other term of the agreement, as was +otherwise expected. + +E. Autonomy’s Sale to HP and Subsequent Writedown + +29. On August 18, 2011, after the conclusion of a financial due diligence process based +on Autonomy’s published financial statements, HP announced its intention to acquire Autonomy +for $11.1 billion, a 64 percent premium over Autonomy’s stock price at the time. In its Form 8-K +announcing the acquisition, HP emphasized the strong financial results that based on its due +diligence process, HP believed, Autonomy had achieved to date, stating, “Autonomy has a +consistent track record of double-digit revenue growth, with 87 percent gross margins and 43 +percent operating margins in calendar year 2010.” + +30. In connection with the acquisition, which closed on October 3, 2011, the company +automatically liquidated the stock options that Egan received as part of his compensation at +Autonomy. Just over $800,000 of the money Egan received is tied to his role on Autonomy’s +reseller transactions discussed above. + +31. On November 20, 2012, HP announced a non-cash impairment charge of $8.8 +billion, the majority of which it claimed was due to “serious accounting improprieties, +misrepresentation and disclosure failures” due to Autonomy’s accounting practices prior to the +acquisition. + +Violations + +32. Section 17(a)(2) of the Securities Act prohibits, by the use of any means or +instruments of interstate commerce, obtaining money or property in the offer or sale of any security +by means of any untrue statement of material fact or any omission to state a material fact necessary +in order to make the statements made, in light of the circumstances under which they were made, +not misleading. As a result of his failure to exercise reasonable care, as described above, +Respondent violated Section 17(a)(2) of the Securities Act. + +33. Section 17(a)(3) of the Securities Act prohibits any transaction, practice, or course +of business that operates as a fraud or deceit upon the purchaser of a security. As a result of his +failure to exercise reasonable care, as described above, Respondent violated Section 17(a)(3) of the +Securities Act. + + + + + 8 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Egan’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act, Respondent Egan shall cease and desist +from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of +the Securities Act. + + B. Respondent shall, within thirty (30) days of the entry of this Order, pay +disgorgement of $800,669 and prejudgment interest of $122,722 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Securities +Exchange Act of 1934 Section 21F(g)(3). If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600. + + Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Christopher Egan 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. + + C. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon his cooperation in a Commission investigation and/or related enforcement action. If at +any time following the entry of the Order, the Division of Enforcement (“Division”) obtains + 9 +information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission or in a related proceeding, the Division may, at its sole +discretion and with prior notice to the Respondent, petition the Commission to reopen this matter +and seek an order directing that the Respondent pay a civil money penalty. Respondent may contest +by way of defense in any resulting administrative proceeding whether he knowingly provided +materially false or misleading information, but may not: (1) contest the findings in the Order; or (2) +assert any defense to liability or remedy, including, but not limited to, any statute of limitations +defense. + +V. + + It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in the Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3824.txt b/raw/aaer/2016/AAER-3824.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf7760862bee7905dcb90a39ce4439572eab7532 --- /dev/null +++ b/raw/aaer/2016/AAER-3824.txt @@ -0,0 +1,1216 @@ + + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79335 / November 17, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3824 / November 17, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17684 + + +In the Matter of + +JP MORGAN CHASE & +CO., + +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 JPMorgan Chase & Co. +(“JPMorgan” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, JPMorgan 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 JPMorgan’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 controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by JPMorgan. +Between 2006 and 2013, the firm provided valuable jobs and internships to the relatives and +friends of certain key executives of its clients, prospective clients, and foreign government +officials in the Asia-Pacific region (“APAC”) as a personal benefit to the requesting officials +in order to obtain or retain investment banking business or other benefits for the firm. Many +of JPMorgan’s clients were state-owned entities (“SOEs”), and therefore the client executives +requesting employment for their relatives and friends were foreign government officials +under the FCPA. The firm provided these jobs and internships with the intent to corruptly +influence the foreign government officials making the requests. + +2. Investment bankers at JPMorgan’s subsidiary in Asia, JPMorgan Securities +(Asia Pacific) Limited (“JPMorgan APAC”), created a client referral hiring program to +leverage the promise of well-paying, career building JPMorgan employment for the relatives +and friends of senior officials with its clients in order to assist JPMorgan APAC in obtaining +or retaining business. A special hiring program (“Client Referral Program”) was created at +JPMorgan APAC for referred candidates that bypassed the firm’s normal hiring process and +was made available exclusively to candidates referred by clients, prospective clients, or +foreign government officials (“Referral Hires”). Non-referral JPMorgan APAC hires were +subjected to a rigorous screening process and competed against other candidates for a limited +number of positions. Referral Hires did not compete against other candidates based on merit +and, in most instances, were less qualified than those employees hired through the firm’s non- +referral hiring programs. Instead, Referral Hires were hired based on direct or potential links +to investment banking revenue that could be generated from the referring client in exchange +for the hire. Referral Hires whose relationships generated sufficient revenue for JPMorgan +APAC were offered longer-term jobs, while others were given shorter terms of employment +unless the referring client offered additional business to the firm. In 2010 and 2011, +JPMorgan APAC employees created spreadsheets to track the revenue to the firm from +clients whose candidates were hired through the Client Referral Program. + +3. Over this seven-year period, JPMorgan hired approximately 200 interns and +full-time employees at the request of its APAC clients, prospective clients, and foreign +government officials. This included nearly 100 candidates referred by foreign government +officials at more than twenty different Chinese SOEs. A number of the referral hires resulted +in business for JPMorgan APAC. The referring SOEs entered into transactions totaling more +than $100,000,000 in revenue for JPMorgan APAC or its affiliates during this period. +JPMorgan also hired referrals from more than 10 different government agencies. JPMorgan +APAC bankers leveraged connections with these government agencies to assist other +JPMorgan APAC clients and the firm itself in navigating complicated regulatory landscapes. + +4. JPMorgan APAC employees understood that hiring relatives and friends of +foreign government officials for the purpose of obtaining or retaining business posed the risk +of violating the FCPA. Nonetheless, JPMorgan APAC investment bankers and supporting +personnel often provided inaccurate or incomplete information as part of the legal and + +3 + +compliance review designed to prevent these violations or withheld key information so that +the Referral Hires would pass compliance review. The legal and compliance review of +Referral Hires became a formality in which JPMorgan APAC investment bankers and +supporting personnel provided inaccurate or incomplete answers to secure approval for hires +without revealing the links to business as a result of certain Referral Hires. Of all the +candidates that passed through JPMorgan APAC’s Client Referral Program, none were +rejected by the legal and compliance review. + +5. JPMorgan failed to devise and maintain a system of internal accounting +controls around its hiring practices sufficient to provide reasonable assurances that its +employees were not bribing foreign officials in contravention of company policy. Likewise, +JPMorgan APAC employees failed to follow the firm’s internal accounting controls, and +JPMorgan failed to implement other appropriate accounting controls to detect or prevent the +Client Referral Program from being used to improperly benefit government officials. +JPMorgan APAC employees took steps to hide the magnitude and purpose of the Client +Referral Program from others within the firm, and devised a way to avoid having certain +Referral Hires in APAC counted within JPMorgan APAC’s internal year-end headcount +calculations. For Referral Hires that originated in APAC but were employed outside of +APAC, JPMorgan APAC employees failed to undertake a compliance review or impose +conflict of interest restrictions despite knowledge of the FCPA and other risks. + +6. JPMorgan also violated the books and records provisions of the FCPA. +JPMorgan APAC personnel created and implemented a system by which inaccurate or +incomplete questionnaires were submitted, reviewed, and approved by compliance in +contravention of the internal policy created to prevent improper hiring of Referral Hires. The +records reflected that they were hired for legitimate business purposes rather than as hires +made to improperly benefit JPMorgan APAC investment banking business. JPMorgan +APAC’s internal records also inaccurately reflected the true number of client Referral Hires +in the APAC region by taking steps to disguise the headcount relating to Referral Hires from +others within the firm. + +Respondent + +7. JPMorgan Chase & Co. is a Delaware corporation with its headquarters in +New York, New York. The company’s common stock is registered under Section 12(b) of +the Exchange Act and listed on the New York Stock Exchange (ticker: JPM). JPMorgan and +its various subsidiaries provide banking and financial services in North America and +worldwide, including in the APAC region. Services provided to APAC region clients by +JPMorgan include investment banking, private banking, asset management, and commercial +banking services. + +Other Relevant Entities and Individuals + +8. JPMorgan Securities (Asia Pacific) Ltd. (“JPMorgan APAC”) is a Hong +Kong registered company and wholly owned and controlled subsidiary of JPMorgan. +JPMorgan APAC operated as JPMorgan’s investment banking office in Hong Kong and +coordinated JPMorgan’s investment banking operations in the Asia-Pacific region. + +4 + +JPMorgan APAC is responsible for JPMorgan’s investment banking and certain other +business in The People’s Republic of China, Hong Kong, and other countries in the Asia- +Pacific region. + +FACTS +JPMorgan’s Policies Prohibited the Hiring of Client Referrals in Exchange for Business +9. As early as 2001, JPMorgan recognized the FCPA risks in hiring the relatives +of foreign government officials. JPMorgan therefore took steps to educate its employees on +the potential dangers in hiring Referral Hires and the potential FCPA violations that could +occur if Referral Hires were tied to business for the firm. JPMorgan’s 2001 FCPA +Compliance Policy noted that the “[h]iring of family members of foreign officials as +employees, agents or consultants” was a “red flag… that could result in [an] FCPA +violation.” JPMorgan’s 2005 anti-bribery training included an example where “[a]s an +understood part of the deal, the company will hire…the daughter of a government official +from that country, for an unpaid summer internship.” This training noted that the hiring of +the daughter could be a bribe because the “internship has some value and is a requirement for +the deal to happen.” +10. In or about September 2007, JPMorgan instituted a new Anti-Corruption +Policy which provided that “the offer of internships or training for relatives of a public +official” required legal and compliance pre-clearance. It also indicated that hiring individuals +in order to win business was prohibited. Specifically, the Policy stated that “it is improper for +a person to offer or give anything to a public official, either directly or through an +intermediary, in an effort to secure an advantage that would not have been granted if the offer +or gift had not been made,” noting that “‘value’ can include such things as the offer of +internships or training for relatives of a public official.” This policy applied to JPMorgan +APAC. In addition, in 2007 JPMorgan APAC instituted training for employees in the region +specifying that pre-clearance from compliance was required before JPMorgan APAC could +hire Referral Hires because “[a]n offer of internship to a relative of a non-U.S. public official +suggests an advantage by causing the official to misuse his or her position.” +11. In approximately June 2011, JPMorgan implemented an updated Anti- +Corruption Policy which also applied to JPMorgan APAC. Training provided regarding this +Policy noted that “almost anything can meet the definition of a ‘bribe,’ including… +internships [and] employment.” The Policy further stated that “[n]o employee may directly +or indirectly offer, promise, grant or authorize the giving of money or anything else of value +to a government official to influence official action or obtain an improper advantage.” +12. During this period, JPMorgan APAC also had an established, highly-selective +hiring program for undergraduates and graduates to enter JPMorgan APAC’s summer +internship and analyst/associate employment programs, primarily in Hong Kong. Hiring was +done mainly through campus recruiting at prestigious, highly-selective schools in the United +States and elsewhere, as well as through an on-line application process. Admission to the +JPMorgan APAC hiring program was highly competitive, with candidates competing based +on educational background, prior experience, language, and other skills. Successful +applicants usually had a minimum grade point average, a demonstrated affinity for and + +5 + +interest in financial services work, language skills, and advanced through multiple rounds of +interviews. Throughout this period JPMorgan APAC had more applicants than it had +available positions with the firm. +JPMorgan APAC Created a Client Referral Hiring Program in 2006 +13. In or around 2006, JPMorgan APAC’s investment banking group created and +implemented a referral hiring program (referred to colloquially during the relevant time +period as the “Sons & Daughters Program”) whereby certain internships and short-term, +entry-level employment opportunities were made available only to Referral Hires in order to +accommodate frequent requests to hire the relatives and friends of senior executives or +officials with its clients, prospective clients, and contacts within foreign government +ministries. JPMorgan APAC created the “Sons & Daughters” program based on these +requests from senior executives or officials and a perception of similar actions being taken by +its competitors. From the outset, the primary goal of client referral hiring was to generate +revenue for JPMorgan APAC by extending personal favors to client executives and +government officials through hiring their relatives and friends. +14. By contrast with the established JPMorgan APAC non-referral hiring +program, most JPMorgan APAC Referral Hires would not have secured positions with the +firm but for the client relationship and request. Referral Hires generally did not meet the +minimum educational, grade-point average, or background qualifications that JPMorgan +APAC looked for in its non-referral hiring programs. Referral Hires were not subjected to +the rigorous, multi-round interviews that non-Referral Hires had to go through before hiring. +Likewise, Referral Hires were not evaluated based on merit, but instead were evaluated based +on JPMorgan APAC’s relationship with and prospects for future revenue from the referring +clients. +15. During this time it was widely recognized within JPMorgan APAC that +Referral Hires generally were not subject to the same requirements, workload, and +expectations as non-referral APAC employees. Nonetheless, these Referral Hires were given +the same titles as non-referral employees as well as significant salaries and other benefits. +JPMorgan APAC employees commented on the lack of capabilities of many Referral Hires, +with some employees referring to them as “photocopiers.” Referral Hires were sometimes +given special consideration regarding work assignments and promotions and protected from +rigorous work schedules. For example, in 2008, one senior JPMorgan APAC investment +banker referred to a Referral Hire as a “protected species requiring [senior management] +input. His reporting line to you is accountable but like national service.” +16. JPMorgan APAC investment bankers were made aware of the risks inherent +in referral hiring under the FCPA and other laws. In 2006, the head of Junior Resources +Management (“JRM”) for JPMorgan APAC, a business support team which oversaw the +hiring and staffing of all interns and junior investment bankers on transactions in the region, +sent an email to JPMorgan APAC investment bankers regarding “Sons & Daughters” which +noted that: +“As you know, the firm does not condone the hiring of the +children or other relatives of clients or potential clients of the + +6 + +Firm or other people who might be helpful to the Firm for +the purpose of securing or potentially securing business for +the Firm. In fact, the firm’s policies expressly forbid this. +There are no exceptions.” +This was further reinforced in 2007 when JPMorgan APAC legal and compliance staff noted +in a message to employees that for Referral Hires “[t]he firm should not be currently actively +pitching for any transaction of such client” and “[t]he firm should not be subject to any direct +regulation of such government authority” making the referral. In analyzing Referral Hires, +legal and compliance looked to see that “[t]he candidate should have been through usual +interview process and feedback from interviewers should be positive.” However, the Client +Referral Program frequently did not follow these stated limitations. +17. Based on the recognition of potential FCPA issues in hiring Referral Hires, in +or about 2006, JPMorgan APAC’s legal and compliance personnel developed a process to +screen prospective Referral Hires for potential FCPA and other risks including conflicts of +interest. As part of this screening process, JPMorgan APAC legal and compliance created a +“Sons & Daughters” questionnaire to elicit information regarding the potential Referral Hire. +Under the process as it was intended to work, each requesting banker was required to fill out +the questionnaire for each specific hire, and then submit that questionnaire to JPMorgan +APAC legal and compliance staff for review and approval. +18. The “Sons & Daughters” questionnaire sought information in order to screen +for potential FCPA and other risks from hiring a specific Referral Hire. The questionnaire +sought confirmation that the Referral Hire: (1) went “through the usual application/interview +process,” (2) had the “necessary qualifications for the position,” and (3) was rated “against +other applicants for the position.” The questionnaire also sought information regarding the +referring client or entity, including whether JPMorgan was “currently working on, or pitching +for any deal or transaction” with the referring client or potential client, and whether +“JPMorgan [was] seeking future opportunity to work or develop a relationship with such +client.” Finally, the questionnaire sought information from the referring banker on the +“expected benefit to JPMorgan in employing the candidate.” +19. JPMorgan APAC legal and compliance also imposed restrictions on what +confidential information Referral Hires were able to access. As part of the “Sons & +Daughters” questionnaire review process, JPMorgan APAC legal and compliance made the +hiring of most Referral Hires conditional on the bankers “walling off” the Referral Hire from +business directly involving or related to the referring client or entity. This was designed to +prevent conflicts of interest and the sharing of sensitive, confidential information regarding +JPMorgan’s clients, or the competitors of those clients, with the relatives and friends of +senior officials with those same clients. In cases in which the referring person was employed +by a government ministry, Referral Hires were supposed to be walled off from transactions +involving that ministry. +20. Due to the misconduct of JPMorgan APAC investment bankers and the +failures of APAC legal and compliance staff, the “Sons & Daughters” questionnaire process +was an ineffective review that failed to operate as an effective check on potential violations. +JPMorgan APAC legal and compliance staff did not understand the actual nature and + +7 + +operation of the Client Referral Program, and did not take adequate steps to fully investigate +the extent and purpose of the Program during the relevant time period. This was due in part +to JPMorgan APAC investment bankers failing to share complete information on the Client +Referral Program with legal and compliance personnel. It was also due to a fundamental +misunderstanding of the Client Referral Program by JPMorgan APAC legal and compliance, +and a failure to investigate potential issues when they arose. For example, in 2007 as part of +the review of Referral Hires, an attorney with JPMorgan’s global legal team conveyed to his +colleague in JPMorgan APAC that “I thought the Sons & Daughters Program was +ended….[JPMorgan Global Compliance officers] are telling …[personnel] that this program +doesn’t work from an FCPA standpoint. What are your thoughts?” In response, a JPMorgan +APAC compliance attorney noted that “‘Sons & Daughters’ is not an active programme to +solicit connected persons to work for us in the hope of obtaining business.” Rather, it was +described as a “filter process” involving a questionnaire and review by the legal staff. The +attorney went on to note: “If we take a Son or Daughter, it is because they have applied for +an internship like thousands of others, meet objective academic requirements, there are no +FCPA concerns. No favours are done. They get treated like everyone else.” This JPMorgan +APAC compliance professional’s understanding was not an accurate description of the Client +Referral Program at the time. +JPMorgan APAC Control Failures +21. Beginning no later than 2007, JPMorgan APAC investment bankers began +using the hiring of Referral Hires to assist in obtaining banking business and other advantages +from senior officials at SOEs, private sector clients, and government agencies. In order to +achieve the business objectives of the Client Referral Program, JPMorgan APAC investment +bankers provided incorrect, misleading, incomplete, or untruthful responses to the “Sons & +Daughters” questionnaires. Certain JPMorgan APAC investment bankers used the +questionnaire to hide the true purpose of the Referral Hire. Investment banking and legal and +compliance support personnel frequently assisted the investment bankers with drafting and +modifying questionnaires that failed to state the true purpose for some Referral Hires. Draft +questionnaires that suggested a potential improper benefit from hiring a Referral Hire were +sometimes edited by bankers and support staff to include responses that would pass scrutiny. +In addition, JPMorgan APAC support personnel supplied questionnaires with pre-populated +answers to questions, including for example a standard answer that there was “[N]o expected +benefit” from hiring a Referral Hire. The questionnaires were also answered as a matter of +practice to give the appearance that the Referral Hires went through the non-referral hiring +process rather than the special Client Referral Program, which was inaccurate. For these +reasons, the “Sons & Daughters” questionnaire that was designed to prevent FCPA violations +was wholly ineffective. In fact, JPMorgan’s APAC legal and compliance staff did not reject +a single Referral Hire candidate from 2007 through 2012. +22. JPMorgan APAC legal and compliance personnel did not take adequate steps +to identify or mitigate the risks of bribery and corruption in approving Referral Hires. For +example, in 2006, a JPMorgan APAC paralegal tasked with organizing and submitting +Referral Hire questionnaires for review informed a JPMorgan APAC attorney that she was +told by an investment banker that JPMorgan APAC was “now pitching for a … project” from +a referring client, and that the project “may potentially result from the hiring of [candidate] as +a summer analyst. I don’t feel quite comfortable about this and would like to have your + +8 + +views.” The paralegal drafted a memorandum to members of the APAC legal and +compliance staff, noting that “[w]e will be exposed to a risk of being alleged of bribing [the +client] for the … project or any other…projects,” especially considering that the candidate +would not otherwise be hired on her own merits. The hire was nonetheless approved after +another JPMorgan APAC investment banker stated that the hire was not in exchange “for +return of any business from [the client].” +23. JPMorgan APAC support personnel also assisted APAC investment bankers +in drafting and modifying “Sons & Daughters” questionnaires in order to avoid scrutiny and +receive compliance approval for specific Referral Hires. This led to multiple cases of “Sons +& Daughters” questionnaires being revised to remove references to a specific or implied +benefit from a client Referral Hire before submitting those questionnaires for final approval. +For example, in 2010, a JPMorgan APAC investment banker noted in a questionnaire for a +prospective Referral Hire that JPMorgan was pitching for a role in the client’s forthcoming +IPO. Regarding the “expected benefit” from the Referral Hire, he wrote: +“It will strengthen our relationship with [client executive] +and solidifying [sic] our position as an advisor to him and +the IPOs of his companies (expected to be >$500mm in +offering size.” +In response, the JPMorgan APAC paralegal tasked with reviewing and commenting on +Referral Hire questionnaires noted: +“The firm does not condone the hiring of client’s referred +person who might be helpful to the firm for the purpose of +securing or potentially securing business for the firm. The +above comment is not acceptable from [legal and +compliance’s] perspective. +Please clarify to what extent the proposed hire will affect our +position in our participation of the IPO [sic]? +Is hiring of the intern part of any agreement to secure +business of the firm?” +In response to these questions, the investment banker contradicted his prior responses, and +now replied: (1) “Hiring of this candidate will not benefit the firm”, (2) “It will not affect our +position”, and (3) “No.” The JPMorgan APAC attorney reviewing the proposed Referral +Hire was then told by the paralegal that the investment banker “has confirmed that the +proposed hire will not affect our position in our participation of the IPO and hiring of the +candidate is not part of any agreement to secure business of the firm [sic].” The initial +answers from the investment bankers were not shared with the JPMorgan APAC attorney, +and the Referral Hire request was approved. +24. None of the hires made through the Client Referral Program were reviewed or +assessed alongside normal JPMorgan APAC hires, yet the “Sons & Daughters” +questionnaires reviewed by legal and compliance noted that the candidates had the “necessary + +9 + +qualifications” and were rated well against “other applicants” for the position. These +responses were inaccurate, as the Client Referral Program operated separate from JPMorgan +APAC’s normal hiring program and candidates were hired based on the referring client +relationship. +25. For Referral Hires that originated in APAC but were employed outside of the +region, such as New York, JPMorgan APAC bankers typically would not submit +questionnaires or seek compliance review of the potential hires despite knowledge that such +questionnaires were part of the controls for hiring Referral Hires. In such cases, JPMorgan +APAC’s human resources and legal departments were usually not made aware of the hire. +Likewise, their counterparts in the jurisdiction in which the Referral Hire was going to work +(such as New York) were usually unaware of any client referral aspect to the hire. Further, +JPMorgan did not always restrict such Referral Hires from working on deals involving the +referring client because no such instruction came from JPMorgan APAC’s compliance +department. +26. Beginning in 2009, JPMorgan APAC personnel structured the contracts for +full-time Referral Hires to withhold the total number of Referral Hires in APAC from other +parts of the firm and give the appearance of conformity with JPMorgan’s internal, year-end +global headcount restrictions. The revised Client Referral Program was designed to give +offers to Referral Hires from “Jan 15 to Dec 15, thereby avoiding year end count.” Referral +Hires were given contracts that would end in mid-December and then a new contract would +re-start the following January, thus avoiding counting the Referral Hire on JPMorgan +APAC’s internal, year-end headcount numbers which were reported as of December 31st. +This allowed JPMorgan APAC to continue to make Referral Hires but not limit the number +of non-referral junior investment bankers hired by JPMorgan APAC who were capable of +functioning as junior investment bankers. In 2010, the JPMorgan APAC employee tasked +with managing headcount noted he had reached “agreement with [coordinator for Client +Referral Program] at start of year was [Referral Hires] would NOT cross year end. we should +push [coordinator] on that because we specifically agreed to track them this way to create +additional slots for full time staff [sic].” The same JPMorgan APAC employee noted that for +Referral Hires, “[f]rom a budget perspective we keep these [Referral Hires] off balance sheet +and are supposed to have a maximum of 10 [Client Referral Program] interns at one time on +contracts that do not cross a year end.” Another JPMorgan APAC employee discussed +structuring contracts for Referral Hires so that the contracts would end in December “[i]n +order to have them NOT counted toward our year end headcount next year...” +27. JPMorgan APAC, including legal and compliance, investment banking, and +human resources personnel, failed to properly review or stop the Client Referral Program +until 2013. At that time, a JPMorgan APAC compliance officer in a newly-created position +was tasked with reviewing and approving client Referral Hire questionnaires. In denying a +request to hire a Referral Hire, he stated that hiring Referral Hires at the request of clients and +outside of the normal hiring system was impermissible under JPMorgan’s compliance and +anti-corruption policies. He further stated that “I’m afraid from an anti bribery [sic] and +corruption standpoint, we cannot create positions to accommodate client requests…. +Employment within JPMorgan is seen as a significant benefit (in terms of training, +experience, and improving the resume).” This effectively ended the Client Referral Program, +although new Referral Hires continued to work at JPMorgan APAC in the summer of 2013. + +10 + +JPMorgan APAC Investment Bankers Knew That Referral Hires Were Hired to +Obtain or Retain Business +28. JPMorgan APAC investment bankers sought to use the Client Referral +Program to exchange valuable employment for assistance with obtaining or retaining banking +business from senior executives with its clients, potential clients, and foreign government +officials. This assistance included the awarding of deals to JPMorgan APAC based in part +on hiring Referral Hires, non-public information on clients and future deals, influence with +foreign government officials, introductions and meetings, and other benefits. +29. Over time, senior JPMorgan APAC investment bankers designed a system to +provide employment to referrals from “decision-makers” or those with the ability to influence +upcoming investment banking transactions at their clients. For example, a senior banker +responsible for overseeing JPMorgan APAC junior banking hiring and staffing, including the +Referral Hires (“APAC Banker A”), encouraged other bankers to prioritize referral requests +received from “decision-makers” or those who had the ability to influence an upcoming +banking deal over less influential individuals. APAC Banker A acknowledged in +communications with his colleagues that they should consider whether the hire would bring +near-term revenue to the firm. In a 2008 email regarding a Referral Hire request from a +senior executive with a private sector JPMorgan APAC client in China, APAC Banker A told +another investment banker seeking his approval for the hire, copying the head of JPMorgan +APAC investment banking, that: “I am supportive of bringing [the referral candidate] on +board given what’s at stake… A couple of points to discuss and agree prior to any offer being +made to [referral candidate]: how do you get the best quid pro quo from the relationship +upon confirmation of the offer.” The banker seeking to make the hire responded “[t]he client +has communicated clearly the quid pro quo on this hire and the team should start working on +the [upcoming] IPO asap.” Although the questionnaire reviewed by compliance relating to +this hire disclosed that JPMorgan APAC was working on one deal for a company affiliated +with the referring executive and pitching for another, the questionnaire did not disclose any +discussion of the “quid pro quo” from this Referral Hire. Instead, the questionnaire reviewed +by compliance indicated that there would be “no expected benefit” to the firm from the hire. +30. These senior JPMorgan APAC personnel also understood that client Referral +Hires were for the most part not qualified on their own merit for the positions they were +given when compared with non-referral employees, yet special considerations were taken to +benefit the business relationship. For example, in 2010, APAC Banker A wrote to the banker +who assisted him with hiring and staffing of junior JPMorgan APAC bankers that “we picked +up a new mandate in Taiwan today – all we have to do is get [referral candidate] a full time +analyst job at JPM in NY. Mission impossible?” In response, the other banker wrote “Can +try… his napping habit will be an eye-opening experience for our NY colleagues if he gets a +job.” APAC Banker A later sent an email titled “client referral” to other investment bankers +in the United States in September 2010 in which he wrote: “[w]e have a very good [private +sector] client in Taiwan who has asked that we find an IB analyst role for his son in NY…. +We are being offered now a [mandate] and the quid pro quo, is an analyst IB job for his +son… Can we in [an investment banking group in New York] adopt him, or can you +recommend a safe place for him where he won’t get too scarred.” After the candidate was +hired by JPMorgan in New York in October 2010, a JPMorgan APAC banker wrote to his +colleagues that the Referral Hire was a “happy young man! And his dad will also be very + +11 + +pleased.” In response, another JPMorgan APAC banker noted: “I am sure this will go a long +way for us in terms of [referring client entity] and [the candidate’s father, a senior executive +of the entity].” +31. Other JPMorgan APAC investment bankers understood the true purpose of +the program and the potential benefits to JPMorgan APAC’s business from hiring Referral +Hires. The purpose and benefit of Referral Hires was discussed amongst JPMorgan APAC +investment bankers. For example: + In 2008, one junior banker wrote to a JPMorgan APAC investment banker +that she had “reconfirmed that [the requested Referral Hire] is very +important to our relationship with [SOE]. [SOE] has a pending placement +subject to market condition, and [referring client] made it clear that +[referral candidate] is our ticket to this mandate.” + In discussing a potential Referral Hire in 2010 from a private sector client, +a senior JPMorgan APAC investment banker wrote to another asking him +to interview a referral candidate, writing: “The last thing I want is we go +slow and they ask another bank and I am sure someone will give him a +full time offer given the mandate up for grabs here. We can give him an +offer under the new ‘sons and daughters’ one year program…They are +interested.” The second banker noted “Happy to speak with son asap. +Seen this movie a lot before, we should consider it part of the pursuit +immediately.” He went on to note “We do way, way, way too little of this +type of hiring and I have been pounding on it with China team for a year. +Let me know if you need me to weigh in at all asap. Confidential, just +added son of #2 at [Chinese SOE] to my team. I got room for a lot more +hires like this ([competitor investment bank] has 25).” + In 2010, a senior JPMorgan APAC investment banker wrote to a +colleague regarding a Referral Hire from a private sector client: “They are +close to mandating banks for their IPO. We are a strong contender. Blink +blink nod nod, can we find a place for his son (they have only approached +us in this regard)?” +32. The expected financial benefit to JPMorgan APAC from hiring certain +Referral Hires was also communicated by JPMorgan APAC investment bankers in certain +cases to the referring clients and the Referral Hires themselves. For example, in 2011, a +Referral Hire wrote to a senior JPMorgan APAC banker regarding his decision to leave +JPMorgan before the expiration of his employment term because despite his hard work “all of +my efforts seemed meaningless to you and you tend to judge me solely on the relation part of +me… I remember when i [sic] first started working here you told me that [other relationship +hires] all paid the price for their seats on the floor. Now I had a better understanding of your +words after getting to know some of the relationship hires on the floor. I do not think my +family is in a position to help you to the extent as others did: bring their family business to +the firm. Therefore i [sic] decided to leave my head count to those who are more valuable to +the company.” This Referral Hire went on to write “regarding [two Chinese SOEs], my +father would try his best to coordinate the meeting.” + +12 + +JPMorgan APAC Revamped the Client Referral Program in 2009 to Directly Link +Referral Hires to New Investment Banking Deal Business +33. Beginning in or about 2009, JPMorgan APAC investment bankers began a +review of all previously hired Referral Hires to determine the success of the program in terms +of the “business rationale” for hiring and retaining Referral Hires. Referring bankers were +asked to list each client referred hire and to provide the “client affiliation” and “the +importance of retaining them from a client/revenue standpoint.” +34. In September 2009, a senior JPMorgan APAC investment banker wrote to the +chief executive officer of JPMorgan APAC that: +“One specific item that we may need your help is how to run +a better sons and daughters program, which has an almost +linear relationship with mandates in China. People believe +[other investment banks] are doing a much better job. On +the other hand, we J.P. Morgan have had a few disas[t]rous +cases which I can share with you later. We have more [lines +of business] in China therefore in theory we can accomodate +[sic] more ‘powerful’ sons and daughters that could benefit +the entire platform.” (emphasis added). +35. Following this email, senior JPMorgan APAC investment bankers on multiple +occasions discussed reforming the Client Referral Program to improve the ability to obtain +specific client business using Referral Hires. Among other things, it was agreed that the +Client Referral Program would prioritize referral requests from “decision-makers” or those +with the ability to influence upcoming investment banking transactions. It was also agreed to +focus on Referral Hires in situations involving near-term transactions. +36. To that end, in or about September 2009, APAC Banker A wrote to the APAC +banker assigned to assist him in running the JRM functions (“APAC Banker B”) that he +“spoke to [a senior JPMorgan APAC investment banker] about referrals. [W]e want to revisit +the programme at two levels.” He wrote that for the one-year Referral Hires, they wanted to +“plan better” in the areas of “accountability” and “deal conversion or revenue attribution and +relationship.” JPMorgan Banker A also noted that for one-year Referral Hires, the hire +should be made “Jan 15 to Dec 15, thereby avoiding year end count.” APAC Banker A noted +that doing this “[w]ould be a clever way to manage all 1 yr [sic] program hires if we could +align the hiring cycle. Maybe able to even get more people.” +37. Per these instructions, APAC Banker B created a presentation titled +“Emerging Asia Client Referral Program (CRP)” in November 2009. The presentation +reviewed the “Current state of play” regarding the “full-time referrals program,” and noted: +“The firm benefits from a CRP to facilitate its business development in China.” It further +noted that the current program was “designed to hire employees referred by our key clients +who may not meet our regular hiring standard… The current program is functional but could +be further improved to optimize control/management and enhance contribution to business +generation.” The presentation noted that “[a]reas for [i]mprovement” for the current program +included “[m]onitoring referral deal conversion.” The revised program also sought to + +13 + +prioritize requests from “decision-makers” or those with the ability to influence future, near- +term deals to benefit JPMorgan APAC. +38. This presentation first sought to summarize the success of the then-current +Client Referral Program. The presentation tracked certain then-current Referral Hires made +through the Client Referral Program, and the “Historical deal conversion track record” +relating to those hires. The presentation noted deal “[c]onversion” with respect to multiple +Referral Hires including (1) conversion of a deal with an SOE after referral of a candidate +from a senior member of a foreign political party; and (2) conversion of a deal with an SOE +after hiring the daughter of a “Deputy Minister.” The presentation also noted “Work in +progress” on potential deals involving the “family friend” of the chairman of a Hong Kong +company and the daughter of a senior foreign government minister. +39. A new aspect to JPMorgan APAC’s Client Referral Program was also +proposed in this presentation. Under the heading “Full-time referrals: Proposed new +program,” the presentation listed new “Selection [C]riteria” for full-time Referral Hires that +would include: + “Directly attributable linkage to business opportunity,” and + “Clear accountability for deal conversion and accountability for abuse of +program.” +40. In 2009, after approval by the head of investment banking for APAC, +JPMorgan APAC implemented the revised Client Referral Program. The revised program +was managed by the JRM business support team with input from senior JPMorgan APAC +investment bankers. Certain senior bankers were given a “quota” of Referral Hires that could +be made each year. Subsequent JRM reports from 2009 through 2012 contained the same +language regarding the “revised” referral hiring program with the selection criteria of a +“[d]irectly attributable linkage to business opportunity.” These presentations were discussed +with the head of investment banking for JPMorgan APAC and other JPMorgan APAC senior +executives. +41. The JPMorgan APAC investment bankers who created and ran the revised +Client Referral Program did not seek a review of the program by the legal and compliance +staff, or otherwise inform the legal and compliance staff of the nature and purpose of the +revised Client Referral Program. JPMorgan APAC personnel continued to provide +inaccurate or incomplete information to JPMorgan APAC legal and compliance staff in order +to secure approval for hiring Referral Hires. +42. Under the revised referral hiring program, Referral Hires were given the same +titles as non-Referral Hires, although they typically were paid less than employees hired +through JPMorgan APAC’s non-referral hiring programs. Referral Hires were generally +hired for a one-year term with limited ability to continue with JPMorgan APAC after the +conclusion of their contracts. However, exceptions were made based on business needs. In +2011, APAC Banker B wrote to several APAC investment bankers that “[t]he client referral +program is strictly one year for everyone else unless [the Referral Hires] bring in a new +profitable deal to justify an extension, otherwise they must move on.” + +14 + +43. Beginning by at least 2009, JPMorgan APAC employees tracked investment +banking deals attributable to entities whose officials had requested Referral Hires. In or +about December 2010, JPMorgan APAC investment bankers created “Referral Hires vs +Revenue” spreadsheets to track revenue from clients whose referrals had been hired by the +firm. The spreadsheet included columns listing: (1) type of hire (fixed term versus intern); +(2) date of hire; (3) a description of the relationship between the Referral Hire and the +referring client or government official (“daughter of Chairman,” “family friend of… +Chairman,” “Son of Executive Vice President … of [SOE].”); and (4) “[r]evenue” to the firm +from those clients. + +44. In March 2011, as part of this review process, JPMorgan APAC personnel +estimated that clients who had referred individuals into the Client Referral Program had +generated more than $14 million in revenue in 2009 and $19 million in 2010, with $21 +million anticipated in the “pipeline” for 2011. +JPMorgan APAC’s Client Referral Summer Internship Programs +45. In addition to providing analyst and associate employment opportunities, in +2009 and 2010 JPMorgan APAC also created summer internship programs to accommodate +Referral Hires. Referral Hires were generally not qualified for the regular JPMorgan APAC +summer internship program; nonetheless, summer internships in the regular program were +sometimes provided by JPMorgan APAC to Referral Hires. In order to accommodate more +client referrals, in 2010 JPMorgan APAC also created an unpaid training program in Hong +Kong (colloquially referred to as “summer camp”) for Referral Hires seeking summer +employment or internships with JPMorgan APAC. The “summer camp” consisted mainly of +social events, lectures, and classroom speakers. Although the participants were not employed +by JPMorgan APAC and were not paid, participants could list the program on their resumes. +APAC Banker B noted that one senior APAC investment banker said that he could “sleep +better at night knowing that we now have a structured program to entertain the little +darlings.” +46. JPMorgan APAC undertook no compliance review of participants in the +“summer camp.” However, candidates for the “summer camp” were selected based on +investment bank client relationships rather than merit. Further, certain client referrals with +links to potential revenue were given paid summer internships with JPMorgan APAC rather +than the opportunity to participate in the “summer camp.” +47. JPMorgan APAC bankers, including APAC Banker B, managed summer +training Referral Hires to generate potential near-term revenue for the firm. APAC Banker B +noted in 2010 that sponsoring bankers “need to make a strong case for their referrals - +minimum $3m tangible fees sounds like a sensible benchmark.” A JPMorgan APAC senior +investment banker also suggested making additional accommodations (such as paying for +flights) for the children of “SOE clients who are not well paid even at senior levels.” This +practice continued, and in 2011 APAC Banker B again noted that the summer training +program “will most probably follow last year’s convention of only considering clients with +>$US3 million new revenue contribution for referring candidates into the training program.” + +15 + +JPMorgan APAC Hired SOE Referral Hires To Assist in Winning or Retaining +Business +48. Between 2006 and 2013, JPMorgan APAC hired numerous relatives and +friends of officials with foreign government entities and senior officials at foreign SOEs to +obtain or retain business for JPMorgan. These hires include: + Beginning in 2005, JPMorgan APAC hired the son of a key executive with a +Chinese manufacturing SOE. The son worked at JPMorgan APAC in various +roles from 2005- 2008 and then again from 2010 until 2015. Another Referral +Hire was given a training opportunity in 2009 based on a request from a +senior executive of the same SOE. JPMorgan APAC was awarded an IPO +from this SOE in 2006 and further advisory business in 2008. JPMorgan +APAC received net profits for its work for this SOE of more than $32 million. + In 2007, JPMorgan APAC hired the relative of a senior official at a Chinese +SOE and the relative of a senior official at the government agency which +oversaw that SOE. JPMorgan APAC was working on the IPO for that SOE +when it agreed to the hires. The firm hired one of the Referral Hires while +negotiating for a better fee from the SOE for its role in that IPO. In part as a +result of this Referral Hire, JPMorgan APAC received additional net profits of +more than $3.3 million. + Between 2007 and 2010, JPMorgan APAC made multiple Referral Hires from +officials with a Chinese financial SOE. Referral Hires were hired at the +request of senior officials with this SOE, including the chairman and chief +financial officer. JPMorgan APAC won multiple investment banking deals +from this SOE from 2007-2010 resulting in net profits of more than $6.5 +million. + JPMorgan APAC hired at least five Referral Hires from 2007 to 2011 from +senior officials with another Chinese financial SOE. This included the hiring +of the son of a Chinese government official from the province in which this +institution was located at the request of the Chairman of the SOE. JPMorgan +APAC was awarded investment banking business from this SOE in 2008 and +2009, with total net profits to the firm of more than $5.8 million. + Between 2010 and 2012, JPMorgan APAC hired two Referral Hires at the +request of officials with a large Chinese energy-related SOE. In 2012 and +2013, the firm was awarded business from this SOE, including bond +issuances, with total net profits of more than $10 million. + Between 2007 and 2010, JPMorgan APAC hired two employees and a trainee +at the request of officials with a large Chinese transportation SOE. The +referrals were made by the chief executive officer and other key employees +with the SOE. JPMorgan APAC was awarded business from this SOE in 2010 +totaling more than $10 million in net profits. + +16 + + JPMorgan APAC hired two employees and a trainee referred by officials at a +Chinese financial SOE between 2008 and 2012. The requests were made by +the chairman of the SOE and another senior official. For one of the Referral +Hires, his parents were both Chinese government officials at different +ministries. JPMorgan APAC was awarded a role in this SOE’s 2012 IPO and +received net profits of more than $2.6 million. +Referral Hire Employed in New York In Order to Obtain IPO Roles for JPMorgan +APAC +49. In 2007, JPMorgan APAC hired the son (“Referral Hire A”) of an executive +(“Official A”) of an energy related Chinese SOE (“SOE A”) for a summer internship position +in China based on the request of Official A. Subsequently, in 2009, the firm hired Referral +Hire A for a position in its Hong Kong internship program, again upon the request of Official +A. +50. Before Referral Hire A started his Hong Kong internship, the referring +JPMorgan APAC banker noted that Official A “was recently promoted to the current position +and is said to be very close to the president [of SOE A]. Maybe we should use [Official A’s] +ask to take over the relationship” from a former APAC banker. The JPMorgan APAC banker +(“APAC Banker C”) who had taken over responsibility for JPMorgan’s relationship with +SOE A noted as part of discussions regarding what information to put in the “Sons & +Daughters” questionnaire that “[w]e are pitching for a couple of M+A deals . . . and we have +been in constant dialogue for a potential block trade. Also, we need to establish broad +relationship with this client as we could provide a broad spectrum of products (corporate, +commodities) to them.” APAC Banker C then submitted the “Sons & Daughters” +questionnaire for Referral Hire A, after being advised by the referring APAC banker that for +the question regarding potential deals with SOE A, he should “limit[] this to real pitches only +to avoid challenges by legal and compliance.” +51. After the hire was approved, APAC Banker C then asked “shall we coordinate +so I can hook up with his father? I will be in [Beijing] next week and we actually have some +meetings with [SOE A] so would be good to do this in time.” The meeting was arranged with +Official A. +52. During Referral Hire A’s summer internship in Hong Kong, APAC Banker C +asked Referral Hire A to get non-public information about potential JPMorgan SOE clients +from SOE A through his father in order to assist JPMorgan APAC in pitching for new +business. Referral Hire A did not provide non-public information to APAC Banker C. Later +that summer, Referral Hire A was told by APAC Banker C that in order to receive a full-time +offer from JPMorgan APAC, he would need to “bring in a deal” for JPMorgan APAC. +53. Referral Hire A specifically wanted an analyst position with JPMorgan in +New York. Therefore, in the fall of 2009, Official A sought assistance from his friend, +another senior executive at a Chinese SOE (“Official B”), to help get Referral Hire A a job +with the firm in New York. Official B was a senior executive with a large Chinese state- +owned financial institution (“SOE B”). In 2009, SOE B was in the process of preparing for +an initial public offering (“IPO”) in Hong Kong that was expected to be lucrative for + +17 + +investment banks working on the transaction. Official B had significant influence over the +decision-making as to which firms would be designated to participate in the forthcoming IPO +of SOE B (“IPO Mandate”). +54. In fall 2009, Officials A and B each sent multiple messages and made +multiple calls to JPMorgan APAC investment bankers seeking a job with JPMorgan in New +York for Referral Hire A. In late 2009 and early 2010, JPMorgan APAC bankers noted that +Official B kept “pushing” for the hire. Official B requested that the Referral Hire request be +kept from JPMorgan APAC bankers involved in the deal. One senior APAC banker wrote in +January 2010 that “to avoid any ‘complication,’ [Official B] has asked to keep this +confidential and particularly away from the ‘[SOE B] pitch team.’ But I have kept [a senior +banker on the pitch team] in the loop… Would be great if you could give this a push in NY +…. Many thanks.” +55. Based upon the requests from Officials A and B and the forthcoming IPO +Mandate, senior JPMorgan APAC investment bankers undertook steps to secure a position +for Referral Hire A with the firm in New York. These bankers believed that JPMorgan +APAC could receive a more significant and lucrative role in the IPO Mandate if the firm +hired Referral Hire A, and would risk JPMorgan APAC’s position or its entire role in the IPO +Mandate if they did not. +56. In December 2009, JPMorgan APAC investment bankers sought the +assistance of a JPMorgan banker in New York who reported to the then-head of JPMorgan +APAC (“JPMorgan Banker D”) with finding a job for Referral Hire A. JPMorgan Banker D +reported back that Referral Hire A was not qualified for a position with the firm in New +York, causing one of the JPMorgan APAC bankers seeking the hire to note that “Jpm in NY +won’t give [Referral Hire A] a preference. Spoke with a few people who know [him]. +Unlikely to pass thorugh [sic] regular process.” A JPMorgan recruiter in New York noted +that “[r]elative to other candidates, his technological and quantitative skills were light (this is +an extremely quantitative position). We plan on notifying him this week that he will not be +moving forward in the process.” Referral Hire A interviewed with multiple groups at +JPMorgan in New York, and each rejected hiring him despite the client relationship. +JPMorgan Banker D noted that, according to two JPMorgan groups in New York, “while +[Referral Hire A] has solid technical skills, his communication and marketing skills as well as +his overall credentials on other metrics fell short of JPM standards. Both groups cite these +deficiencies as reason not to pursue his case further, making the point that is hard to argue, +that lowering the highly competitive recruitment bar at JPM is not a desirable option.” +57. Despite this negative feedback, in February 2010 the JPMorgan APAC +investment bankers emailed the then-chief executive officer of JPMorgan APAC and the +head of human resources for JPMorgan Hong Kong to state they had “reached consensus +among us to offer [Referral Hire A] a one year fixed term position at [JPMorgan Banker D’s] +team in our New York office. We understand that you have been always supportive of this +hire. [I]t is time to ask your approval to proceed on that basis. [Official B] called and sent +sms to [two JPMorgan APAC bankers] several times to ask the status. If we can get this hire +done soon, that will be very helpful.” The next day, the head of the JPMorgan APAC group +handling the IPO Mandate noted that he had a meeting with the chairman of another Chinese +entity at which he learned “[v]ery interesting info re [SOE B]: will launch [IPO Mandate] + +18 + +process just before or just after chinese new year. Very definitive. So we should act reg [sic] +this young guy and place him in [JPMorgan Banker D]’s group. One year analyst.” The hire +was thereafter approved by the chief executive officer of JPMorgan APAC, and Referral Hire +A began working in New York in 2010 as part of JPMorgan Banker D’s group. +58. In April 2010, JPMorgan APAC was selected for a significant role in the IPO +Mandate. In June 2010, a JPMorgan APAC banker sent an email to JPMorgan Banker D +stating that “I understand from his father, [Official A], that [Referral Hire A] will start today +in office. His uncle [Official B] did deliver [SOE B] IPO and his father is helping us on [an +energy-related] ipo.” Later in July 2010, an APAC banker noted that “we are on track to +make [SOE B] the largest IPO ever.” +59. In 2010, JPMorgan APAC investment bankers learned that Referral Hire A’s +father, Official A, had assisted JPMorgan APAC in securing a mandate from a Chinese +energy company that was preparing for its own IPO. In August 2010, Referral Hire A was +added to JPMorgan APAC’s team working on that IPO. In November 2010, JPMorgan +APAC bankers consulted with Official A regarding this IPO pitch. Later discussions +regarding the “game plan” included that “[Official A] will help us from the side.” In +December 2010, an APAC banker told other senior APAC bankers that Referral Hire A, +described as the referral from Official B and “the analyst we placed under [JPMorgan Banker +D]’s team in NY, has played a critical role in helping secure this mandate. [Referral Hire +A’]s father is a senior executive at [SOE A]. FYI.” JPMorgan Banker D responded “He is a +quietly efficient worker…” +60. In January 2011, a JPMorgan APAC banker emailed the then-CEO of +JPMorgan APAC regarding Referral Hire A’s application to be transferred to a different +department at JPMorgan in New York, noting that “[Referral Hire A] (and his family) has +been instrumental in helping us on both the [SOE B] IPO and [another] IPO.” He further +noted that Referral Hire A’s “father is helping us on [other companies] at the moment as +well.” The then-CEO of JPMorgan APAC then wrote to another senior banker at the firm to +ask him to help Referral Hire A find another job within JPMorgan, stating “[h]is Dad is pretty +important in China and I am happy to keep him on my headcount if you can use him.” In +March 2011, the firm then hired Referral Hire A into another position when his initial fixed- +term Referral Hire contract expired. +61. JPMorgan APAC did not inform JPMorgan APAC legal and compliance +about the 2010 hire of Referral Hire A in New York. Therefore, a “Sons & Daughters” +questionnaire was not completed or reviewed. In July 2010, JPMorgan’s compliance group +became aware that Referral Hire A had been hired without compliance review or a “Sons & +Daughters” questionnaire for his 2010 hire. A JPMorgan compliance officer noted “[c]learly, +in a perfect world, it would be best if this had gone through another formal review prior to the +position being offered. However, since [Referral Hire A] had already been reviewed in the +past for at least his 2009 internship, I am not sure what value there would be in reviewing +again at this point in time.” No additional inquiry was undertaken, and instead JPMorgan +APAC reviewed the questionnaire that was submitted in 2009 prior to Referral Hire A’s +Hong Kong internship. That questionnaire had no reference to SOE B, the IPO Mandate, or +the other IPO which Official A helped JPMorgan APAC secure. Although JPMorgan APAC +legal and compliance had required Referral Hire A to be walled off from pitches involving + +19 + +SOE A (where his father worked) at the time of his summer internship, this was not +communicated to JPMorgan legal and compliance in New York and nothing was done to +enforce this restriction even after JPMorgan APAC legal and compliance learned of Referral +Hire A’s position in New York. At no point after he was hired in 2010 was Referral Hire A +walled off from transactions involving either his father, Official A, entities related to SOE A, +or his father’s friend, Official B, and entities relating to him. +62. JPMorgan APAC participated in the IPO for SOE B in 2010. For its efforts, +the firm received net profits of more than $23 million. In 2010, JPMorgan APAC also +worked on the IPO for another Chinese SOE which was connected to SOE A, where Referral +Hire A’s father was an official. For its efforts on the latter IPO, JPMorgan APAC received +more than $3.7 million in net profits. +Referral Hire from Government Ministry In Order to Obtain Favorable Treatment for +JPMorgan +63. In 2006, a JPMorgan APAC investment banker sought to find a job with the +firm in New York for the son (“Referral Hire X”) of a deputy minister (“Official X”) at a +Chinese government agency. In seeking the hire, a JPMorgan APAC investment banker +wrote of Official X that “[a]lthough he is now promoted to be a government official, his +influence remains strong both personally as well as in an official capacity [at the Ministry]… +[and] a good indepth [sic] relationship with the Ministry will pave the ground for us in many +large and important industries in China as well as large cap companies, despite the fact some +of them are ‘independent’ commercial entities, a unique feature of the Chinese/government +business alliance.” +64. Referral Hire X interviewed for the position in New York but was not selected +for hire. He nonetheless received an offer for an analyst position in November 2006 based on +the referral request. Referral Hire X then sought to start his employment one month earlier +than planned. To do so, Referral Hire X contacted an executive at a Chinese company who +then contacted a different JPMorgan APAC investment banker about the request. In +December 2006, an employee with the firm in New York emailed the JPMorgan APAC +banker seeking the early start for Referral Hire X that Referral Hire X “did very very poorly +in interviews – some [managing directors] said he was the worst [business analyst] candidate +they had ever see [sic] – and we obviously had to extend him an offer… [o]bviously, we will +need to accommodate due to client pressure, but we’re going to have to handle this very +carefully.” In or about mid-2007, Referral Hire X began working as an analyst in Corporate +Finance in New York on a one-year contract. +65. In May 2008, during Referral Hire X’s first year of work with the firm in New +York, Official X requested that a JPMorgan APAC investment banker provide his son with +another job after the expiration of his one-year term. In June 2008, a JPMorgan APAC senior +banker sent his supervisor an email in which he stated: “The father indicated to me +repeatedly that he is willing to go extra mile to help JPM in whatever way we think he can. +And I do have a few cases where I think we can leverage the father’s connection…[G]iven +the above, I’d like to discuss with you and seek your advice/support on how to handle the son +in NY and leverage the father in China.” + +20 + +66. In July 2008, JPMorgan Banker D offered a position in his group to Referral +Hire X. After he was hired, JPMorgan Banker D wrote to the JPMorgan APAC banker in +Hong Kong that “I don’t have the details of the incident but apparently last Friday when I +was out of the office, [Referral Hire X] sent out an email (which he inadvertently copied to an +HR Person), where he made inappropriate … remarks.” In August 2008, JPMorgan Banker +D wrote that there was a “general consensus among seniors in our group” that Referral Hire +X was “immature, irresponsible, and unreliable” and that one banker was “no longer will to +have [Referral Hire X] as part of the pool [of junior analysts on his deals]…there is also +concern about his reliability on confidentiality of client records/documents which means that +we may not be able to let him have access to sensitive transactional records/documents.” +Referral Hire X remained in his position until it was eliminated 10 months later. +Hiring of Referral Hire to Initiate Client Relationship with SOE +67. In 2010, JPMorgan APAC began taking steps to hire the son (“Referral Hire +Z”) of the chairman (“Official Z”) of another large Chinese financial SOE, at his father’s +request. Official Z had asked a senior JPMorgan APAC banker to hire his son at the firm +during an in-person meeting. In an email to other senior bankers, this APAC banker noted +“[g]iven the size of the group and the existing and potential business opportunities from this +group to both FIG [Financial Institutions Group] and GI [group within investment banking], I +responded to this request positively. Let’s gather our thought on how we can leverage more +on this account going forward.” +68. JPMorgan APAC bankers discussed that hiring Referral Hire Z could help the +firm win future business from Official Z’s SOE entity. A senior banker wrote in 2010 in +response to the request to hire the son “[a]gree with [other banker]. [Official Z’s entity] is an +important client. We need to help his son that definately [sic] will give us leverage of +business opportunities for both fig and non fig for jpm.” The head of FIG within JPMorgan +APAC’s investment bank, later checked to make sure that JPMorgan had in fact followed +through and “onboarded” Official Z’s son. +69. Steps were taken to hire Referral Hire Z for a fixed-term position with +JPMorgan APAC. The compliance questionnaire for Referral Hire Z noted that his father +was the CEO of a Chinese SOE and that JPMorgan APAC was in discussions with a +subsidiary of the SOE for a “potential financing transaction at the moment.” It also noted that +JPMorgan APAC intended “to maintain a close relationship with the client.” The +questionnaire falsely stated that there was “No expected benefit” from hiring Referral Hire Z. +70. A few weeks after JPMorgan APAC offered Referral Hire Z a one-year +position, the same banker who proposed the hire noted to a senior JPMorgan APAC banker +that the firm had won “a mandate to be sole bookrunner for a USD300mm+ placement of +[Official Z’s SOE]’s listed subsidiary in HK. This will be our first transaction for this +group.” One year later, JPMorgan APAC was mandated for the IPO for Official Z’s SOE, +but the firm withdrew from that deal in 2013. In 2010, JPMorgan APAC also worked on a +private placement for Official Z’s SOE for which the firm received net profits of more than +$1.4 million. + + +21 + +Legal Standards and Violations + +71. Under Section 21C(a) of the Exchange Act, the Commission may impose a +cease-and-desist order upon any person who is violating, has violated, or is about to violate +any provision of the Exchange Act or any regulation thereunder, and upon any other person +that is, was, or would be a cause of the violation, due to an act or omission the person knew +or should have known would contribute to such violation. + +FCPA Violations + +Anti-Bribery Violations + +72. JPMorgan violated the anti-bribery provisions of the federal securities laws +by corruptly providing valuable internships and employment to relatives and friends of +foreign government officials in order to assist JPMorgan in retaining and obtaining +business. + +73. As a result of the conduct described above, JPMorgan violated Section 30A of +the Exchange Act which prohibits any issuer with a class of securities registered pursuant to +Section 12 of the Exchange Act, 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]. + +Books and Records Violations + +74. JPMorgan violated the books and records provisions of the FCPA in +conjunction with certain Referral Hires. Under Section 13(b)(2)(A) of the Exchange Act, +JPMorgan was required 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. +JPMorgan APAC’s controls required that investment bankers submit accurate questionnaires +to compliance for review before client referrals from SOEs and foreign government officials +could be hired. Contrary to that requirement, JPMorgan APAC personnel submitted, +reviewed, and approved inaccurate compliance questionnaires containing false and +incomplete information which failed to disclose the intended, improper purpose of making +certain client Referral Hires. JPMorgan’s internal records also inaccurately reflected the true +number of client Referral Hires in the APAC region by taking steps to withhold certain +headcount information relating to Referral Hires. [15 U.S.C § 78m(b)(2)(A)]. + +Internal Controls Violations + +75. JPMorgan violated the internal accounting controls provisions of the FCPA in +conjunction with certain Referral Hires. JPMorgan failed to devise and maintain an +effective system of internal accounting controls. JPMorgan’s internal accounting controls + +22 + +were insufficiently designed to prevent the corruption risks inherent in the hiring of Referral +Hires, and therefore inadequate to enforce or effectuate JPMorgan’s referral hiring policy. +JPMorgan recognized the inherent risks in hiring Referral Hires, yet proceeded with a system +that failed adequately to address those risks. The safeguards put in place by JPMorgan +APAC to minimize compliance and FCPA risks were not effective to curb the true purpose of +the Client Referral Program. JPMorgan APAC’s referral hiring questionnaire was designed +to ensure that Referral Hires were hired based on merit and not for improper purposes. +However, in practice the Client Referral Program operated as a separate tier of employment +within JPMorgan APAC where hiring and retention decisions were based on client +relationships and potential revenue and not employee merit. + +76. Referral Hires were subject to a completely separate hiring process, and once +hired their jobs and terms of employment were likewise different than non-Referral Hires. +The interview and screening process for Referral Hires was perfunctory, with candidates +receiving an offer based on the perceived strength of the client relationship and prospect for +future business. Referral Hires were also generally less qualified than employees hired +through the non-referral, entry-level hiring program, and once hired the Referral Hires were +generally not expected to do the same work as non-referral employees in similar positions. + +77. JPMorgan APAC attempted to put in place protections to mitigate the inherent +conflicts and FCPA risks in hiring Referral Hires. However, these protections were +insufficient to prevent the violations. While legal and compliance staff were required to +approve Referral Candidates before they could be hired, in practice they never failed to +approve a Referral Candidate. In certain cases, the protections were ignored. JPMorgan +APAC bankers sought to have certain Referral Hires work outside of APAC at the request of +the APAC-based client or prospective client seeking the employment. These Referral Hires +did not go through the normal hiring process for that region, and instead were hired based on +the perceived benefit to JPMorgan APAC from the hire. In such cases, a compliance +questionnaire was not completed and therefore no review was made to analyze the potential +conflicts of interest and FCPA violations inherent in referral hiring. In cases in which the +Referral Hire was hired outside of APAC, the conflict of interest prohibitions were not +imposed or enforced. This led to Referral Hires being staffed on the deal teams for the +referring person’s entity, often at the request of the referring person, in direct contravention of +the conflict of interest rules imposed on the referral hiring program. + +78. 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)]. + + +23 + +Commission Consideration of JPMorgan’s Cooperation and Remedial Efforts + +79. In determining to accept the Offer, the Commission considered cooperation +JPMorgan afforded to the Commission staff. Through its counsel, JPMorgan provided +thorough, complete, and timely cooperation throughout the investigation. JPMorgan +responded promptly to Commi ssion requests for information, retained outside counsel to +investigate the co nduct, and self-reported much of the conduct described herein. +JPMorgan made timely and thorough document productions and provided frequent +updates on the status of the company’s internal investigation and the evidence. JPMorgan +also made its employees a vailable for interviews upon request , and facilitated the +interviews of former employees, including facilitating certain interviewees traveling to the +United States from overseas for interviews with the Commission. JPMorgan provided key +document binders a nd factual chronologies to the Commission staff . JPMorgan +responded to all requests for information and documents in a timely and efficient manner. + +80. The Commission has also considered the significant remediation efforts +undertaken by JPMorgan to address the risks inherent in client referral hiring . Prior to the +start of this investigation, JPMorgan had taken steps to cease the Client Referral Program +in APAC. Since the outset of the investigation, JPMorgan has enhanced its anti- +corruption compliance prog ram and hiring practices on a global basis, including: making +changes to its Anti -Corruption Policy to further address the hiring of government +officials’ relatives; requiring that every hire with JPMorgan, including Referral Hires, be +routed through a ce ntralized human resources application process; establishing a control +function role for human resources with respect to hiring; requiring that JPMorgan’s anti- +corruption office reviews and approves each hire of a candidate referred by a client, potential +client, or government official; and instituting procedures and practices for the monitoring and +auditing of referral hiring. In addition, JPMorgan enhanced its overall compliance function +in the APAC region. JPMorgan also undertook employment actions based upon its findings +regarding the underlying conduct, and separated from certain employees and made personnel +changes to remediate in the APAC region. + +Non-Prosecution Agreement + +81. JPMorgan APAC has entered into a non-prosecution agreement with the +Department of Justice that acknowledges responsibility for criminal conduct relating to +certain findings in the Order. + +Non-Imposition of a Civil Penalty + +82. Respondent acknowledges that the Commission is not imposing a civil +penalty based upon the imposition of a $72,000,000 criminal fine as part of JPMorgan +APAC’s settlement with the United States Department of Justice. + + + + + + +24 + +IV. + +Undertakings + + 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 Respondent’s remediation and +implementation of compliance measures. During this three-year period, should Respondent’s +Board of Directors, senior management, or legal and compliance personnel discover credible +evidence, not already reported to the Commission staff, that corrupt payments or corrupt +transfers of value may have been offered, promised, paid, or authorized by Respondent, or +any entity or person working 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: (i) conduct an initial review and +submit an initial report, and (ii) 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 or actions already implemented +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 (“Initial Report”). The +Initial Report shall be transmitted to Paul G. Block, Assistant Regional +Director, FCPA Unit, Enforcement Division, Boston Regional Office, U.S. +Securities and Exchange Commission, 33 Arch Street, Suite 2300, Boston, +Massachusetts 02110. 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 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 preceding follow-up review. +The third Follow-up Report shall be completed by no later than 810 days after +the completion of the preceding follow-up review. 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 + +25 + +information. Public disclosure of the reports could discourage cooperation, +impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, +the reports and contents thereof are intended to remain and shall remain non- +public, except (1) pursuant to court order, (2) as agreed by the parties in +writing, (3) to the extent that the Commission staff determines in its sole +discretion that disclosure would be in furtherance of the Commission’s +discharge of its duties and responsibilities, or (4) is otherwise required by +law. + +2. Certify, in writing, that Respondent has made good faith efforts to comply +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 Paul G. +Block, Assistant Regional Director, 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. + +V. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist +from committing or causing any violations and any future violations of Sections +13(b)(2)(A), 13(b)(2)(B) and 30A of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), +78m(b)(2)(B), and 78dd-1]. + +B. Respondent shall, within 10 days of the entry of this Order, pay +disgorgement of $105,507,668 and prejudgment interest of $25,083,737, for a total +payment of $130,591,405 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). +If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of +Practice 600. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via P ay.gov +through the SEC Web site at http://www.sec.gov/about/offices/ofm.htm; +or + + +26 + +(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 +JPMorgan 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 Paul G. Block, Assistant +Regional Director, FCPA Unit, Enforcement Division, Boston Regional Office, U.S. Securities +and Exchange Commission, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. + +C. Respondent shall comply with the undertakings enumerated in Section IV above. + + +By the Commission. + + + + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3825.txt b/raw/aaer/2016/AAER-3825.txt new file mode 100644 index 0000000000000000000000000000000000000000..706035d7811912eb9e5223ca9e9356811d9ec1ac --- /dev/null +++ b/raw/aaer/2016/AAER-3825.txt @@ -0,0 +1,936 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79364 / November 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3825 / November 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17691 + + + + +In the Matter of + +PMB Helin Donovan, LLP, +Christopher Bauer, CPA, +and Jeffrey Jamieson, 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 PMB Helin +Donovan, LLP (“PMBHD”), Christopher Bauer (“Bauer”) and Jeffrey Jamieson (“Jamieson”) +(collectively “Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act 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 +2 + +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, 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. This proceeding concerns improper professional conduct and violations of Commission +and Public Company Accounting Oversight Board (“PCAOB”) rules and standards that require a +registered public accounting firm and its associated persons to be independent of the firm’s audit + +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. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +client throughout the audit and professional engagement period. As a result of failing to comply +with partner rotation requirements, PMBHD was not independent with respect to seven issuer +clients in connection with the 2010 through 2013 reporting periods detailed below resulting in the +issuance of audit reports that erroneously stated PMBHD had conducted its audits in accordance +with PCAOB standards. + +2. This proceeding also concerns the failure to conduct quarterly reviews and an annual +audit relating to Uni-Pixel, Inc. (“UNXL”) for the year ended December 31, 2013 in accordance +with applicable professional standards and issuance of an audit report that erroneously stated it had +conducted its audit in accordance with PCAOB standards. + +B. RESPONDENTS + +3. PMBHD is a public accounting firm that has been registered since 2003 with the +PCAOB and is headquartered in Austin, Texas. + +4. Christopher Bauer, CPA, age 41 and a resident of Austin, Texas, is a CPA licensed +in Texas and Colorado. He also was a licensed CPA in Massachusetts from 2001 until his license +expired in 2009. Bauer served as the lead engagement partner on UNXL engagements from the +2008 audit through the second quarter review in 2013. He served as PMBHD’s CFO from 2011 +through 2013, the partner in charge of the firm’s Texas audit practice beginning in 2013, and then +the firm-wide chair of the audit quality committee in 2014. Bauer left PMBHD in October 2014. + +5. Jeffrey Jamieson, CPA, age 64 and a resident of Dallas, Texas, is a CPA licensed in +Texas, Florida and California. He has been the managing partner for PMBHD’s Dallas office since +2009. Jamieson served as the engagement quality review partner for UNXL’s 2012 audit and 2013 +first and second quarter reviews. From the 2013 third quarter review through the 2015 audit, +Jamieson served as the lead engagement partner for UNXL engagements. + +C. RELATED INDIVIDUALS AND ENTITY + +6. Partner A, is a CPA licensed in Texas. He joined PMBHD in 2002 and departed in +January 2014. At relevant times, he served as the lead engagement partner for Issuer F and as the +engagement quality review partner for Issuer E. + +7. Partner B, is a CPA licensed in California. He joined PMBHD in 2002 and departed +in December 2012. At relevant times, he served as the engagement quality review partner for +Issuer F. + +8. Partner C, is a CPA licensed in Washington. She joined PMBHD in 2007 and +departed in March 2016. At relevant times, she served as the lead engagement partner for Issuers +D and G. + +4 + +9. Partner D, is a CPA licensed in Texas. He has been an audit partner with PMBHD +since 2002. At relevant times, he served as the lead engagement partner for Issuers B and C and +the engagement quality review partner for Issuers B, C, and D. + +10. Uni-Pixel, Inc. (“UNXL”) is a Delaware Corporation originally headquartered in The +Woodlands, Texas, and, beginning in August 2015, headquartered in Santa Clara, California. +UNXL purports to develop and sell display and touch screen technologies. At all relevant times, +UNXL’s common stock was registered with the Commission pursuant to Section 12(b) of the +Exchange Act and quoted on the NASDAQ. At all relevant times, UNXL had a fiscal year ended +on the last day of December. On March 16, 2016, by consent, a Final Judgment was entered +against UNXL, enjoining it from violating Section 17(a) of the Securities Act of 1933 (“Securities +Act”), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, +12b-20, 13a-1, 13a-11, 13a-13 thereunder, and pay a $750,000 civil penalty, in a civil action +entitled SEC v. Killion et. al, Civ. Act. No. 4:16-cv-00621 (S.D.Tex. Mar. 16, 2016). + +D. RELEVANT ISSUERS + +11. At all relevant times, Issuer B filed reports with the Commission pursuant to Rule +30b2-1(a) of the Investment Company Act, had a fiscal year ended on the last day of December +and had securities that traded on the NASDAQ. + +12. At all relevant times, Issuer C filed reports with the Commission pursuant to Rule +30b2-1(a) of the Investment Company Act, had a fiscal year ended on the last day of December +and had securities that traded on the NASDAQ. + +13. At all relevant times, Issuer D’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and traded on the OTC Market. The issuer also had +a fiscal year ended on the last day of December. + +14. At all relevant times, Issuer E’s common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act and traded on the OTC Market. The issuer also had +a fiscal year ended on the last day of December. + +15. At all relevant times, Issuer F’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ. The issuer also had a +fiscal year ended on the last day of March. + +16. At all relevant times, Issuer G’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and traded on the OTC Market. The issuer also had +a fiscal year ended on the last day of December. + +5 + +E. FACTS + +i. Commission Audit Partner Rotation Requirements and PCAOB Engagement +Quality Review Requirements + +17. Registered public accounting firms and their associated persons are required to be +independent of their audit clients throughout the audit and professional engagement period. +Because of the importance of an accountant’s independence to the integrity of the financial +reporting system, the Commission has concluded that circumstances that raise questions about an +accountant’s independence always merit heightened scrutiny. See Amendment to Rule 102(e) of +the Commission’s Rules of Practice, 63 Fed. Reg. 57,164 – 67; 57,168 (Oct. 26, 1998). + +18. Section 10A(j) of the Exchange Act, Audit Partner Rotation, states “it shall be +unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or +coordinating) audit partner (having primary responsibility for the audit) or the partner responsible +for reviewing the audit, has performed audit services for that issuer in each of the five previous +fiscal years of that issuer.”4 + +19. Rule 10A-2 of the Exchange Act, Auditor Independence, provides that it shall be +unlawful for an auditor not to be independent with respect to, among other requirements, the +partner rotation requirements of the Commission’s Regulation S-X. The Commission’s +independence rules allow lead and concurring partners5 to serve for five consecutive years, after +which they may not serve in either role for another period of five consecutive years. Rule +2-01(c)(6)(i)(A) of Regulation S-X. PCAOB Rule 3520, Auditor Independence, requires that a +registered public accounting firm and its associated persons be independent of the Firm’s issuer +audit clients throughout the audit and professional engagement period. + +20. For fiscal years beginning on or after December 15, 2009, Auditing Standard No. 7, +Engagement Quality Review (“AS 7”) requires that an engagement quality review be performed on +audits and interim reviews conducted pursuant to PCAOB standards. AS 7, ¶ 1. “The person who +served as the engagement partner during either of the two audits preceding the audit subject to the +engagement quality review may not be the engagement quality reviewer.” (“Cooling-Off Period”). +AS 7, ¶ 8. In addition, the engagement quality reviewer should, among other things, review the +engagement team’s evaluation of the firm’s independence in relation to the engagement. AS 7, +¶¶ 10 and 15. When reviewing interim financial information, and / or performing an engagement +quality review for an audit, the engagement quality reviewer may provide concurring approval of +issuance only if, after performing with due professional care the review required by AS 7, he or she +is not aware of a significant engagement deficiency. Id. at ¶¶ 12 and 17. AS 7 provides that a + +4 PCAOB Rule 1001(a)(vii) defines audit services in part as “professional services +rendered for the audit of an issuer’s annual financial statements, and (if applicable) for the +reviews of an issuer’s financial statements included in the issuer’s quarterly reports.” +5 See Definitions at Rule 2-01(f)(7)(ii)(A) and (B) of Regulation S-X. +6 + +significant engagement deficiency in a review of interim financial information exists when, among +other things, the firm is not independent of its client. Id. + +ii. PMBHD Violated Audit Partner Rotation Requirements and PCAOB +Engagement Quality Review Cooling-Off Period Requirements + +21. PMBHD failed to comply with the audit partner rotation requirements and, as a result, +PMBHD’s independence was impaired with respect to the seven engagements described below. +PMBHD also failed to comply with the PCAOB Engagement Quality Review Cooling-Off Period +requirements. In connection therewith, the firm issued audit reports erroneously stating that +PMBHD conducted its audits in accordance with PCAOB standards. + +Issuer Violations of Audit Partner Rotation Requirements +UNXL Bauer improperly served as lead engagement partner for the Q1 and Q2 2013 +reporting periods after previously serving as lead engagement partner for the +preceding five fiscal periods (December 31, 2008 through December 31, 2012) +Issuer D Partner C improperly served as lead engagement partner for the Q1, Q2, and Q3 +2013 reporting periods after previously serving as lead engagement partner for +the preceding five fiscal periods (December 31, 2008 through December 31, +2012); Partner D improperly served as the engagement quality review partner for +the 2012 and Q1 and Q2 2013 reporting periods after previously serving as the +concurring partner or the engagement quality review partner for the preceding +five fiscal periods (December 31, 2007 through December 31, 2011) +Issuer E Partner A improperly served as the engagement quality review partner for the Q1, +Q2, and Q3 2012 reporting periods after previously serving as the concurring +partner or the engagement quality review partner for the preceding five fiscal +periods (December 31, 2007 through December 31, 2011) +Issuer F Partner A improperly served as the lead engagement partner for the Q1 and Q2 +fiscal 2013 reporting periods after previously serving as lead engagement partner +for the preceding five fiscal periods (March 31, 2008 through March 31, 2012); +Partner B improperly served as the engagement quality review partner for the Q1 +and Q2 fiscal 2013 reporting periods after previously serving as the concurring +partner or the engagement quality review partner for the preceding five fiscal +periods (March 31, 2008 through March 31, 2012) +Issuer G Partner C improperly served as lead engagement partner for the Q1, Q2, and Q3 +2013 reporting periods after previously serving as lead engagement partner for +the preceding five fiscal periods (December 31, 2008 through December 31, +2012) + +7 + + +Issuer Violations of Engagement Quality Review Cooling-Off Period and Audit +Partner Rotation Requirements +Issuer B Partner D improperly served as the engagement quality review partner for the +2010 fiscal reporting periods after having previously served as lead engagement +partner during either of the two audits preceding the audit subject to the +engagement quality review – Partner D served as the lead engagement partner for +the fiscal years ended December 31, 2005 through 2008 and the concurring +partner for the fiscal year ended December 31, 2009. +Issuer C Partner D improperly served as engagement quality review partner for the 2010 +fiscal reporting periods after having previously served as lead engagement partner +during either of the two audits preceding the audit subject to the engagement +quality review – Partner D served as the lead engagement partner during the fiscal +years ended December 31, 2005 through 2008 and the concurring partner for the +fiscal year ended December 31, 2009. + +iii. 2013 UNXL Engagement Review and Audit Failures + +22. As detailed below, PMBHD, Bauer, and Jamieson failed to conduct UNXL’s 2013 +quarterly reviews and annual audit in accordance with PCAOB standards for two main reasons. +First, Bauer was not independent of UNXL during the Q1 and Q2 2013 reviews of interim +financial information because he served as lead engagement partner for the preceding five fiscal +periods. Jamieson, who served as engagement quality review partner for UNXL’s 2012 audit – +and Bauer’s fifth consecutive audit – failed to identify that Bauer was not independent when +Jamieson performed his engagement quality reviews for Q1 and Q2 2013. Second, PMBHD, +Bauer, and Jamieson improperly evaluated whether UNXL’s disclosures in its interim and year- +end financial statements relating to two research and development arrangements contained the +information essential for a fair presentation of the financial statements in conformity with the +applicable financial reporting framework. PMBHD and Jamieson should have evaluated these +departures from Generally Accepted Accounting Principles (“GAAP”) in UNXL’s audited +financial statements for fiscal 2013, and should have considered whether to modify the audit report +based on their evaluation. + +a. PMBHD’s Independence Was Impaired For Q1 and Q2 2013 + +23. As noted above, Bauer was not independent of UNXL when he served as lead +engagement partner for the Q1 and Q2 2013 reviews because he previously functioned as lead +engagement partner for the preceding five fiscal periods (December 31, 2008 through December +31, 2012). Additionally, Jamieson failed to identify that Bauer’s continuing involvement impaired +PMBHD’s independence as a part of his engagement quality reviews of PMBHD’s Q1 and Q2 +2013 interim review engagements. The engagement quality review partner should, among other +things, review the engagement team’s evaluation of the firm’s independence in relation to the +8 + +engagement. AS 7, ¶ 15. When reviewing interim financial information, the engagement quality +reviewer may provide concurring approval of issuance only if, after performing with due +professional care the review required by AS 7, he or she is not aware of a significant engagement +deficiency. Id. at ¶ 17. AS 7 provides that a significant engagement deficiency in a review of +interim financial information exists when, among other things, the firm is not independent of its +client. Id. Despite the impairment of PMBHD’s independence, Jamieson nonetheless provided +concurring approval of issuance in connection with the reviews of UNXL’s Q1 and Q2 2013 +interim financial information. + +b. UNXL’s Agreements with Dell and Intel + +24. Effective on November 20, 2012, UNXL entered into a “preferred price and capacity +license” agreement with Dell to introduce products to the market using the company’s purportedly +proprietary technology (the “Dell Agreement”). The Dell Agreement contemplated UNXL +satisfying three potential deliverables or milestones. At the completion of each milestone, +contingent upon the mutual agreement of the parties, Dell would pay UNXL $5 million, for a +potential total of $15 million. UNXL received the first milestone payment of $5 million in March +2013, but did not receive any additional amounts under the Dell Agreement. + +25. The Dell Agreement – a preferred price and capacity license – was the first contract of +its kind for UNXL. It granted Dell an exclusive license in the notebook market segment for +UNXL’s purported technology, and the potential revenue of $15 million dwarfed not only UNXL’s +2012 revenues of $76,000 but also the Company’s lifetime total revenue of approximately $1.67 +million. + +26. Effective March 21, 2013, UNXL entered into an agreement with Intel in connection +with the development and production of UNXL’s purported technology (the “Intel Agreement”). +The Intel Agreement contemplated two potential milestones requiring deliverables from UNXL. +At the completion of each milestone, contingent upon the mutual agreement of the parties, Intel +would pay UNXL $5 million, for a potential total of $10 million. UNXL received an initial +payment of $5 million in May 2013 to assist with the purchase of certain equipment, and this was +classified as deferred revenue until completion of the first required deliverable. UNXL never +reached the first milestone contemplated by the Intel Agreement and did not receive any additional +payments from Intel. + +c. UNXL’s GAAP Required Disclosure Omissions + +27. UNXL filed with the Commission quarterly reports on Forms 10-Q on April 30, +August 8, and November 7, 2013 and its 2013 annual report on Form 10-K on February 26, 2014. +In each of these reports, UNXL failed to provide disclosures required under GAAP in connection +with the Dell and Intel Agreements despite noting that it used the milestone accounting method in +its 2013 Form 10-K. + +9 + +28. Applicable accounting standards require specific disclosures, including the terms of +significant arrangements and a description of each milestone and related contingent consideration. +UNXL’s lack of disclosure allowed the Company to conceal the fact that it not only missed, but +also did not even have the capability to meet, contractually defined milestones required under both +the Dell and Intel Agreements. + +29. Under GAAP, the Dell and Intel Agreements are research and development +arrangements. ASC 730-20, Research and Development Arrangements, requires the following +disclosures: + +a. The terms of significant agreements under the research and development +arrangement (including royalty arrangements, purchase provisions, license +agreements, and commitments to provide additional funding) as of the date of each +balance sheet presented; and + +b. The amount of compensation earned and costs incurred under such contracts for +each period for which an income statement is presented. + +30. ASC 605-28, Revenue Recognition: Milestone Method, requires an entity to disclose +the following for each arrangement that includes milestones: + +a. A description of the overall arrangement; + +b. A description of each milestone and related contingent consideration; + +c. A determination of whether each milestone is considered substantive; + +d. The factors that the entity considered in determining whether the milestone or +milestones are substantive; and + +e. The amount of consideration recognized during the period of the milestone or +milestones. + +31. UNXL failed to make all of the foregoing disclosures in connection with the Dell and +Intel Agreements until January 27, 2015 when it filed an amended Form 10-K for the 2013 +reporting period. + +d. PMBHD’s Reviews of Q1 and Q2 2013 Interim Information + +32. The objective of a review of interim financial information is to provide the accountant +with a basis for communicating whether he or she is aware of any material modifications that +should be made to the interim financial information for it to conform with GAAP. A review +consists principally of performing analytical procedures and making inquiries, and does not +contemplate tests of accounting records, tests of controls, or performing other procedures +10 + +ordinarily performed in an audit. A review may bring to the accountant's attention significant +matters affecting the interim financial information, but it does not provide assurance that the +accountant will become aware of all significant matters that would be identified in an +audit. AU 722, Interim Financial Information, at .07. + +33. Accountants should make inquiries of management and perform other review +procedures when conducting a review of interim financial information. AU 722.18. One example +of a situation ordinarily requiring an accountant to inquire of management is the existence of new +or complex revenue recognition methods. AU 722.55. If the accountant becomes aware of +information that leads him or her to believe that the interim financial information may not be in +conformity with GAAP in all material respects, the accountant should make additional inquiries or +perform other procedures that the accountant considers appropriate to provide a basis for +communicating whether he or she is aware of any material modifications that should be made to +the interim financial information. Another example is if the accountant questions whether a +significant sales transaction is recorded in conformity with GAAP, the accountant should perform +additional procedures, such as discussing the terms of the transaction with senior marketing and +accounting personnel, reading the sales contract, or both, to resolve his or her +questions. AU 722.22. + +34. Misstatements identified by the accountant or brought to the accountant's attention, +including inadequate disclosure, should be evaluated individually and in the aggregate to determine +whether material modification should be made to the interim financial information for it to +conform with GAAP. AU 722.26. + +35. Rule 10-01 of Regulation S-X states, in part, that + +The interim financial information shall include disclosures either on the face of the +financial statements or in accompanying footnotes sufficient so as to make the +interim information presented not misleading. Registrants may presume that users +of the interim financial information have read or have access to the audited +financial statements for the preceding fiscal year and that the adequacy of additional +disclosure needed for a fair presentation, except in regard to material contingencies, +may be determined in that context. Accordingly, footnote disclosure which would +substantially duplicate the disclosure contained in the most recent annual report to +security holders or latest audited financial statements […] may be omitted. +However, disclosure shall be provided where events subsequent to the end of the +most recent fiscal year have occurred which have a material impact on the +registrant. + +36. When reviewing interim financial information, engagement quality reviewers should, +among other things, evaluate the engagement team’s significant judgments in connection with the +company’s business and recent significant activities. AS 7, ¶ 15. The engagement quality +reviewer should also review the interim financial statements for all periods presented and for the +immediately preceding interim period. Id. +11 + + +37. As a part of PMBHD’s reviews of UNXL’s Q1 and Q2 2013 interim financial +information, Bauer, as the lead engagement partner, and Jamieson, as the engagement quality +review partner, were aware that UNXL had entered into material agreements with Intel and +Dell. Additionally, Bauer examined the agreements and discussed the company’s accounting +treatment with UNXL’s management. Bauer and Jamieson knew or should have known that these +agreements were research and development agreements containing contractual milestones affecting +revenue recognition. Similarly, Bauer and Jamieson knew or should have known that the interim +financial information included in UNXL’s Q1 and Q2 2013 Forms 10-Q, read in conjunction with +the audited financial statements included in UNXL’s 2012 Form 10-K, did not contain all of the +disclosures about these agreements that were required for the Q1 and Q2 2013 interim financial +information to be in conformity with GAAP in all material respects. + +38. Bauer improperly evaluated the required revenue recognition disclosures in the +financial statements included in UNXL’s Q1 and Q2 2013 Forms 10-Q. The Dell Agreement was +the first contract of its kind for UNXL and amounted to the most revenue ever recognized by the +Company. Yet, the financial statements included in UNXL’s Form 10-Q for Q1 2013 was devoid +of any mention of the milestone method, let alone the disclosures required about the Dell +Agreement. + +39. The Intel Agreement similarly resulted in significant operational results for UNXL and +caused the company to recognize $5 million in deferred revenue – amounting to approximately +76% of UNXL’s total liabilities. UNXL’s financial statements included in its Form 10-Q for Q2 +2013 again failed to mention it was using the milestone method and did not include all of the +required disclosures about the Intel Agreement. + +40. As engagement quality reviewer, Jamieson’s review should have included a review of +the significant judgments of the engagement team’s review of UNXL’s most significant revenue +transactions. Jamieson discussed the Dell and Intel agreements with the engagement team and had +access to all relevant facts, yet he failed to identify that the engagement team’s documentation did +not address the engagement team’s erroneous conclusion regarding UNXL’s omission of required +revenue recognition disclosures under GAAP. AS 7 ¶ 16. Similarly, when Jamieson served as the +engagement quality reviewer for UNXL’s 2012 audit and Q1 and Q2 2013 review engagements, he +reviewed the engagement team’s evaluation of the firm’s independence in relation to the +engagement but failed to identify that Bauer was required to rotate off the engagement beginning +in Q1 2013. As a result, Jamieson, as engagement quality reviewer for PMBHD’s Q1 and Q2 2013 +engagements, improperly provided concurring approval of issuance and approved Bauer’s +communications of the engagement conclusions to UNXL’s management and audit committee +without objecting to UNXL’s failure to include the required revenue recognition disclosures in the +Company’s financial statements included in its Q1 and Q2 2013 Forms 10-Q or informing them +that PMBHD’s independence was impaired. + +12 + +e. PMBHD’s Review of Q3 2013 Interim Information and 2013 Audit + +41. Jamieson, as the lead engagement partner for PMBHD’s Q3 2013 review and 2013 +audit, improperly evaluated the required revenue recognition disclosures in the financial statements +included in UNXL’s Q3 2013 Form 10-Q and 2013 Form 10-K. Neither filing included all of the +required disclosures about the Dell and Intel Agreements. + +42. In connection with its audit of UNXL’s December 31, 2013 financial statements, a +PMBHD audit manager communicated in writing to UNXL’s then-CFO, copying Jamieson, +providing specific instructions on required disclosures about the Dell and Intel Agreements, +including references and details about the milestone accounting method. Most notably, the +communication stated, in part, “We appreciate that you will want to have limited disclosures +around the Dell contract but the disclosure still needs to fall in line with GAAP.” + +43. PMBHD’s audit documentation contained the inappropriate conclusion that UNXL’s +financial statement disclosures complied with GAAP. For instance, PMBHD utilized a +standardized disclosure checklist to review UNXL’s primary disclosure requirements under +GAAP. In the workpaper section relating to “Revenue Recognition – Special Areas,” the +workpaper indicated that all of the relevant disclosures relating to “Milestone Method Related to +Research and Development” had been made despite, in the starkest example, UNXL not disclosing +a “description of each milestone and related contingent consideration” for either the Dell or Intel +Agreements. + +44. In another instance, PMBHD’s 2013 audit revenue recognition memorandum properly +identified ASC 730-20 and ASC 605-28 as the applicable accounting standards for the Dell and +Intel Agreements but improperly concluded that the filed disclosures complied with GAAP. + +iv. PMBHD’s Audit Reports Did Not Comply With PCAOB Standards and Thus +Violated Rule 2-02 of Regulation S-X + +45. Under AU 508, Reports on Audited Financial Statements, 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). + +13 + +46. As described above, PMBHD’s violations of the partner rotation requirements resulted +in the firm not being independent with respect to seven issuer audit clients for the 2010 through +2013 reporting periods. As a result, PMBHD should therefore not have issued audit reports +asserting that PMBHD had conducted its audits in accordance with PCAOB standards for the +periods in which it was not independent. + +47. As described above, PMBHD improperly evaluated the required revenue recognition +disclosures in the financial statements included in UNXL’s 2013 Form 10-K. PMBHD should +therefore not have issued an audit report asserting that PMBHD had conducted its audit of UNXL’s +2013 financial statements in accordance with PCAOB standards and that UNXL’s 2013 financial +statements were presented fairly, in all material respects. + +v. PMBHD Failed to Exercise Due Professional Care and Professional Skepticism + +48. 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, Generally Accepted Auditing +Standards, at .02; AU 722.01 (noting the three general standards discussed in AU 150 are +applicable to a review of interim financial information). 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, Due Professional Care in the Performance of Work, at .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. + +49. PMBHD failed to act with due professional care because the firm repeatedly failed to +comply with partner rotation requirements resulting in the firm not being independent with respect +to seven issuer clients for the 2009 through 2013 reporting periods. Bauer and Jamieson failed to +act with due professional care in connection with the firm not being independent with respect to +UNXL’s Q1 and Q2 2013 review engagements. Bauer and Jamieson also failed to act with due +professional care by improperly evaluating the required revenue recognition disclosures relating to +the Dell and Intel Agreements despite the significance of the agreements to the issuer and +identification of the applicable accounting standards. PMBHD, Bauer, and Jamieson should have +addressed these departures from GAAP in UNXL’s audited financial statements by modification of +the audit opinion. Auditing Standard No. 14, Evaluating Audit Results, ¶ 31; AU 508, Reports on +Audited Financial Statements, .20 and .41. + +14 + +F. VIOLATIONS + +50. As a result of the conduct described above, PMBHD willfully6 violated, and Bauer and +Jamieson willfully aided and abetted PMBHD’s violations of, Section 10A(j) of the Exchange Act +and Rule 10A-2 thereunder which makes it unlawful for an auditor not to be independent with +respect to, among other requirements, the partner rotation requirements. + +51. As a result of the conduct described above, PMBHD violated, and Bauer and Jamieson +willfully aided and abetted PMBHD’s violations of, Rule 2-02 of Regulation S-X which requires +an accountant’s report to state whether the audit was made in accordance with generally accepted +auditing standards. + +52. As a result of the conduct described above, PMBHD, Bauer, and Jamieson caused +issuers to violate Section 13(a) of the Exchange Act and Rule 13a-1 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. The obligation to file such reports +embodies the requirement that they be true and correct. PMBHD authorized issuers to include +audit reports that falsely stated that the audits had been conducted in accordance with PCAOB +standards. Similarly, PMBHD, Bauer, and Jamieson caused issuers to violate Section 13(a) of the +Exchange Act and Rule 13a-13 thereunder when the issuers failed to include in their Forms 10-Q +interim financial statements that had been reviewed in accordance with PCAOB standards. + +G. FINDINGS + +Based on the foregoing, the Commission finds that: + +a. PMBHD, Bauer, and Jamieson engaged in improper professional conduct pursuant +to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice; + +b. PMBHD (i) willfully violated Section 10A(j) of the Exchange Act and Rule 10A-2 +thereunder, and Rule 2-02 of Regulation S-X; and (ii) caused issuers to violate Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder; + +c. Bauer (i) willfully aided and abetted PMBHD’s violations of Section 10A(j) of the +Exchange Act and Rule 10A-2 thereunder, and Rule 2-02 of Regulation S-X; and (ii) caused +issuers to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder; and + + +6 A finding of willfulness does not require intent to violate, but merely intent to do the act which +constitutes a violation. SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1309 (S.D. Fla.2007), +citing Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); SEC v. Steadman, 603 F.2d +1126, 1135 (5th Cir. 1979); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976). +15 + +d. Jamieson (i) willfully aided and abetted PMBHD’s violations of Section 10A(j) of +the Exchange Act and Rule 10A-2 thereunder, and Rule 2-02 of Regulation S-X; and (ii) caused +issuers to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +H. REMEDIAL EFFORTS + + In determining to accept the Offer, the Commission considered remedial acts undertaken by +PMBHD. + +I. UNDERTAKINGS + + Respondent PMBHD undertakes: + +a. to retain, within 60 days of the date of the Order, at its own expense, the services of an +Independent Consultant not unacceptable to the Division of Enforcement of the +Commission (“Division of Enforcement”), to review PMBHD’s written policies and +procedures concerning (i) audit client acceptance, (ii) audit partner and engagement +quality review partner assignment, and (iii) auditor independence including audit +partner and engagement quality review partner rotation; + +b. to require the Independent Consultant, at the conclusion of the review, which shall be +no more than 120 days after the entry of the Order, to submit a Report of the +Independent Consultant to PMBHD and the Division of Enforcement. The report shall +address the issues described above and shall include a description of the review +performed, the conclusions reached, the Independent Consultant’s recommendations +for changes or improvements to the policies, procedures and practices of PMBHD and +a procedure for implementing the recommended changes or improvements to such +policies, procedures, and practices to provide reasonable assurance that PMBHD’s +audits are conducted in compliance with (i) the relevant Commission’s regulations and +(ii) auditing standards relevant to appearing and practicing before the Commission; + +c. to adopt, implement, and thereafter maintain all policies, procedures, and practices +recommended in the Report of the Independent Consultant within 180 days from the +date of the entry of the Order; provided however, that within 150 days from the date of +the entry of the Order, PMBHD will in writing advise the Independent Consultant and +the Division of Enforcement of any recommendations that it considers to be +unnecessary or inappropriate. With respect to any such recommendation, PMBHD +need not adopt that recommendation at that time but will propose in writing an +alternative policy, procedure, or system designed to achieve the same objective or +purpose. As to any of the Independent Consultant’s recommendations about which +PMBHD and the Independent Consultant do not agree, such parties shall attempt in +good faith to reach agreement within 180 days of the date of the entry of the Order. In +the event that PMBHD and the Independent Consultant are unable to agree on an +alternative proposal, PMBHD will abide by the determinations of the Independent +16 + +Consultant and adopt those recommendations deemed appropriate by the Independent +Consultant; + +d. to cooperate fully with the Independent Consultant in its review, including making such +information and documents available as the Independent Consultant may reasonably +request, and by permitting and requiring PMBHD’s employees and agents to supply +such information and documents as the Independent Consultant may reasonably +request; + +e. that, in order to ensure the independence of the Independent Consultant, PMBHD +(i) shall not have the authority to terminate the Independent Consultant without prior +written approval of the Division of Enforcement; and (ii) shall compensate the +Independent Consultant, and persons engaged to assist the Independent Consultant, for +services rendered pursuant to the Order at their reasonable and customary rates; + +f. to 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 PMBHD, or +any of its present or former affiliates, directors, officers, employees, or agents acting in +their capacity as such. The agreement will also provide that the Independent Consultant +will require that any firm with which he/she is affiliated or of which he/she is a +member, and any person engaged to assist the Independent Consultant in performance +of his/her duties under this Order shall not, without prior written consent of the +Division of Enforcement’s Fort Worth office, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with PMBHD, 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; and + +g. to certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of compliance +in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. The Commission staff may make reasonable requests for further evidence +of compliance, and Respondent agrees to provide such evidence. The certification and +supporting material shall be submitted to David L. Peavler, Associate Regional +Director, with a copy to the Office of Chief Counsel of the Division of Enforcement, no +later than sixty (60) days from the date of the completion of the undertakings. + +h. For good cause shown and upon timely application by the Independent Consultant or +PMBHD, the Commission’s staff may extend any of the deadlines set forth above. + +17 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Section 21C of the Exchange Act, PMBHD, Bauer and Jamieson shall +cease and desist from committing or causing any violations and any future violations of Sections +10A(j) and 13(a) of the Exchange Act and Rules 10A-2, 13a-1, and 13a-13 thereunder, and Rule 2- +02 of Regulation S-X. + +B. Pursuant to Sections 4C and 21C of the Exchange Act and Rules 102(e)(1)(ii) and +(iii) of the Commission’s Rules of Practice PMBHD is censured. + +C. PMBHD shall comply with the undertakings enumerated in Section III.I. above. + +D. PMBHD shall, within 14 days of the entry of this Order, pay a civil money penalty +in the amount of $160,000 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. Pursuant to Sections 4C and 21C of the Exchange Act and Rules 102(e)(1)(ii) and +(iii) of the Commission’s Rules of Practice, Bauer is denied the privilege of appearing or practicing +before the Commission as an accountant. + +1. After one year from the date of this order, Bauer may request that the +Commission consider his reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Bauer’s work in his practice before the Commission will be reviewed +either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +b. an independent accountant. Such an application must satisfy the +Commission that: + +(1) Bauer, 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; +18 + + +(2) Bauer, 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 Bauer’s +or the firm’s quality control system that would indicate that the +Bauer will not receive appropriate supervision; + +(3) Bauer has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by +the PCAOB (other than reinstatement by the Commission); and + +(4) Bauer acknowledges his responsibility, as long as Bauer 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. + +2. The Commission will consider an application by Bauer 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 Bauer’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + +F. Bauer shall pay civil penalties in the amount of $15,000 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: + +a. $5,000 within 14 days of the entry of this Order; +b. $5,000 within 365 days of the entry of this Order; and +c. $5,000 within 729 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. + +G. Pursuant to Sections 4C and 21C of the Exchange Act and Rules 102(e)(1)(ii) and +(iii) of the Commission’s Rules of Practice, Jamieson is denied the privilege of appearing or +practicing before the Commission as an accountant. + +19 + +1. After one year from the date of this order, Jamieson may request that the +Commission consider his reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Jamieson’s work in his practice before the Commission will be +reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as +long as he practices before the Commission in this capacity; and/or + +b. an independent accountant. Such an application must satisfy the +Commission that: + +(1) Jamieson, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to +be effective; + +(2) Jamieson, 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 Jamieson’s or the firm’s quality control system that would +indicate that the Jamieson will not receive appropriate +supervision; + +(3) Jamieson has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions +imposed by the PCAOB (other than reinstatement by the +Commission); and + +(4) Jamieson acknowledges his responsibility, as long as Jamieson +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. + +2. The Commission will consider an application by Jamieson 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 +20 + +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Jamieson’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + +H. Jamieson shall pay civil penalties in the amount of $15,000 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: + +a. $5,000 within 14 days of the entry of this Order; +b. $5,000 within 365 days of the entry of this Order; and +c. $5,000 within 729 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. + +I. 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 PMBHD, +Bauer or Jamieson 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. + +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 +21 + +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 +Bauer and Jamieson, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Bauer or Jamieson 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 Bauer or Jamieson of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3826.txt b/raw/aaer/2016/AAER-3826.txt new file mode 100644 index 0000000000000000000000000000000000000000..58199c79eba6969fe147a433e66892cdd14ef338 --- /dev/null +++ b/raw/aaer/2016/AAER-3826.txt @@ -0,0 +1,1636 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79368 / November 21, 2016 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4572 / November 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3826 / November 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17694 + + +In the Matter of + +GRASSI & CO., CPAs, P.C., + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 4C OF THE SECURITIES +EXCHANGE ACT OF 1934, SECTION +203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940 AND RULE +102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Grassi & Co., CPAs, P.C., (“Grassi” or “Respondent”) pursuant to Section 4C1 of the Securities +Exchange Act of 1934 (“Exchange Act”), Section 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +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 + + +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 Respondent and the subject +matter of these proceedings, which are admitted, Respondent consents to the entry of this Order +Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 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 Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. Grassi served as independent auditor for several private funds advised by +ClearPath Wealth Management, LLC (“ClearPath”) and ClearPath’s principal, Patrick +Churchville (“Churchville”) between January 2012 and January 2013. During that time, Grassi +issued nine audit reports containing unqualified opinions on the financial statements for four +different funds, for years ended 2009 through 2011. From 2010 forward, however, ClearPath +and Churchville were defrauding the funds they advised, and the investors in those funds, by +misappropriating fund assets and by making repeated misstatements to investors about the value +and existence of fund investments. For its part, Grassi repeatedly violated professional standards +while failing to heed indications of ClearPath’s and Churchville’s fraud. As a result of its +negligence, five of Grassi’s nine audit reports were materially false. This enabled ClearPath and +Churchville to continue to report to limited partners materially inflated values of their +investments without contradiction, to conceal use of limited partners’ investments for their own +benefit, and continue their scheme to defraud the funds and their investors unimpeded. Grassi +thereby 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, and was a cause of +ClearPath’s and Churchville’s violations of Sections 206(2) and 206(4) of the Advisers Act and +Rule 206(4)-8 thereunder. + + +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 and are not binding on any other person or entity in +this or any other proceeding. + +3 + +B. RESPONDENT + +2. Grassi is a New York domestic professional corporation and is registered with the +Public Company Accounting Oversight Board as a public accounting firm with its headquarters +in Jericho, New York. Grassi acquired the public accounting firm Pustorino, Puglisi & Co., LLP +(“Pustorino”) effective January 1, 2012. + +C. OTHER RELEVANT ENTITIES AND INDIVIDUAL + +3. ClearPath is a Delaware limited liability company (“LLC”) and an investment +adviser that was licensed by the State of Rhode Island with its principal place of business in +Barrington, Rhode Island. ClearPath was registered with the Commission as an investment +adviser beginning January 3, 2008 through November 16, 2012 (SEC File No. 801-68715). +ClearPath is the manager of several LLCs that were the general partners of five private funds. +ClearPath was also the adviser to these private funds pursuant to management agreements +between ClearPath and each of the funds. On May 7, 2015, the Commission filed a civil +complaint alleging fraud charges against ClearPath and its owner, Patrick Evans Churchville, in +the United States District Court for the District of Rhode Island. Securities and Exchange +Commission v. ClearPath Wealth Management, LLC, Patrick Evans Churchville, as Defendants, +and ClearPath Multi-Strategy Fund I, L.P., ClearPath Multi-Strategy Fund II, L.P., ClearPath +Multi-Strategy Fund III, L.P., and HCR Value Fund, L.P., as Relief Defendants, Civil Action No. +15-cv-00191 (D.R.I. May 7, 2015). ClearPath is now run by a court-appointed receiver. + +4. Churchville, age 47, lives in Barrington, Rhode Island. He is the sole owner and +President of ClearPath. On August 4, 2016, Churchville pled guilty to five counts of wire fraud +and one count of tax evasion, in criminal charges alleging misconduct also alleged in the +Commission’s complaint. United States of America v. Patrick Churchville, (CR 16 00068, D. +R.I. July 5, 2016). + +5. The four private funds managed by ClearPath and Churchville for which Grassi +provided audit and tax services were (collectively, the “Funds”): + +a. ClearPath Multi-Strategy Fund I, L.P. (“MSF I”), formerly known as +ClearPath Private Equity Fund, L.P., is a Delaware limited partnership formed +in 2008. + +b. ClearPath Multi-Strategy Fund II, L.P. (“MSF II”) is a Delaware limited +partnership formed in 2011. + +c. ClearPath Multi-Strategy Fund III, L.P. (“MSF III”), formerly known as +the ClearPath Healthcare Receivables Investments Fund L.P., is a Delaware +limited partnership formed in 2009. + +d. ClearPath Alternative Investments Fund, L.P. (“CPAI”) was a Delaware +limited partnership formed in 2009. As of January 1, 2012, this Fund was +merged into MSF I. + +4 + +D. FACTS + +Grassi’s Relationship with ClearPath and the Funds + +6. ClearPath retained Pustorino on behalf of three of the four Funds as their +independent auditor in November 2011 (for MSF I, MSF III and CPAI). When Pustorino +merged with Grassi in January 2012, the audit work was transitioned to Grassi. In May 2012, +ClearPath retained Grassi for the audit of MSF II. Grassi was engaged to audit the Funds in +accordance with U.S. generally accepted auditing standards (“GAAS”) and express an opinion +about whether the Funds’ financial statements were fairly presented, in all material respects, in +conformity with U.S. generally accepted accounting principles (“GAAP”).4 Grassi was also +engaged to prepare all required tax returns, including Forms K-1, for the Funds’ partners for the +2011 calendar year. + +7. Grassi issued nine audit reports expressing an unqualified opinion on the fair +presentation of the financial statements between April 2012 and January 2013 for the Funds. +The table below identifies each audit report issued by Grassi including the audit report date. + MSF I MSF II MSF III CPAI +2009 6/12/2012 Not Audited 4/19/2012 Not Audited +2010 7/2/2012 Not Audited 6/11/2012 4/19/2012 +2011 1/29/2013 1/22/2013 1/29/2013 1/26/2013 + +8. ClearPath sent Grassi’s audit reports to the custodian for the vast majority of the +Funds’ limited partner investors. +Grassi’s Audit Planning and Fund Structure + +9. The Funds’ predecessor auditor sent ClearPath a resignation letter in October +2011 stating it could not complete the audits for MSF I and MSF III for the year ended +December 31, 2009 because it had “…not received satisfactory documentation to support +significant audit objectives related to certain investment and partner withdrawal transactions.” +This letter, which originally was sent to Pustorino, was included in Grassi’s audit workpapers. +Citing the reasons for the prior auditor’s resignation, Grassi assessed the audit risk related to the +Investments and Equity sections as “significant.” Grassi’s risk assessment prescribed “extended” +audit procedures for the Investments area and in the 2011 workpapers required 100% +confirmation of partners’ contribution and withdrawal activity in the Equity area. + + +4 References to auditing standards in this Order are to generally accepted auditing standards in effect at the time the +audit work was performed. Grassi was engaged to audit the ClearPath Funds in accordance with GAAS +promulgated by the Auditing Standards Board (“ASB”) of the American Institute of Certified Public Accountants. +The references are to standards as they existed before the ASB’s clarification project, which was effective for audits +of financial statements for the years ending on or after December 15, 2012. + +5 + +10. Grassi’s audit planning documents did not address the risk presented by the +Funds’ series structure. The ClearPath Funds were organized as series funds. Each series +within each Fund generally invested in one investment (e.g., limited partnership interests, +secured debt instruments, or private equity). Limited partners, through their subscription +agreements, designated in which specific series they wanted to invest. The Limited Partnership +Agreements for each Fund established the series structure and how each series was intended to +stand alone: + +“The Partnership’s assets shall be divided into separate series…and each +Series shall generally be accounted for as a ‘sub-partnership’ for purposes +of this Agreement…the interests in any Series shall be considered a +separate Series from interests in any other Series…the debts, liabilities and +obligations incurred, contracted for or otherwise existing with respect to +any one Series shall be enforceable against the assets of such Series only +and not against the assets of the Partnership generally or of any other +Series.” + +11. Despite the fact that the Funds’ governing documents specified that each series +must be accounted for as a sub-partnership and that the assets and liabilities of each series could +not be commingled with any other series, Grassi did not identify inter-series commingling as an +audit risk.5 +Oppenheimer & Co. Investment (MSF I) + +12. One of the series in MSF I was called the Oppenheimer Public Markets series. +ClearPath raised approximately $4.9 million from various limited partners in August 2011 and +established a brokerage account at Oppenheimer & Co. (“OPCO”) where the cash was deposited. +ClearPath used the cash to purchase short-term U.S. government and agency bonds. As of +December 31, 2011, the OPCO account had a balance of $4.8 million, which represented 23% of +total partners’ capital in MSF I. + +13. In connection with the MSF I audit for the year ended December 31, 2011, Grassi +sent an audit confirmation to OPCO in May 2012 to confirm investment balances as of +December 31, 2011 and the transactions for the year then ended. OPCO sent its confirmation +response directly to Grassi. In addition to the account in the name of the Fund, which held the +bonds, OPCO’s response disclosed that ClearPath and Churchville had also opened a margin +account in the same name as the Fund, and an account in the name of MSF I’s general partner. +As part of the confirmation response, OPCO also provided monthly account statements for all +three accounts for all of 2011. Together, the monthly account statements for the three accounts +showed that immediately after depositing investors’ cash with OPCO, ClearPath and Churchville +had borrowed against the $4.9 million investment and withdrawn $4.1 million of the loan +proceeds in wire transfers to ClearPath’s bank account. As alleged in the Commission’s +complaint against ClearPath and Churchville, Churchville used $2.5 million of the margin loan + +5 ClearPath maintained only one bank account for each Fund, which further elevated the risk of prohibited inter - +series commingling. + +6 + +proceeds to purchase Churchville’s personal residence overlooking Narragansett Bay in +Barrington, Rhode Island and $1.6 million of the proceeds to cover-up losses from +misappropriation in MSF III as outlined in the following sections. + +14. The Grassi junior auditor who obtained the OPCO statements sent an email to the +Funds’ administrator on July 2, 2012, inquiring about the margin account: + +“We received the December 2011 bank statements from Oppenheimer – +see attached – there are two accounts, do you know why one has a +negative balance of $4.1 million?” + +15. On July 9, 2012, the administrator responded to the Grassi junior auditor that the +administrator would have to discuss the issue with ClearPath because: + +“I have never seen the statements or the other account with the negative +balance. I have to find out what this account is and then I will get back to +you about this. This might change everything for the [OPCO] class.” +(emphasis added) + +16. There is no evidence that Grassi completed its discussion with the Funds’ +administrator, discussed the accounts with its client, or applied any further audit procedures to +the previously undisclosed accounts. Grassi’s workpapers did not mention the margin account or +the material cash withdrawals from the account in favor of ClearPath. Workpapers also did not +include the email exchange above or otherwise document Grassi’s decision not to include +information regarding the margin account in the workpapers. + +17. In April 2012, when the sole investment in the account, the U.S. Treasury bonds, +matured, OPCO did not allow Churchville to roll over the proceeds to a new investment. +Instead, OPCO applied the cash generated from the maturity of the bonds to the outstanding +margin account, paying down the loan balance with the redemption proceeds, reducing the value +of the OPCO Series to just under $600,000. In October 2012, ClearPath transferred the +remaining cash in the OPCO account to a bank account it did not disclose to Grassi or to the +ClearPath Fund administrator in the name of MSF I. All of these transactions occurred after +MSF I’s December 31, 2011 balance sheet date, but months before Grassi issued its audit report. +Grassi auditors did not request or review any OPCO account statements after the balance sheet +date. + +18. On January 29, 2013, Grassi issued its audit report containing an unqualified audit +opinion for MSF I for the year ended December 31, 2011. The audited financial statements +reflected a $4.8 million value for the OPCO investment when the true value, as determined from +the information in OPCO’s confirmation response to Grassi, was less than $650,000 at year-end +2011. The footnotes to the audited financial statements made no reference to the existence of the +margin account, or the material related party transactions with ClearPath. The audited financial +statements were materially misstated as a result. Limited partners in the ClearPath Funds lost +$4.1 million in connection with ClearPath and Churchville’s theft of OPCO assets. + + +7 + +Feingold O’Keeffe (MSF I and CPAI) +19. The largest portfolio holding in MSF I (approximately 51% of total partners’ +capital), and the only holding in CPAI, as of December 31, 2011, were limited partner interests +in the Feingold O’Keeffe Distressed Loan Fund, L.P. (“Feingold O’Keeffe”). + +20. In connection with the Funds’ audits for the year ended December 31, 2011, +Grassi sent audit confirmations to Feingold O’Keeffe in May 2012 to confirm the capital +balances as of December 31, 2011 and the transactions for the year then ended. Feingold +O’Keeffe completed the audit confirmations and attached the December 31, 2011 statements of +partner’s capital for MSF I and CPAI, the Forms K-1, as well as the audited financial statements +for the Feingold O’Keeffe limited partnership. + +21. Each of the first three pages of the confirmation response filed in both MSF I and +CPAI workpapers included references indicating that the investments were “pledged.” The face +of the confirmation form bears a handwritten note stating, “note > Account is subject to a pledge +agreement dated 2011.” In December 2011, Churchville and ClearPath had secured a $7 million +line of credit from a Massachusetts-based bank by pledging the Feingold O’Keeffe assets held by +MSF I and CPAI as collateral. The line of credit agreement also included a personal guarantee +of Churchville, and corporate guarantees of ClearPath and the MSF I general partner. By +January 9, 2012, ClearPath had borrowed $3.75 million against the line of credit and used the +proceeds to pay for investments, which were not recorded in the books and records of any +ClearPath Fund. + +22. At the end of 2012, ClearPath and Churchville instructed Feingold O’Keeffe to +redeem the MSF I and CPAI investments, and Feingold O’Keeffe’s December 31, 2012 capital +account statements reflected the complete redemption. ClearPath used the Feingold O’Keeffe +redemption proceeds to pay down the credit line balance in January 2013. + +23. Grassi auditors did not inquire of ClearPath, its administrator or Feingold +O’Keeffe about the meaning of the “pledged” notification and its effect on the MSF I and CPAI +financial statements subject to Grassi’s audit. The financial statements did not reflect that +ClearPath had entered into the line of credit as of the end of 2011, and Grassi did not propose an +audit disclosure that the audited financial statements disclose that after year end ClearPath had +liquidated the Feingold O’Keeffe investment and used the proceeds to pay down the credit line +balance. Grassi also did not request or review Feingold O’Keeffe statements after the December +31, 2011 balance sheet date. The audited financial statements did not disclose that ClearPath and +Churchville used proceeds due to Feingold O’Keeffe series limited partners for their own +purposes, and were therefore materially misstated. Limited partners in the Feingold O’Keeffe +series lost $3.75 million of their investment due to unauthorized borrowing under the undisclosed +credit line outlined above. +Managed Futures (MSF III) + +24. In December 2010, ClearPath redeemed the MSF III’s largest portfolio holding, +referred to as the Managed Futures series. This redemption resulted in a $6.6 million cash + +8 + +deposit into the MSF III bank account on December 22, 2010. This transaction initiated a string +of conspicuous transfers between MSF III series and between Funds in clear violation of the +Funds’ offering documents. ClearPath and Churchville attempted to cover up the misconduct by +posting unsupported accounting entries. The 2010 audited financial statements for MSF III show +that the limited partners’ capital accounts were reduced to zero as of December 31, 2010 and the +MSF III balance sheet included a Distributions Payable liability balance of approximately $6.5 +million. + +25. Instead of distributing all of the Managed Futures proceeds to the applicable +limited partners in the series, Churchville transferred approximately $400,000 of the Managed +Futures proceeds to ClearPath to cover administrative expenses. The MSF III limited partnership +agreement obligated ClearPath to pay for the Fund’s administrative expenses using the +management and organization fees that it earned from the Funds, rather than investment +proceeds. This transaction was reflected in the 2010 audited financial statements as a receivable +Due from Investment Manager. + +26. On December 30, 2010, in the last transaction of the year, ClearPath and +Churchville used approximately $1.0 million of the Managed Futures proceeds to make an +investment in Drug Discovery Fund I, LLC (“DD1”), but ClearPath did not allocate any equity to +limited partners in connection with the DD1 investment. As a result, the 2010 MSF III audited +financial statements reflected an error (a $1 million difference between partners’ contributions +and the portfolio investments balance for the DD1 series) on their face. + +27. In January 2011, ClearPath distributed approximately $4.9 million of the +Managed Futures proceeds to limited partners, reducing the cash balance in MSF III to less than +$400,000. MSF III had a continuing obligation to pay the remaining $1.6 million of distributions +owed to the limited partners in the Managed Futures series. Grassi received and included in its +audit workpapers cash activity schedules from ClearPath and its administrator that reflected that +the Managed Futures series no longer had assets sufficient to satisfy this debt. These +transactions were red flags of ClearPath’s and Churchville’s improper conduct. Yet Grassi’s +workpapers did not include evidence regarding how MSF III would be able to fund the +remaining $1.6 million of distributions payable to Managed Futures investors with less than +$400,000 cash and no other assets attributable to the series. + +28. In July 2011, ClearPath and Churchville raised approximately $2.1 million from +limited partners to establish a new series in MSF III for a loan to Receivable Partners, LLC +(“Receivable Partners”), purportedly to purchase a portfolio of healthcare receivables. However, +instead of remitting the capital to Receivable Partners for the new investment (“RP5”), ClearPath +and Churchville diverted $1.6 million of new investors’ money to pay off the remaining +obligations to the Managed Futures investors. + +29. On September 2, 2011, ClearPath and Churchville deposited approximately $1.6 +million into the MSF III bank account in a series of 14 intra-bank transfers all sourced from +ClearPath’s bank account. ClearPath and Churchville used these deposits, with existing money +in the MSF III account, to pay Receivable Partners the $2.1 million for the RP5 investment from +which ClearPath and Churchville misappropriated investor proceeds in July. + +9 + + +30. Had Grassi traced the source of the $1.6 million deposits into MSF III’s account +back through the cash activity schedules and confirmation responses already in its possession, +Grassi could have discovered that the $1.6 million was deposited only two days after ClearPath +and Churchville transferred $1.6 million from the OPCO margin account to the same ClearPath +bank account. The $1.6 million was misappropriated from investors in MSF I to cover up losses +from ClearPath’s and Churchville’s misappropriation in MSF III, which was evident from +Grassi’s workpapers. + +31. ClearPath and Churchville posted several unsupported journal entries that masked +the misappropriation scheme. Had Grassi followed its own audit program, it could have +discovered that the journal entries contained red flags. ClearPath and Churchville had caused +four unsupported journal entries to be posted to the MSF III general ledger with effective dates +of March, April, May and August 2011 to credit ClearPath with equity ownership in the DD1 +series. These entries increased ClearPath’s ownership in the series by approximately $1.2 +million but were not tied to contemporaneous cash investments in the series by ClearPath and +were not accompanied by any subscription documents evidencing the investment. Since there +was no cash received by the Fund for each of these ClearPath “investments,” the entries +increased the “Due from Investment Manager” receivable balance. By August 2011, the “Due +from Investment Manager” account had ballooned to $1.6 million. ClearPath and Churchville +caused the balance of the “Due from Investment Manager” account to be improperly recorded as +repaid when ClearPath transferred the $1.6 million of OPCO money it misappropriated from +MSF I to cover the hole ClearPath created in MSF III in September 2011. + +32. Grassi’s workpapers related to the 2011 audit of MSF III included a detailed +schedule of “partner allocations” which showed all contributions, withdrawals and allocations of +profit, loss and expenses for each partner’s capital account in each series. Grassi’s audit plan, +developed in part in response to the risks raised by the prior auditor, required Grassi to confirm +100% of partner contribution and withdrawal activity with the partners in the Fund. The Grassi +workpapers for the DD1 series showed Grassi traced all capital transactions in the series to +confirmations, subscription documents or withdrawal notices except for the $1.2 million in +capital contributions ascribed to ClearPath. There were no contemporaneous cash receipts and no +corresponding subscription agreements accompanying ClearPath’s reported capital contributions +to the DD1 series. Related party transactions should receive appropriate scrutiny under GAAS +pursuant to AU § 334, but Grassi did not perform sufficient audit procedures on these related +party transactions. + +33. When ClearPath and Churchville transferred the $1.6 million of OPCO loan +proceeds from MSF I into MSF III on September 2, 2011, the “Due from Investment Manager” +receivable account was reduced accordingly. ClearPath never repaid its $400,000 loan to MSF +III and ClearPath was allocated a material investment in the DD1 series without contributing any +of its own cash. + +34. The 2011 MSF III audited financial statements were materially misstated due to +the transactions above because they (a) allocated unsupported equity to ClearPath in the DD1 +series, (b) did not reflect a payable due from MSF III to MSF I for the $1.6 million transferred + +10 + +from the OPCO series, and (c) did not disclose the existence and nature of a series of unusual +and material related party transactions. +Fair Value of Receivable Partners Loans (MSF III and MSF II) + +35. In the fair value hierarchy under GAAP, the best evidence of fair value are quoted +prices in active markets (Level 1), followed by evidence other than quoted prices that is +observable for the asset (Level 2). The least reliable valuations are those based on unobservable +inputs reflecting the reporting entity’s own assumptions (Level 3). (FASB ASC 820-10-35).6 + +36. A significant portion of the Funds’ assets reflected in the financial statements for +the year ended December 31, 2011 were valued using methodologies relying on Level 3 inputs. +According to the 2011 audited financial statements for MSF III and MSF II, approximately 85% +and 49% of the Funds’ portfolio investments relied on Level 3 inputs, respectively. The majority +of these assets in both Funds were secured loans made to Receivable Partners during 2011, +accounting for approximately 62% and 26% of total partners’ capital in MSF III and MSF II, +respectively.7 + +37. Despite its recognition of the audit risks associated with those assets, Grassi +inaccurately documented its planned audit procedures for assets relying on Level 3 inputs, and +failed to conduct adequate audit procedures to obtain evidence regarding the value of the largest +investments in the MSF II and MSF III Funds.8 + +38. Grassi failed to document its planned audit procedures for the assets relying on +Level 3 inputs in MSF III, and as a result, the audit program for the largest ClearPath Fund was +devoid of procedures to sufficiently test management’s assertion of their fair value as required by +GAAS. + +39. In workpapers related to the 2011 audit procedures for the fair values of MSF II +and MSF III investments based on Level 3 inputs, Grassi’s procedures were deficient because +Grassi accepted as sufficient appropriate audit evidence the ClearPath-prepared valuation reports +without performing substantive procedures on the information contained in the reports. Grassi +also failed to recognize errors in those valuation reports that directly affected the reported fair +values.9 For example, each report included a discounted cash flow model to support the + +6 Financial Accounting Standards Board (FASB), Accounting Standards Codification (ASC) 820, Fair Value +Measurement. +7 Receivable Partners, LLC had no operational history. It was formed at the same time as MSF III’s initial +investment in early 2011. +8 Grassi’s workpapers highlighted the fair value of investments as one of the most significant risks in its audit +planning documentation for the 2011 audits of the Funds and reflected the engagement partner’s view that the prior +auditor had resigned because it was “uncomfortable auditing Level 3 investments.” +9 ClearPath had retained a valuation consultant to assist it in preparing the valuation reports, but the consultant +informed Grassi that it did not perform sufficient work to sign off as the preparer on the reports. ClearPath, not the +consultant, prepared the valuation reports for those assets, and the valuation reports do not refer to any involvement +by a specialist. Nevertheless, in both the MSF II and MSF III audit workpapers, Grassi prepared a “SAS 73 Memo,” + + +11 + +assertion of fair value. ClearPath’s assumptions in each model included estimated future cash +flows and discount rates used to determine the present value of the loan. ClearPath’s discounted +cash flow models included errors in the data and assumptions, but Grassi accepted them without +performing appropriate procedures regarding their reasonableness. For example, the discounted +cash flow model for the first and largest of the seven Receivable Partners loans in MSF III +attributed $945,000 in fair value to certain interest payments in 2012 that were never made by +the time of the audit report issuance in January 2013. The last quarterly interest payment made +on the underlying loan occurred 355 days before the date of Grassi’s audit report. + +40. Grassi was aware that ClearPath had not received the 2012 interest payments for +that same loan, but did not propose an adjustment to management’s asserted fair value. A +November 2012 workpaper titled, “Subsequent Interest Receipts on Loans – 2012,” reflected that +two payments due in May and August 2012 were not received, yet Grassi concluded that “…the +loans are performing as expected.” The conclusion that “the loans are performing as expected” +applied to six of the seven Receivable Partners loans in MSF III (the seventh loan was not +subject to this audit test), but in fact, only the two most recent loans were current when Grassi +conducted its testing in August 2012. Each of the other four loans subject to Grassi’s testing was +behind in its interest payments. Grassi also did not consider the impact of this information on its +assessment of the collectability of the subsequent capital and interest payments on the loans. + +41. Grassi also performed insufficient procedures to test the existence, valuation, +rights, and access to or transferability of the collateral underlying the secured debt investments in +the Receivable Partners loans. While ClearPath provided Grassi with UCC filings which were +filed months after each loan’s origination, these forms only provided the “aggregate face value” +of receivables reportedly purchased by Receivable Partners. Grassi’s workpapers did not reflect +any testing to evaluate the underlying portfolio of the acquired receivables or to verify whether +MSF II and MSF III had effective rights to transfer the collateral in the event of Receivable +Partners’ default. +Subsequent Write-Down of Receivable Partners Loans (MSF III and MSF II) + +42. In November 2012, Grassi followed up with ClearPath about the issue of the +missed interest payments by Receivable Partners discussed above. Churchville emailed the +Grassi engagement partner in December 2012 and explained that ClearPath wrote down the +value of the loans upon technical default in September 2012. + +43. On January 7, 2013, Churchville emailed three auditors on the engagement team +and attached two reports prepared by a third-party consultant (“Consultant”) that contained +purported collateral files that ClearPath was negotiating to have assigned to it in lieu of payment + +pursuant to Statement on Auditing Standards No. 73 (“SAS 73”) (subsequently codified as AU § 336 – Using the +Work of a Specialist) which is intended to document an auditor’s use of a specialist’s work as audit evidence. While +the SAS 73 memo in part asserted that the “specialist’s report” could be used for purposes of the audit of the +financial statements of MSF II and MSF III and that Grassi intended to rely on the valuation consultant “as +specialists,” Grassi concluded that it “…did not rely on [the valuation consultant], but merely utilized their +assistance in gaining comfort on the loan valuations.” + +12 + +by Receivable Partners. Grassi included the email and attached reports in its workpapers. The +reports, totaling more than 1,300 pages, provided data on two pools of healthcare receivables +acquired from a hospital group, but they did not identify the date of acquisition nor the acquirer. +The reports were last updated in February and March 2011, nearly two years before the Grassi +audit report and did not describe any connection between the Consultant and the healthcare +receivable portfolios to Receivable Partners. ClearPath provided no evidence, and there is no +documentation in Grassi’s audit workpapers reflecting that Grassi attempted to verify that the +reported collateral related in any way to the ClearPath Funds’ investments.10 + +44. Grassi’s sole inquiry about the collateral report was made to Churchville directly. +On January 8, 2013, after a meeting with Grassi’s engagement partner and “QC department,” the +senior manager on the Grassi engagement team emailed Churchville reminding him that Grassi +had asked to speak with Receivable Partners in an earlier telephone call, and asking again +whether there was “…anyone at [Receivable Partners] who can discuss their analysis of the +underlying pool at 12/31/11 and going forward through today?” Churchville, citing “legal +negotiations,” claimed there was no one at Receivable Partners who would be “forthcoming with +any more information until we reach an agreement or they resume payments and make us whole +(which they are still claiming they will do ASAP).” + +45. A Grassi subsequent events memo dated less than a week later documented +Grassi’s conclusion that the 2012 write down of the Receivable Partners loan values did not +require an adjustment to the numbers included in the 2011 financial statements because there was +“no reason to believe the loans were impaired at 12/31/11.” The memo did not address the fact +that Grassi asked two times to contact Receivable Partners to discuss the status of the healthcare +receivables pools, but that Churchville denied this request. The fact that Churchville rebuffed +auditors’ requests to independently verify the collateral for the largest investments in MSF III +should have caused Grassi to undertake more audit procedures. Instead, Grassi accepted all of +Churchville’s representations and performed no substantive testing procedures to verify the +existence, valuation and transferability of the loan collateral or the status of negotiations and +likelihood of successful resolution. + +46. The audited financial statements disclosed that ClearPath wrote down the fair +value of the Receivable Partners loans significantly in 2012. The write downs were $10.4 +million in MSF III and $18,000 in MSF II and represented 52% and 18%, respectively, of the +December 31, 2011 values of the loans reported in the Funds’ audited financial statements. +Grassi included an explanatory paragraph in its 2011 audit reports issued in January 2013 for +both Funds referencing the write down, which Grassi referred to as a significant “impairment.” +The audited financial statements also included a subsequent events note discussing the issue +(excerpt from MSF III’s financial statements): + + +10 The total face value of the alleged collateral in the Consultant’s report was over $900 million which was more +than three times the minimum aggregate face value of the receivables securing the MSF III and MSF II loans +according to the UCC filings included in Grassi’s workpapers. There is no documentation in Grassi’s workpapers +that attempts to explain this inconsistency. + +13 + +“In August of 2012, it was determined by management that the loans made to +Receivable Partners, LLC (the ‘Borrower’) became impaired due to the lack of +the receipt of scheduled interest payments specified in the loan agreements. +Management issued demand letters for those amounts to be paid and is currently +in settlement discussion [sic] with the Borrower. For the third quarter of 2012, +management has reduced the valuation of these loans significantly. The reduction +is approximately 52% or $10,400,000.” +47. Receivable Partners was a sham organization, founded in early 2011 through the +collusive efforts of Churchville and Jonathan E. Rosenberg. The ClearPath Funds had prior +investments in healthcare receivables instruments with another Rosenberg entity, JER +Receivables, LLC (“JER Receivables”) dating back to 2008. These investments began to +deteriorate in 2010 and 2011. In order to mask the collapse of the JER Receivables investments, +Churchville and Rosenberg established Receivable Partners in January 2011 for the purpose of +“refinancing” the JER Receivables investments. Churchville and ClearPath raised more than $20 +million from new limited partners in MSF III and MSF II for Receivable Partners loans +purportedly to finance the purchase of new healthcare receivables portfolios. Instead, with +Churchville’s knowledge and direction, Rosenberg transferred the cash from Receivable Partners +over to JER Receivables and sent it back to the Funds to close out the prior investments in JER +Receivables in MSF I and MSF III. After the JER Receivables investments were closed out, the +last several rounds of capital raised for Receivable Partners loans were used to pay “interest” on +the earlier Receivable Partners loans. Receivable Partners never used any of the cash raised from +MSF III or MSF II investors to purchase any healthcare receivables portfolios. There was never +any collateral underlying these investments which were reported with a fair value in excess of +$20 million on the 2011 audited financial statements for MSF III and MSF II.11 Limited partners +in the Receivable Partners series in MSF III and MSF II incurred losses in excess of $16 million. +Supervision Review and Approval Issues + +48. Grassi permitted its engagement partner to approve release of the audit reports +despite evidence that he had not conducted adequate review as part of his engagement partner +responsibilities, and did not comply with firm policy with regard to quality control procedures in +other audits. Grassi had a single engagement partner for all nine ClearPath Fund audits, who +authorized the release of each of Grassi’s audit reports. Under GAAS, the engagement partner +was “the auditor charged with final responsibility for the engagement[s].” With respect to the +two audits with the most significant errors, the 2011 audits of MSF I and MSF III, Grassi’s +workpapers showed that the engagement partner signed off on only six of the 94 workpapers in +the Grassi electronic workpaper binder for the 2011 audit of MSF I and only two of the 134 +workpapers in the 2011 MSF III audit. + + +11 Rosenberg pleaded guilty to conspiracy to commit wire fraud in connection with a complex scheme to defraud +investors and lenders by selling fraudulent investment portfolios of debts purpor tedly owed by hospital patients. +United States v. Shusterman, Crim. No. WDQ-13-0460 (U.S. Dist. Ct. D. Md.); see also +https://www.justice.gov/usao-md/pr/new-jersey-man-guilty-148-million-investment-fraud-scheme + +14 + +49. The engagement partner was on medical leave for significant portions of 2012 +while the ClearPath audits were underway, and worked a sharply reduced work schedule from +June through October 2012. While the engagement partner was on medical leave and on a +reduced work schedule, another Grassi partner took on the work that the engagement partner +would typically have done, effectively replacing the engagement partner. The replacement +Grassi partner left Grassi effective December 31, 2012. + +50. The engagement partner then resumed that role on the ClearPath audits, but did +not substantively review workpapers upon the return to the engagement as part of his +engagement partner responsibilities before authorizing the release of the audit reports at the end +of January 2013. + +51. Grassi permitted the engagement partner to continue to work on the ClearPath +engagements and to sign audit reports, despite evidence that he did not comply with Grassi’s +quality control procedures. Grassi’s quality control procedures required Grassi to perform an +engagement quality control review (“EQCR”) on all audit engagements. In January 2013, Grassi +senior executives discovered that the engagement partner had permitted the issuance of two non- +ClearPath audit reports under the Grassi name without subjecting the audits to EQCR. After +learning the engagement partner had circumvented firm policy, Grassi permitted the engagement +partner to continue his contact with audit clients, including to solicit payment from ClearPath, +and to approve Grassi’s release of the 2011 audit reports. On January 24, 2013, the engagement +partner reported in an email to Grassi’s Chief Administrative Officer that ClearPath had made a +“substantial payment” and asked, “…can we take them off credit hold so we can start issuing +statements and get paid for the remainder?” On January 29, 2013, Grassi permitted the +engagement partner to authorize the issuance of the 2011 reports for MSF I and MSF III. Shortly +thereafter, Grassi agreed to the engagement partner’s withdrawal from the firm. + +52. Grassi also permitted release of two ClearPath Fund audit reports despite failing +to obtain certification from the engagement partner that audits were performed in accordance +with GAAS. Grassi used an off-the-shelf audit form called the Supervision, Review, and +Approval Form (“SRA Form”) to document the completion of the detailed review, partner +review and EQCR. The SRA Form instructs that “[s]ufficient audit evidence includes evidence +that the audit documentation has been reviewed.” The SRA Form served as Grassi’s prescribed +workpaper “to assist in performing and documenting the review” and to record that the audit +work “…was conducted in accordance with generally accepted auditing standards and applicable +regulatory and legal requirements.” According to the engagement partner, the SRA Form was +“the final evidence of signing off…on the financial statements.” + +53. The SRA Forms for the 2011 audits of MSF I and MSF III financial statements +did not accurately reflect which partner had completed the review to comply with GAAS at the +time that the audit report was issued. The electronic audit trail for the SRA Form for MSF I and +MSF III also does not reflect that the engagement partner signed off on the release of the two +audit reports. + +54. Grassi had a practice of obtaining email authorization from the members of the +engagement team before releasing the audit reports, referred to as the “good to go” or “GTG” + +15 + +email. Grassi permitted the engagement partner to approve the MSF III audit report merely by +responding to the “GTG” email inquiry. + +55. The SRA Forms for those audits were inaccurate and incomplete at the time +Grassi permitted the release of the 2011 MSF I and MSF III audit reports and as a result the +workpapers did not properly document the reviewers’ certifications that the audits were +performed in accordance with GAAS. +Grassi’s Improper Professional Conduct – +Violations of General, Planning and Supervision Standards + +56. Grassi’s audit for the 2010 financial statements of MSF III and its audits for the +2011 financial statements for MSF I, MSF II, MSF III and CPAI were deficient and not +performed in accordance with GAAS. Section 4C(b) and Rule 102(e)(1)(iv) define improper +professional conduct with respect to persons licensed to practice as accountants. “Improper +professional conduct” includes two types of negligent conduct: (1) a single instance of highly +unreasonable conduct that results in a violation of professional standards in circumstances in +which an accountant knows, or should know, that heightened scrutiny is warranted; or (2) +repeated instances of unreasonable conduct, each resulting in violations of professional +standards, that indicate a lack of competence. + +57. As set forth above, Grassi should have known that the five sets of financial +statements accompanying the audit reports were materially misstated, yet Grassi issued audit +reports containing an unqualified opinion on each. Grassi reported that the audits were +conducted in accordance with GAAS when they were not. Grassi also reported that the financial +statements were fairly presented in all material respects in accordance with GAAP when they +were not. The five false audit reports and the associated accounting and disclosure errors +included, but were not limited to: +Fund Audit +Year Material Errors and Omissions in Financial Statements +MSF III 2010  Material discrepancy between the investment and capital +balances in the DD1 series + Lack of disclosure regarding the misappropriation of Managed +Futures series’ redemption proceeds + Lack of disclosure regarding the source of funding for the +Managed Futures distributions paid in 2011 including +prohibited inter-fund transfers + +MSF I +CPAI +2011 + + MSF I financial statements materially overstate the fair value +of the OPCO investment by $4.1 million + MSF I and CPAI financials lack disclosure relating to the +pledge agreement encumbering the largest asset in both +Funds, Feingold O’Keeffe + MSF I and CPAI financial statements lack disclosures +regarding material subsequent events, including the complete + +16 + +Fund Audit +Year Material Errors and Omissions in Financial Statements +redemptions of the OPCO and Feingold O’Keeffe series + MSF I and CPAI financials lack disclosures related to material +related party transactions with ClearPath including the +transfers of OPCO proceeds, and the Churchville and +ClearPath personal and corporate guarantees + +MSF III +MSF II +2011  MSF III financials fail to disclose inter-series and inter-fund +commingling and material related party transactions involving +the Managed Futures / DD1 / RP5 series + MSF II and MSF III financials materially overstate the value +of investments in Receivable Partners loans by more than $20 +million + + +Failure to Exercise Due Professional Care and Professional Skepticism (AU §§ 230, 316) +58. GAAS requires auditors to exercise due professional care in the performance of +the audit. (AU § 230.01). Auditors must maintain an attitude of professional skepticism, which +includes a questioning mind and a critical assessment of audit evidence. (AU § 230.07). +Auditors should consider the competency and sufficiency of the evidence and exercise +professional skepticism throughout the audit process. (AU § 230.08). An auditor should not be +satisfied with less than persuasive evidence because of a belief that management is honest (AU +§§ 230.09 and 316.13), and should: (1) perform an ongoing questioning of whether the +information and evidence obtained suggests that a material misstatement due to fraud has +occurred; and (2) conduct the engagement with a mindset that recognizes that a material +misstatement due to fraud could be present, regardless of past experience with the entity and the +auditors’ belief about management’s honesty and integrity. (AU § 316.13). + +59. As a result of Grassi’s conduct described throughout, Grassi failed to exercise due +professional care and professional skepticism in its 2010 audit of MSF III and its 2011 audits of +MSF I, MSF II, MSF III and CPAI. +Failure to Properly Plan the Audit (AU § 311) +60. GAAS requires the auditor to adequately plan the work and properly supervise +any assistants. (AU § 311.01). Audit planning involves developing an overall audit strategy for +the expected conduct, organization and staffing of the audit. (AU § 311.02). The overall audit +strategy should consider areas of higher risks of material misstatement and determine which +resources should be assigned to the audit and how the resources are to be managed, directed and +supervised. (AU § 311.14-15). Once the audit strategy has been established, the auditor should +develop a more detailed audit plan to achieve the audit objectives. (AU § 311.17). The audit +plan should include a description of the nature, timing and extent of planned risk assessment +procedures sufficient to assess the risks of material misstatement and further procedures at the +relevant assertion level for each material class of transactions, account balance and disclosure + +17 + +and any other audit procedures in order to comply with GAAS. (AU § 311.21). Planning is not a +discrete phase of the audit, but rather an iterative process. If, as a result of performing planned +audit procedures, the auditor obtains disconfirming evidence, the auditor may need to revise the +overall audit strategy. (AU § 311.03). + +61. Grassi failed to include audit procedures whose nature, timing and extent were +appropriately responsive to the risk presented by the Funds’ series structure, and thereby failed to +note ClearPath and Churchville’s many inter-series and inter-fund transactions undertaken in +violation of fund governing documents. Grassi also failed to plan appropriate procedures to +audit the valuation of Level 3 investments for MSF III. Grassi also failed to amend its audit plan +and execution in light of the audit evidence that was either insufficient or contradicted +management’s assertions in the Funds’ financial statements. As a result, Grassi failed to +properly plan its 2010 audit of MSF III and its 2011 audits of MSF I, MSF II and MSF III. +Failure to Properly Supervise the Engagement Team (AU § 311) +62. GAAS requires the auditor with final responsibility for the audit to properly +supervise the audit assistants, including firm personnel other the engagement partner. (AU § +311.01). Supervision involves directing the efforts of assistants who are involved in +accomplishing the objectives of the audit and determining whether those objectives were +accomplished. (AU § 311.28). The auditor with final responsibility for the audit should +communicate with members of the audit team regarding the susceptibility of the entity's financial +statements to material misstatement due to error or fraud, with special emphasis on fraud. (AU § +311.29). The auditor with final responsibility for the audit should direct assistants to bring to his +or her attention accounting and auditing issues raised during the audit that the assistant believes +are of significance to the financial statements or auditor's report so the auditor with final +responsibility may assess their significance. (AU § 311.30). The work performed by each +assistant, including the audit documentation, should be reviewed to determine whether it was +adequately performed and documented and to evaluate the results, relative to the conclusions to +be presented in the auditor's report. (AU § 311.31). + +63. As a result of Grassi’s conduct described above, including among other things the +fact that Grassi permitted audit reports to be issued even though the engagement partner had not, +as part of his engagement partner responsibilities, adequately reviewed the audit team’s work to +determine whether it had been sufficiently performed and documented, Grassi failed to properly +supervise the engagement team in its 2010 audit of MSF III and its 2011 audits of MSF I, MSF +II, MSF III and CPAI. +Failure to Obtain Sufficient Appropriate Audit Evidence (AU § 326) +64. GAAS requires auditors to obtain sufficient appropriate audit evidence to provide +a reasonable basis for an opinion with respect to the financial statements under audit. (AU §§ +326.01, 326.06). To obtain reasonable assurance, the auditor must not be satisfied with audit +evidence that is less than persuasive. (AU § 326.13). In general, audit evidence is more reliable +when it is obtained from knowledgeable independent sources outside the entity, when it is +obtained directly by the auditor, or when it exists in documentary form. (AU § 326.08). When +audit evidence obtained from one source is inconsistent with that obtained from another, the + +18 + +auditor should determine what additional audit procedures are necessary to resolve the +inconsistency. (AU § 326.11). + +65. Among other things, Grassi failed to obtain sufficient appropriate audit evidence +of purported investments by ClearPath, and of the value of the Receivable Partners loans, and +failed to consider discrepancies between the audit evidence obtained and ClearPath’s records of +value concerning the OPCO and other investments. As a result, Grassi failed to obtain sufficient +appropriate audit evidence for its 2010 audit of MSF III and its 2011 audits of MSF I, MSF II, +MSF III and CPAI. +Failure to Properly Document the Audit (AU § 339) +66. GAAS requires auditors to prepare audit documentation in connection with each +engagement in sufficient detail to provide a clear understanding of the work performed +(including the nature, timing, extent, and results of audit procedures performed), the audit +evidence obtained and its source, and the conclusions reached. (AU § 339.03). The auditor +should prepare audit documentation that enables an experienced auditor, having no previous +connection to the audit, to understand, among others, the results of the audit procedures +performed and the audit evidence obtained, and the conclusions reached on significant matters. +(AU § 339.10). The auditor should document significant findings or issues, actions taken to +address them (including any additional evidence obtained), and the basis for the final conclusions +reached. Judging the significance of a finding or issue requires an objective analysis of the facts +and circumstances. Significant findings or issues include, but are not limited to, circumstances +that cause the auditor significant difficulty in applying auditing procedures the auditor +considered necessary, for example, the lack of responsiveness to confirmation or information +requests, or the lack of original documents. (AU § 339.14). The auditor should document +discussions of significant findings or issues with management and others on a timely basis, +including responses. The audit documentation should include documentation of the significant +findings or issues discussed, and when and with whom the discussions took place. (AU § +339.15). If the auditor has identified information that contradicts or is inconsistent with the +auditor's final conclusions regarding a significant finding or issue, the auditor should document +how the auditor addressed the contradiction or inconsistency in forming the conclusion. (AU § +339.16). In documenting the nature, timing, and extent of audit procedures performed, the +auditor should record who performed the audit work and the date such work was completed, and +who reviewed specific audit documentation and the date of such review. (AU § 339.18). + +67. Among other things, Grassi failed to adequately document the audit procedures +performed and evidence obtained to audit the valuation and existence of certain investments as of +the date the audit reports were issued. Grassi did not document such audit procedures for the +OPCO, Feingold O’Keeffe and Receivable Partners investments. Grassi also failed to adequately +document discussions of certain significant findings or issues, including subsequent events, with +management and its conclusions on the issues in accordance with the auditing standards +referenced above. As a result of Grassi’s conduct described above, Grassi failed to prepare +sufficient audit documentation in support of its 2010 audit of MSF III and its 2011 audits of MSF +I, MSF II, MSF III and CPAI. + +19 + +Grassi’s Improper Professional Conduct – +Specific Violations of Fieldwork and Reporting Standards + +Subsequent Events (AU § 560) +68. Subsequent events are events or transactions that occur after the balance-sheet +date, but before the issuance of the financial statements that have a material effect on the +financial statements and therefore require adjustment or disclosure in the statements. (AU § +560.01). Type 212 subsequent events provide evidence with respect to conditions that did not +exist at the date of the balance sheet being reported on but arose after that date. These events +should not result in adjustment of the financial statements. Some of these events, however, may +be of such a nature that disclosure of them is required to keep the financial statements from being +misleading. (AU §560.05). Occasionally, a Type 2 subsequent event has such a material impact +on the entity that the auditor may wish to include in his report an explanatory paragraph directing +the reader's attention to the event and its effects. (AU § 560.09). + +69. GAAS requires auditors to perform procedures with respect to the period after the +balance-sheet date for the purpose of ascertaining the occurrence of subsequent events that may +require adjustment or disclosure essential to a fair presentation of the financial statements in +conformity with generally accepted accounting principles. These procedures should be +performed at or near the date of the auditor's report. (AU § 560.12). + +70. Grassi’s audit program to address the GAAS requirements for subsequent events +included the following procedures: +a. Read the accounting records subsequent to year end to the date of the auditor's +report for evidence of significant transactions related to the financial +statements under audit. +b. Read any financial statements or significant financial reports that have been +prepared since the balance-sheet date. +c. Inquire of management about the existence of material subsequent events. +Inquire about the status of items unresolved at the balance-sheet date. + +71. The 2010 audit report for MSF III was issued in June 2012 – 18 months after the +balance sheet date. The 2011 audit reports for MSF I, MSF II, MSF III and CPAI were issued in +January 2013 – 13 months after the balance sheet dates. Grassi had the obligation under GAAS +to review subsequent events through a period “at or near the date of the auditor’s report.” Grassi +auditors testified generally that auditors should have looked at the periodic statements for the +portfolio investments up to the date of the audit report as part of the subsequent events review. +Instead, in the ClearPath audits and in general practice, Grassi simply relied upon management’s +representations about subsequent events and did not request or review accounting records +through the date of the audit report. + +12 Type 1 subsequent events are events that provide additional evidence with respect to conditions that existed at the +date of the balance sheet and affect the estimates inherent in the process of preparing financial statements. The +financial statements should be adjusted for any changes in estimates resulting from the use of such evidence. (AU § +560.03). + +20 + + +72. Several of the material accounting errors outlined in the preceding sections could +have been further highlighted through a GAAS-compliant subsequent events review, but Grassi +failed to execute its own audit plan. For example: + +OPCO (MSF I, 2011) Grassi did not request or review any OPCO brokerage +statements after December 31, 2011. If Grassi had reviewed +OPCO statements as early as April 2012, Grassi would have +seen the effect of OPCO’s margin call. Statements on or after +October 2012 showed that the remaining balance in the series +was completely liquidated. + +Feingold O’Keeffe (MSF +I and CPAI, 2011) +Grassi did not request or review Feingold O’Keeffe +statements of partner’s capital accounts after December 31, +2011. Feingold O’Keeffe’s December 31, 2012 statements +reflected the full redemption of the MSF I and CPAI series in +excess of $10 million. Further, upon reasonable inquiry, if +Grassi followed up on the “pledge agreement” referred to on +the Feingold O’Keeffe confirmation, Grassi could have +discovered ClearPath’s borrowing against the credit line +within nine days of the 2011 balance sheet date and the +existence of a previously undisclosed bank account. + +Receivable Partners +(MSF II and MSF III, +2011) +Grassi failed to properly consider whether Receivable +Partners’ default on interest payments in 2012 should have +resulted in an adjustment to the fair value of the assets at +December 31, 2011. + +Managed Futures (MSF +III, 2010) +Grassi did not properly evaluate how the largest liability on +the 2010 financial statements, the Distributions Payable +balance of $6.5 million related to the Managed Futures series, +was settled during 2011 after the assets in the series were +fraudulently dissipated. + + +73. As a result of Grassi’s conduct described above, Grassi failed to comply with +GAAS requirements for subsequent events testing in its 2010 audit of MSF III and its 2011 +audits of MSF I, MSF II, MSF III and CPAI. +The Confirmation Process (AU § 330) +74. Confirmation is undertaken to obtain evidence from third parties about financial +statement assertions made by management. AU § 326 – Audit Evidence, states that, in general, it +is presumed that “audit evidence is more reliable when it is obtained from knowledgeable +independent sources outside the entity.” (AU § 330.06). The auditor should evaluate the +combined audit evidence provided by the confirmations and the alternative procedures to +determine whether sufficient audit evidence has been obtained about all the applicable financial + +21 + +statement assertions. In performing that evaluation, the auditor should consider (a) the reliability +of the confirmations and alternative procedures; (b) the nature of any exceptions, including the +implications, both quantitative and qualitative, of those exceptions; (c) the audit evidence +provided by other procedures; and (d) whether additional audit evidence is needed. If the +combined audit evidence provided by the confirmations, alternative procedures, and other +procedures is not sufficient, the auditor should request additional confirmations or extend other +tests, such as tests of details or analytical procedures. (AU § 330.33). + +75. As described above, among other things, Grassi failed to obtain confirmation or +other audit evidence of the purported investments by ClearPath, and also, failed to adequately +evaluate the OPCO confirmation and obtain additional audit evidence based on that +confirmation. As a result, Grassi failed to comply with GAAS requirements for the confirmation +process in its 2011 audits of MSF I and CPAI. +Auditing Fair Value Measurements and Disclosures and +Using the Work of a Specialist (AU §§ 328, 336) +76. GAAS requires auditors to obtain sufficient appropriate audit evidence to provide +reasonable assurance that fair value measurements and disclosures are in conformity with +GAAP. (AU § 328.03). Fair value measurements for which observable market prices are not +available are inherently imprecise. That is because, among other things, those fair value +measurements may be based on assumptions about future conditions, transactions, or events +whose outcome is uncertain and will therefore be subject to change over time. The auditor's +consideration of such assumptions is based on information available to the auditor at the time of +the audit. (AU § 328.05). + +77. When there are no observable market prices and the entity estimates fair value +using a valuation method, the auditor should evaluate whether the entity's method of +measurement is appropriate in the circumstances. That evaluation requires the use of +professional judgment. It also involves obtaining an understanding of management's rationale +for selecting a particular method by discussing with management its reasons for selecting the +valuation method. The auditor considers whether: +a. Management has sufficiently evaluated and appropriately applied the criteria, +if any, provided by GAAP to support the selected method. +b. The valuation method is appropriate in the circumstances given the nature of +the item being valued. +c. The valuation method is appropriate in relation to the business, industry, and +environment in which the entity operates. (AU § 328.18). + +78. Based on the auditor's assessment of the risk of material misstatement, the auditor +should test the entity's fair value measurements and disclosures by performing audit procedures +that may involve (a) testing management's significant assumptions, the valuation model, and the +underlying data, (b) developing independent fair value estimates for corroborative purposes, or +(c) reviewing subsequent events and transactions. (AU § 328.23). + +79. Collateral often is assigned for certain types of investments in debt instruments +that either are required to be measured at fair value or are evaluated for possible impairment. If + +22 + +the collateral is an important factor in measuring the fair value of the investment or evaluating its +carrying amount, the auditor obtains sufficient appropriate audit evidence regarding the +existence, value, rights, and access to or transferability of such collateral, including consideration +of whether all appropriate liens have been filed, and considers whether appropriate disclosures +about the collateral have been made. (AU § 328.25). + +80. The auditor's understanding of the reliability of the process used by management +to determine fair value is an important element in support of the resulting amounts and therefore +affects the nature, timing, and extent of audit procedures. When testing the entity's fair value +measurements and disclosures, the auditor evaluates whether: +a. Management's assumptions are reasonable and reflect, or are not inconsistent +with, market information, +b. The fair value measurement was determined using an appropriate model, if +applicable. +c. Management used relevant information that was reasonably available at the +time. (AU § 328.26). + +81. During the audit … an auditor may encounter complex or subjective matters +potentially material to the financial statements. Such matters may require special skill or +knowledge and in the auditor's judgment require using the work of a specialist to obtain +appropriate audit evidence. (AU § 336.06). The 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, among others: +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 +f. The form and content of the specialist’s findings. (AU § 336.09). + +82. If the auditor determines that the specialist’s findings support the related +assertions in the financial statements, he or she reasonably may conclude that sufficient +appropriate audit evidence has been obtained. (AU § 336.13). + +83. As outlined in the section above regarding the fair value of the Receivable +Partners loans in MSF II and MSF III, ClearPath engaged a valuation firm to assist management +in the year-end valuation of the loans made to Receivable Partners which were all assets valued +using Level 3 inputs. There was no documentation provided by the valuation firm that would +allow Grassi to obtain an understanding of the nature of the work performed by the valuation +firm and its effect on the further audit procedures, as required by AU § 336.09. Furthermore, +Grassi audit documentation noted that the valuation firm did not perform sufficient work that +would allow Grassi to use the valuation firm’s findings as audit evidence. Instead, Grassi +accepted the ClearPath-prepared valuation reports without evaluating the appropriateness of +management’s valuation method and model, evaluating the reasonableness of management’s + +23 + +assumptions in the model, or testing the reliability of the information used in the preparation of +the model. + +84. Further, AU § 328 provides guidance for evaluating fair value assertions of +secured debt instruments similar to the Receivable Partners loans. Grassi failed to design or +execute audit procedures to properly test the existence, valuation and transferability of the +underlying collateral. + +85. As a result of Grassi’s conduct described above, Grassi failed to comply with +GAAS requirements in connection with testing management’s fair value assertions in its 2011 +audits of MSF II and MSF III. +Consideration of Fraud in a Financial Statement Audit (AU § 316) +86. GAAS requires auditors to design procedures to test the appropriateness of +journal entries recorded in the general ledger and other adjustments (for example, entries posted +directly to financial statement drafts) made in the preparation of the financial statements. More +specifically, the auditor should: +a. Obtain an understanding of the entity's financial reporting process and the +controls over journal entries and other adjustments. +b. Identify and select journal entries and other adjustments for testing. +c. Determine the timing of the testing. +d. Inquire of individuals involved in the financial reporting process about +inappropriate or unusual activity relating to the processing of journal entries +and other adjustments. (AU § 316.58). + +87. As noted in the Managed Futures section above, ClearPath and Churchville +caused a series of journal entries to be posted to the MSF III general ledger during 2011 which +created and subsequently increased ClearPath’s equity position in the DD1 series with no +contemporaneous cash contribution by ClearPath to MSF III. These journal entries were manual, +non-standard, round dollar and material entries representing unusual transactions that affected a +related party account – exactly the types of journal entries that should have been flagged for +review in AU § 316 journal entry testing. + +88. The audit workpapers for each of the Grassi audits included an identical memo +co-authored by the Grassi manager and junior auditor purportedly documenting Grassi’s +procedures related to journal entry testing performed in satisfaction of GAAS requirements under +AU § 316. Other than the title of each three-page memo which was changed to reflect the +specific Fund and the applicable year, the memo does not include references specific to +ClearPath or its personnel, the fund administrator or its personnel, the accounting system used, +the general ledger or journal entry reports requested or reviewed, the entries selected for testing, +or the results of Grassi’s testing. In fact, there is no evidence in Grassi’s workpapers or +otherwise that Grassi ever requested or reviewed the Funds’ general ledgers or specific journal +entries. The memo claimed that Grassi reviewed the journal entries and focused on entries that +were “nonstandard,” “large and unusual,” “processed outside the normal course of business,” and +“[contained] round numbers or a consistent ending number,” but there is no evidence that Grassi +conducted that review. At the same time, all of the journal entries resulting in ClearPath’s + +24 + +unsupported allocation of equity in the DD1 series fit the testing criteria outlined in Grassi’s +memo, but those entries evidently were not subjected to testing. + +89. The Grassi journal entry testing memo includes the following unsupported +statements: +a. There were no instances of non-standard journal entries other than topside or +adjusting journal entries, +b. Grassi scanned the general ledger and noted no activity other than normal +purchases and sales of investments and or expenses paid, +c. Entries appear to be for transactions in connection to the ordinary course of +business, i.e.: investment purchases, income/expense accruals. +d. There were no material unusual journal entries found, and +e. Based upon procedures performed above, Grassi auditor was satisfied that all +material journal entries described above were recorded properly. + +90. During the course of the audit, the auditor may become aware of significant +transactions that are outside the normal course of business for the entity, or that otherwise appear +to be unusual given the auditor's understanding of the entity and its environment. The auditor +should gain an understanding of the business rationale for such transactions and whether that +rationale (or the lack thereof) suggests that the transactions may have been entered into to engage +in fraudulent financial reporting or conceal misappropriation of assets. (AU § 316.66). + +91. In understanding the business rationale for the transactions, the auditor should +consider, among others: + Whether the form of such transactions is overly complex (for example, involves +multiple entities within a consolidated group or unrelated third parties). + Whether management is placing more emphasis on the need for a particular +accounting treatment than on the underlying economics of the transaction. (AU § +316.67). + +92. In addition to the required journal entry testing, GAAS requires auditors to +consider conditions identified during fieldwork that change or support a judgment regarding the +assessment of the risks of material misstatement due to fraud, including, among others: +a. Discrepancies in the accounting records, including unsupported or +unauthorized balances or transactions +b. Conflicting or missing audit evidence, including missing documents, +significant unexplained items on reconciliations, or unusual discrepancies +between the entity’s records and confirmation replies +c. Problematic or unusual relationships between the auditor and management, +including denial of access to records, facilities, certain employees, customers, +vendors, or others from whom audit evidence might be sought. (AU § 316.68). + +93. Grassi failed to update its risk assessment and audit plans to address fraud +indicators including, but not limited to: (a) undisclosed accounts, (b) prohibited and undisclosed +borrowing against Fund assets, (c) unusual discrepancies in confirmation responses, (d) + +25 + +unsupported and unusual journal entries, and (e) the scope limitation related to Grassi’s request +to contact Receivable Partners. + +94. As a result of Grassi’s conduct described above, Grassi failed to properly consider +fraud risk factors in violation of GAAS in its 2010 audit of MSF III and its 2011 audits of MSF I, +MSF II, MSF III and CPAI. +Related Parties (AU § 334) +95. GAAS specifies that auditors should be aware of the possible existence of +material related party transactions that could affect the financial statements and of common +ownership or management control relationships for which FASB ASC 850-10-50 requires +disclosure.13 (AU § 334.04). The auditor should place emphasis on testing material transactions +with parties the auditor knows are related to the reporting entity. (AU § 334.07). + +96. After identifying related party transactions, the auditor should apply the +procedures the auditor considers necessary to obtain satisfaction concerning the purpose, nature, +and extent of these transactions and their effect on the financial statements. The procedures +should be directed toward obtaining and evaluating sufficient appropriate audit evidence and +should extend beyond inquiry of management. Procedures that should be considered include the +following, among others: +a. Obtain an understanding of the business purpose of the transaction. +b. Examine pertinent documents. +c. Test for reasonableness the compilation of amounts to be disclosed, or +considered for disclosure, in the financial statements. +d. Inspect or confirm and obtain satisfaction concerning the transferability and +value of collateral. (AU § 334.09). + +97. When necessary to fully understand a particular transaction, the following +procedures, which might not otherwise be deemed necessary to comply with generally accepted +auditing standards, should be considered, among others: +a. Confirm transaction amount and terms, including guarantees and other +significant data, with the other party or parties to the transaction. +b. Inspect evidence in possession of the other party or parties to the transaction. +c. Confirm or discuss significant information with intermediaries, such as banks, +guarantors, agents, or attorneys, to obtain a better understanding of the +transaction. (AU § 334.10). + +98. For each material related party transaction (or aggregation of similar transactions) +or common ownership or management control relationship for which FASB ASC 850-10-50 +requires disclosure,14 the auditor should consider whether he has obtained sufficient appropriate + +13 FASB ASC 850, Related Party Disclosures. +14 FASB ASC 850-10-50 requires disclosure “of material related party transactions, other than compensation +arrangements, expense allowances, and other similar items in the ordinary course of business.” + +26 + +audit evidence to understand the relationship of the parties and, for related party transactions, the +effects of the transaction on the financial statements. He should then evaluate all the information +available to him concerning the related party transaction or control relationship and satisfy +himself on the basis of his professional judgment that it is adequately disclosed in the financial +statements. (AU § 334.11). + +99. Grassi failed to examine, document and satisfy itself as to the adequate disclosure +of material related party transactions that it knew, or should have known about, including: + +OPCO (MSF I, 2011) Even though Grassi learned of OPCO brokerage accounts that +management did not disclose to auditors through third-party +confirmation provided directly to the audit team, Grassi’s +workpapers made no reference to the undisclosed OPCO +brokerage accounts. Further, Grassi’s workpapers did not +address the fact that $4.1 million of cash was transferred from +the OPCO accounts to ClearPath. There are no disclosures in +the audited financial statements related to these transactions. + +Feingold O’Keeffe (MSF +I and CPAI, 2011) +Despite the “pledged” notification on a confirmation +statement received from Feingold O’Keeffe, Grassi auditors +did not evaluate the meaning of the “pledged” notification; as +a result, Grassi’s workpapers did not reveal that the “pledge” +related to a credit line that Churchville and ClearPath secured +with the Feingold O’Keeffe assets as collateral, with personal +and corporate guarantees, none of which were reflected in the +Funds’ audited financial statements. + +DD1 (MSF III, 2011) Grassi workpapers did not include any evidence of the +auditor’s evaluation of the allocation of more than $1 million +of equity in the DD1 series to ClearPath outside the ordinary +course of business. Furthermore, no disclosure of the +transaction was included in the audited financial statements. + + +100. As a result of Grassi’s conduct described above, Grassi failed to comply with +GAAS requirements for the testing and disclosure of related party transactions in its 2011 audits +of MSF I, MSF III and CPAI. +Adequacy of Disclosure in Financial Statements (AU § 431) +101. The presentation of financial statements in conformity with generally accepted +accounting principles includes adequate disclosure of material matters. These matters relate to +the form, arrangement, and content of the financial statements and their appended notes, +including, for example, the terminology used, the amount of detail given, the classification of +items in the statements, and the bases of amounts set forth. An independent auditor considers + +27 + +whether a particular matter should be disclosed in light of the circumstances and facts of which +he is aware at the time. (AU § 431.02). + +102. Grassi’s audit plan included the use of a disclosure checklist specifically designed +for investment companies. The disclosure checklist section for Notes Payable and Other Debt +included the question, “Is information related to unused lines of credit, conditions of credit +agreements, and long-term debt maturities disclosed in the notes to the financial statements?” +The checklist indicated that this question was “not applicable” despite the fact Feingold +O’Keeffe reported directly to Grassi as part of its audit confirmation response that the largest +assets in the MSF I and CPAI Funds were pledged. The checklist was prepared by the Grassi +audit manager and reviewed by the engagement partner and the EQCR Reviewer. The 2011 +audited financial statements for these Funds do not include a disclosure of the line of credit. + +103. As a result of Grassi’s conduct described above, Grassi failed to comply with +GAAS requirements regarding the adequacy of disclosures in the 2011 audits of MSF I and +CPAI. +Grassi’s Improper Professional Conduct – Violation of Quality Control Standards + +Quality Control Standards (AU § 161, QC § 10) +104. GAAS requires accounting firms to adopt a system of quality control in +conducting an audit practice. (AU § 161.02). The elements of quality control are identified in +QC section 10 – A Firm's System of Quality Control.15 A system of quality control consists of +policies designed to provide the firm with reasonable assurance that the firm and its personnel +comply with professional standards and applicable legal and regulatory requirements and that +reports issued by the firm are appropriate in the circumstances, and the procedures necessary to +implement and monitor compliance with those policies. (AU § 161.01 [f/n 1]). + +105. Grassi maintained a “Quality Control Document” which set forth the policies and +procedures to be followed by the firm’s partners and employees in order to comply with the +GAAS requirement to adopt a system of quality control. + +106. The GAAS quality control standards require firms to, among other things, +establish policies and procedures designed to provide it with reasonable assurance that it has +sufficient personnel with the competence, capabilities, and commitment to ethical principles +necessary to perform engagements in accordance with professional standards and applicable +legal and regulatory requirements and enable the firm to issue reports that are appropriate in the +circumstances. Further, the firm’s policies and procedures should provide that personnel +selected for advancement have the qualifications necessary for fulfillment of the responsibilities +that they will be called on to assume. (QC §§ 10.31-32) + + +15 References herein are to QC Section 10 as applicable to a CPA firm’s system of quality control for its accounting +and auditing practice as of January 1, 2012. + +28 + +107. When assigning partners and staff to audit engagements, the quality control +standards require the firm to establish policies and procedures requiring, among others, that the +engagement partner has the appropriate competence, capabilities, and authority to perform the +role. Further, these policies and procedures should provide the firm with reasonable assurance +that appropriate personnel are assigned to the engagement with the necessary competence and +capabilities to perform engagements in accordance with professional standards and applicable +legal and regulatory requirements and enable the firm to issue reports that are appropriate in the +circumstances. (QC §§ 10.33-34) + +108. Quality control standards require audit firms to monitor compliance with their +quality control policies and procedures and evaluate, communicate and remedy identified +deficiencies in systems of quality control. These monitoring standards require firms, among +other things, to identify systemic, repetitive, or other significant deficiencies that require prompt +corrective action. Remedial actions may include disciplinary action against individuals that +failed to comply with the policies and procedures of the firm. Based on these monitoring +controls, a firm may find that a report may be inappropriate or that procedures were omitted +during the performance of the engagement. Such policies and procedures should require the firm +to determine what further action is appropriate to comply with relevant professional standards +and legal and regulatory requirements, and consider whether to obtain legal advice. (QC §§ +10.52-57). + +109. Grassi permitted the ClearPath engagement partner to sign for release of the 2011 +audit reports, even though the engagement partner had not properly reviewed the audit +workpapers, and despite the fact that Grassi had learned that the engagement partner had +previously circumvented firm policy for engagements other than ClearPath. Grassi also failed to +appropriately document that the audits were performed in accordance with GAAS, and instead +permitted issuance of the reports by sending an email. As a result, Grassi failed to comply with +GAAS requirements regarding quality control standards in the 2011 audits of MSF I, MSF II, +MSF III and CPAI. +FINDING +110. Based on the foregoing, the Commission finds that Grassi 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. Grassi’s conduct in the 2010 audit of MSF +III and the 2011 audits of MSF I, MSF II, MSF III and CPAI involved repeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards and +indicating a lack of competence to practice before the Commission, and also satisfies the +standard of highly unreasonable conduct that resulted in a violation of applicable professional +standards in circumstances in which heightened scrutiny was warranted. +GRASSI WAS A CAUSE OF VIOLATIONS OF +SECTIONS 206(2) and 206(4) of the ADVISERS ACT and +RULE 206(4)-8 THEREUNDER. + +111. Section 206(2) of the Advisers Act prohibits any investment adviser from +engaging in any transaction, practice, or course of business which operates as a fraud or deceit + +29 + +upon any client or prospective client. A violation of Section 206(2) may rest on a finding of +negligence. SEC v. Steadman, 967 F.2d 363, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital +Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). Proof of scienter is not required to +establish a violation of Section 206(2). Id. + +112. Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder make it +unlawful for any investment adviser to a pooled vehicle to make any untrue statement of a +material fact or to omit to state 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 to otherwise engage in any act, practice, or course +of business that is fraudulent, deceptive or manipulative with respect to any investor or +prospective investors in the pooled investment vehicle. A violation of Section 206(4) of the +Advisers Act and the rules thereunder does not require scienter. Steadman, 967 F.2d at 647. + +113. As a result of the conduct described above, Grassi was a cause of ClearPath’s and +Churchville’s violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 +thereunder. +E. UNDERTAKINGS + +114. Independent Consultant. Grassi has undertaken to retain, within 30 days of the +date of the issuance of this Order, the services of an Independent Consultant (“Consultant”) not +unacceptable to the staff of the Commission. Grassi shall provide to the Commission staff a +copy of the engagement letter detailing the scope of the Consultant’s responsibilities. The +Consultant’s compensation and expenses shall be borne exclusively by Grassi. + +115. Grassi shall require the Consultant to conduct a review (the “Consultant Review”) +of the following: + +a. Grassi’s quality controls, including policies and procedures for audits and +reviews regarding the following (hereinafter referred to as “Grassi’s Policies”) +to determine whether Grassi’s Policies are adequate and sufficient to provide +reasonable assurance of compliance with all relevant Commission regulations +and auditing standards and rules: + +i. Professional conduct for general, planning and supervision standards, +including: + +1. The exercise of due professional care and professional +skepticism; + +2. Properly planning an audit; + +3. Supervising the engagement team; + + +30 + +4. Obtaining sufficient appropriate audit evidence, including from +independent sources, directly by the auditor, and in +documentary form; + +5. Properly documenting an audit in sufficient detail to provide a +clear understanding of the work performed, including in +situations involving lack of responsiveness or original +documents from the client, documentation of findings or issues +with management, information that contradicts or is +inconsistent with final conclusions, and documentation of when +and with whom significant discussions occurred; and + +6. Properly training the engagement team, in particular, in audits +of pooled investment vehicles as that term is defined by Rule +206(4)-8(b) promulgated under the Advisers Act (a “PIV”), +and in technical training related to such audit work; + +ii. Professional conduct for fieldwork and reporting, including; + +1. Subsequent events testing, including obtaining financial +reports, accounting records or other independent evidence +related to material subsequent events, aside from inquiry of +management; + +2. The confirmation process, including obtaining evidence from +third parties, evaluating that evidence and determining whether +further testing is required; + +3. Fair value measurements and disclosures, including use of +and/or reliance on the work of a specialist, and designing and +executing audit procedures to test existence, valuation and +transferability of collateral; + +4. Consideration of fraud in a financial statement audit, including +review and testing of journal entries; + +5. Identification, examination and evaluation of appropriate +disclosure of related party transactions; and + +6. Adequacy of disclosure in financial statements, including lines +of credit or other agreements that might affect the value of +investments; + +iii. Appropriate design and monitoring of compliance with quality control +standards, including accurate review and sign-off on key workpapers, +and objective review; + +31 + + +b. A sample, to be selected by the Consultant on a reasonable and defined basis +not unacceptable to the SEC, of Grassi’s audits of financial statements of a +PIV for periods ended on or after December 31, 2013. + +116. Grassi shall cooperate fully with the Consultant and shall provide reasonable +access to firm personnel, information and records as the Consultant may reasonably request for +the Consultant Review (including training materials), subject to Grassi’s right to withhold from +disclosure any information or records protected by any applicable protection or privilege such as +the attorney-client privilege or the attorney work product doctrine. + +a. At the end of the review, which in no event shall be more than six months after +the date of the issuance of this Order, Grassi shall require the Consultant to issue a +detailed written report (the “Consultant Report”) to Grassi, (a) summarizing the +Consultant Review, (b) making recommendations, where appropriate, reasonably +designed to ensure that Grassi’s Policies are adequate and sufficient to provide +reasonable assurance of compliance with all relevant Commission regulations and +auditing standards and rules, and (c) identifying any violations of auditing +standards found in the review of Grassi’s audits of financial statements of private +or registered fund clients required in Paragraph 115.b. Grassi shall require the +Consultant to provide a copy of the Consultant Report to the Commission staff +when issued. + +b. Grassi shall adopt, as soon as practicable, all recommendations of the Consultant +in the Consultant Report; provided, however, that within thirty days of issuance of +the Consultant Report, Grassi may advise the Consultant in writing of any +recommendation that it considers to be unnecessary, outside the scope of this +Order, unduly burdensome, or impracticable. Grassi need not adopt any such +recommendation at that time, but instead may propose in writing to the Consultant +and the Commission staff an alternative policy or procedure designed to achieve +the same objective or purpose. Grassi and the Consultant shall engage in good- +faith negotiations in an effort to reach agreement on any recommendations +objected to by Grassi. In the event that the Consultant and Grassi are unable to +agree on an alternative proposal within 30 days, Grassi shall abide by the +determinations of the Consultant. Grassi may also advise if it disagrees with the +Consultant’s identification of violations of audit standards found in the review of +Grassi’s audits of financial statements of private or registered PIV clients required +in Paragraph 115.b. + +c. Within nine months after the date of issuance of this Order, Grassi shall require +the Consultant to complete its review and submit a written final report (“Final +Report”) to Commission staff. The Final Report shall describe the review made +of Grassi’s policies and procedures; set forth the conclusions reached and the +recommendations made by the Consultant, as well as any proposals made by +Grassi; describe how Grassi is implementing the Independent Consultant’s final +recommendations; certify that the Consultant agrees with Grassi’s adoption and + +32 + +implementation of the recommendations; and identify the violations of auditing +standards identified by the Consultant in its review of Grassi’s audits of financial +statements of private or registered PIV clients required in Paragraph 115.b. + +d. Grassi shall take all necessary and appropriate steps to adopt and implement all +recommendations contained in the Final Report. The date of completion of the +undertakings shall, in no event, be later than one year from the date of issuance of +this Order; + +e. Grassi shall require the Consultant to enter into an agreement providing that for +the period of the 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 Grassi, 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 or her duties under this Order shall not, without prior written consent of the +Commission staff, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with Grassi, 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. + +117. Grassi shall inform its audit professionals involved in financial services audits of +the non-financial terms of this Order and undertakings, within 10 business days after entry of the +Order. + +118. Training. Within 15 months of the issuance of this order, Grassi shall require +each audit professional serving audits of a PIV to complete successfully a minimum of 8 hours of +audit-related training. The audit-related training shall address any recommendations made by the +Consultant regarding changes in Grassi’s Policies related to the auditing standards set forth +above (the “Audit Training”). + +119. Within 16 months of the issuance of this order, Grassi shall certify, in writing, +compliance with the undertakings set forth above. The certification shall identify the +undertakings, provide written evidence of compliance in the form of a narrative, and be +supported by exhibits sufficient to demonstrate compliance. The Commission’s staff may make +reasonable requests for further evidence of compliance, and Grassi agrees to provide such +evidence. The certification and supporting material shall be submitted to Robert B. Baker, +Assistant Director, Asset Management Unit, Boston Regional Office, Securities and Exchange +Commission, 33 Arch Street, 24th Floor, Boston, MA 02110, with a copy to the Office of the +Chief Counsel of the Enforcement Division. + +120. For good cause shown, the Commission staff may extend any of the procedural +dates related to the undertakings. Deadlines for procedural dates shall be counted in calendar + +33 + +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. + +121. In determining whether to accept Grassi’s Offer, the Commission has considered +these undertakings. Grassi agrees that if the Division of Enforcement believes that Grassi has +not satisfied these undertakings, it may petition the Commission to reopen this matter to +determine whether additional sanctions are appropriate. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Grassi shall cease and desist from committing or causing any violations and any +future violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 +thereunder. + +B. Grassi is censured. + +C. Grassi shall comply with the undertakings enumerated in Section III.E. above. + +D. Grassi shall pay disgorgement of $130,000 and prejudgment interest of +$11,510.41, for a total payment of $141,510.41, to Stephen F. Del Sesto, Esq., the court- +appointed receiver for ClearPath pursuant to Rule 1102 of the Commission Rules of Fair Fund +and Disgorgement Plans [17 C.F.R. § 201.1102]. Payment shall be made in the following +installments: $28,302.09 within 10 days of the issuance of the Order; $28,302.08 within 90 days +of the issuance of the Order; $28,302.08 within 180 days of the issuance of the Order; +$28,302.08 within 270 days of the issuance of the Order; and $28,302.08 within 360 days of the +issuance of the Order. If timely payment is not made, additional interest shall accrue pursuant to +Commission Rule 600. Payment must be: (A) made by United States postal money order, +certified check, bank cashier’s check or bank money order; (B) made payable to Stephen F. Del +Sesto, Esq.; (C) hand-delivered or mailed to Stephen F. Del Sesto, Esq., Donoghue Barrett & +Singal, P.C., One Cedar Street, Suite 300, Providence, RI 02903; and (D) submitted under cover +letter that identifies Grassi as a Respondent in these proceedings, the file number of these +proceedings, and Securities and Exchange Commission v. ClearPath Wealth Management, LLC, +Patrick Evans Churchville, as Defendants, and ClearPath Multi-Strategy Fund I, L.P., +ClearPath Multi-Strategy Fund II, L.P., ClearPath Multi-Strategy Fund III, L.P., and HCR +Value Fund, L.P., as Relief Defendants, Civil Action No. 15-cv-00191, a copy of which cover +letter and money order or check must be sent to Robert B. Baker, Assistant Director, Asset +Management Unit, Securities and Exchange Commission, 33 Arch Street, 24th Floor, Boston, +MA 02110. + +E. Grassi shall pay a civil money penalty of $260,000 to Stephen F. Del Sesto, Esq., +the court-appointed receiver for ClearPath pursuant to Rule 1102 of the Commission Rules of +Fair Fund and Disgorgement Plans [17 C.F.R. § 201.1102]. Payment shall be made in the + +34 + +following installments: $52,000 within 10 days of the issuance of the Order; $52,000 within 90 +days of the issuance of the Order; $52,000 within 180 days of the issuance of the Order; $52,000 +within 270 days of the issuance of the Order; and $52,000 within 360 days of the issuance of the +Order. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § +3717. Payment must be: (A) made by United States postal money order, certified check, bank +cashier’s check or bank money order; (B) made payable to Stephen F. Del Sesto, Esq.; (C) hand- +delivered or mailed to Stephen F. Del Sesto, Esq., Donoghue Barrett & Singal, P.C., One Cedar +Street, Suite 300, Providence, RI 02903; and (D) submitted under cover letter that identifies +Grassi as a Respondent in these proceedings, the file number of these proceedings, and Securities +and Exchange Commission v. ClearPath Wealth Management, LLC, Patrick Evans Churchville, +as Defendants, and ClearPath Multi-Strategy Fund I, L.P., ClearPath Multi-Strategy Fund II, +L.P., ClearPath Multi-Strategy Fund III, L.P., and HCR Value Fund, L.P., as Relief Defendants, +Civil Action No. 15-cv-00191, a copy of which cover letter and money order or check must be +sent to Robert B. Baker, Assistant Director, Asset Management Unit, Securities and Exchange +Commission, 33 Arch Street, 24th Floor, Boston, MA 02110. + +F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for disgorgement, prejudgment interest and penalties referenced in paragraphs D. +and E. above. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3827.txt b/raw/aaer/2016/AAER-3827.txt new file mode 100644 index 0000000000000000000000000000000000000000..48d46bdc9404bbd9efabe39c7459857a527d4ede --- /dev/null +++ b/raw/aaer/2016/AAER-3827.txt @@ -0,0 +1,708 @@ + +1 + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79369 / November 21, 2016 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4573 / November 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3827 / November 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17695 + + +In the Matter of + +GARY R. PURWIN, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 4C OF THE SECURITIES +EXCHANGE ACT OF 1934, SECTION +203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940 AND RULE +102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Gary R. Purwin, CPA (“Purwin” or “Respondent”) pursuant to Section 4C1 of the Securities +Exchange Act of 1934 (“Exchange Act”), Section 203(k) of the Investment Advisers Act +(“Advisers Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found … +(1) not to possess the requisite qualifications to represent others … (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may … deny, temporarily or permanently, the privilege of appearing or + + +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 Respondent 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 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 (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: +A. SUMMARY +1. Grassi & Co. CPAs, P.C. (“Grassi”) served as independent auditor for several +private funds advised by ClearPath Wealth Management, LLC (“ClearPath”) and ClearPath’s +principal, Patrick Churchville (“Churchville”) between January 2012 and January 2013. Purwin +was the engagement partner on Grassi’s ClearPath audits. During that time, Purwin authorized +Grassi to issue nine audit reports expressing an unqualified opinion on the fair presentation of the +financial statements for four different funds, for years ended 2009 through 2011. From 2010 +forward, however, ClearPath and Churchville were defrauding the funds they advised, and the +investors in those funds, by misappropriating fund assets and by making repeated misstatements to +investors about the value and existence of fund investments. Purwin failed to fulfill his role as the +engagement partner with final responsibility for the audit work on the ClearPath engagements, +by failing to appropriately assess audit risks, to establish audit plans to effectively address those +risks, to properly supervise the audit engagement, and to exercise professional skepticism in light +of the indicia of ClearPath and Churchville’s fraud that was apparent from the accounting +records. +2. During the course of audit work, Purwin experienced significant health issues that +left him cognitively impaired. Purwin was on medical leave from March to April 2012, and +again from July to October 2012. Another Grassi partner took over the engagement partner role +during Purwin’s absence, but the replacement engagement partner left Grassi before the 2011 +audits of the ClearPath funds were completed. In January 2013, after Grassi discovered that + +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 and are not binding on any other person or entity in +this or any other proceeding. + +3 + +Purwin had circumvented a firm policy with regard to non-ClearPath work, Purwin’s health +worsened. Despite Purwin’s violation of the firm policy, Grassi instructed Purwin to participate +in the final review of the 2011 audits of ClearPath funds and the related audit reports and +permitted him to authorize the release of these audit reports. Purwin did not substantively review +workpapers himself before authorizing the release of the 2011 audit reports and thereby failed to +take the review steps required as part of his engagement partner responsibilities to certify that the +audits had been performed in accordance with U.S. generally accepted auditing standards +(“GAAS”). +4 +3. Purwin’s failure to conduct sufficient review of the audit work as part of his +engagement partner responsibilities meant that he permitted release of the 2011 audit reports despite +inadequate work on many key areas of the audits, in violation of GAAS. As a result, five of +Grassi’s nine audit reports were materially false in that they expressed an unqualified opinion on the +financial statements despite the fact that these financial statements included material errors and +omissions. This enabled ClearPath and Churchville to continue to report materially inflated +values of the funds’ investments without contradiction, to conceal use of limited partners’ +investments for ClearPath and Churchville’s own benefit, and to continue their scheme to +defraud the funds and their investors unimpeded. Purwin thereby 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 and was a cause of ClearPath’s and +Churchville’s violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 +thereunder. +B. RESPONDENT +4. Gary R. Purwin, age 55, is a Certified Public Accountant (“CPA”) licensed to +practice in New York since 1988 and was licensed in Connecticut from 1993 through 2003. Purwin +was a partner of the public accounting firm Pustorino, Puglisi & Co, LLP (“Pustorino”), which was +acquired by Grassi effective January 1, 2012. From January 1, 2012 through March 1, 2013, +Purwin was a partner of Grassi. From January 2015 to the present, Purwin has been a manager at an +audit firm in New York, New York. From February 2013 to the present, Purwin has also been self- +employed as the sole owner and principal of FINOP, LLC, which provides accounting, financial +reporting and related consulting services to broker-dealer entities. He holds the Series 27 securities +license and is registered with FINRA as a Financial and Operations Principal (FinOp) and as an +Operations Principal (S99). +C. OTHER RELEVANT ENTITIES AND INDIVIDUAL + +4 References to auditing standards in this Order are to generally accepted auditing standards in effect at the time the +audit work was performed. Grassi was engaged to audit the ClearPath Funds in accordance with GAAS +promulgated by the Auditing Standards Board (“ASB”) of the American Institute of Certified Public Accountants. +The references are to standards as they existed before the ASB’s clarification project, which was effective for audits +of financial statements for the years ending on or after December 15, 2012. + +4 + +5. Grassi is a New York domestic professional corporation and is registered with the +Public Company Accounting Oversight Board as a public accounting firm with its headquarters in +Jericho, New York. +6. ClearPath is a Delaware limited liability company (“LLC”) and an investment +adviser that was licensed by the State of Rhode Island with its principal place of business in +Barrington, Rhode Island. ClearPath was registered with the Commission as an investment adviser +beginning January 3, 2008 through November 16, 2012 (SEC File No. 801-68715). ClearPath is the +manager of several LLCs that were the general partners of private funds. ClearPath was also the +adviser to these private funds pursuant to management agreements between ClearPath and each of +the funds. On May 7, 2015, the Commission filed a civil complaint alleging fraud charges against +ClearPath and its owner, Patrick Evans Churchville, in the United States District Court for the +District of Rhode Island: Securities and Exchange Commission v. ClearPath Wealth Management, +LLC, Patrick Evans Churchville, as Defendants, and ClearPath Multi-Strategy Fund I, L.P., +ClearPath Multi-Strategy Fund II, L.P., ClearPath Multi-Strategy Fund III, L.P., and HCR Value +Fund, L.P., as Relief Defendants, Civil Action No. 15-cv-00191 (D.R.I. May 7, 2015). ClearPath is +now run by a court-appointed receiver in the litigation. +7. Churchville, age 47, lives in Barrington, Rhode Island. He is the sole owner and +President of ClearPath. On August 4, 2016, Churchville pled guilty to five counts of wire fraud +and one count of tax evasion, in criminal charges alleging misconduct also alleged in the +Commission’s complaint. United States of America v. Patrick Churchville, (CR 16 00068, D. +R.I., July 5, 2016). + +8. The four private funds managed by ClearPath and Churchville for which Grassi +provided audit and tax services were (collectively, the “Funds”): +a. ClearPath Multi-Strategy Fund I, L.P. (“MSF I”), formerly known as +ClearPath Private Equity Fund, L.P., is a Delaware limited partnership +formed in 2008. +b. ClearPath Multi-Strategy Fund II, L.P. (“MSF II”) is a Delaware limited +partnership formed in 2011. +c. ClearPath Multi-Strategy Fund III, L.P. (“MSF III”), formerly known as +the ClearPath Healthcare Receivables Investments Fund L.P., is a Delaware +limited partnership formed in 2009. +d. ClearPath Alternative Investments Fund, L.P. (“CPAI”) was a Delaware +limited partnership formed in 2009. As of January 1, 2012, this fund was +merged into MSF I. +D. THE CLEARPATH FUNDS AUDITS +Grassi’s and Purwin’s Relationship with ClearPath and the Funds + +5 + +9. ClearPath retained Pustorino on behalf of three of the four Funds as their +independent auditor in November 2011 (for MSF I, MSF III and CPAI). Purwin was the ClearPath +engagement partner. When Pustorino merged with Grassi in January 2012, the audit work was +transitioned to Grassi and Purwin continued to serve as the engagement partner on the three audits. +In May 2012, ClearPath retained Grassi for the audit of the fourth fund, MSF II, and Purwin was +assigned by the firm to serve as the engagement partner on that audit. Grassi was engaged to audit +the Funds’ financial statements under GAAS and to express an opinion about whether the financial +statements were fairly presented, in all material respects, in conformity with U.S. generally accepted +accounting principles (“GAAP”). Grassi was also engaged to prepare all required tax returns, +including Forms K-1, for the Funds’ partners for the 2011 calendar year. +10. During the course of audit work, Purwin worked on ClearPath Fund audits from +January to March 2012, but experienced significant health issues that left him cognitively +impaired. Purwin was on leave from March to April 2012. Purwin returned to work on the +ClearPath engagement from May to June 2012, and authorized the release of the 2010 audit +report for the MSF III during this time, but his illness continued. From approximately July to +October 2012 he worked a sharply reduced schedule during which he did not perform any audit +work while he obtained treatment for his illness. +11. In October 2012, Purwin received medical clearance to return to work, but +remained unwell. In January 2013, after the replacement engagement partner left Grassi and +Purwin resumed his role as engagement partner on the ClearPath Fund audits, Grassi senior +executives discovered that Purwin had permitted the issuance of two non-ClearPath audit reports +under the Grassi name without subjecting the audits to quality control review as required by firm +policy. Purwin informed Grassi that he did not recall issuing the two reports. Purwin’s illness +worsened following Grassi’s discovery of Purwin’s circumvention of firm policy. After Grassi +learned that Purwin had circumvented firm policy, Grassi permitted Purwin to solicit payment of +audit and tax fees from ClearPath and authorize the issuance of the 2011 reports for MSF I and MSF +III. Shortly after completing these tasks and obtaining partial payment for audit and tax fees from +ClearPath, Grassi agreed to Purwin’s withdrawal from the firm. +12. During the course of Grassi’s audit work on the ClearPath Funds, Purwin authorized +Grassi to issue nine audit reports containing unqualified opinions. The table below identifies each +audit report issued including the audit report date. The five audit reports that were materially false +and that had accompanying financial statements that were materially misstated are bolded and +italicized, below. As the engagement partner, Purwin had final responsibility for the audits of the +ClearPath Funds. + MSF I MSF II MSF III CPAI +2009 6/12/2012 Not Audited 4/19/2012 Not Audited +2010 7/2/2012 Not Audited 6/11/2012 4/19/2012 +2011 1/29/2013 1/22/2013 1/29/2013 1/26/2013 + +13. ClearPath sent Grassi’s audit reports to the custodian for the vast majority of the +Funds’ limited partner investors. + +6 + +Purwin Failed to Adequately Plan the ClearPath Funds Audits +14. GAAS requires the auditor to adequately plan the work and properly supervise any +assistants. (AU § 311.01). Audit planning involves developing an overall audit strategy for the +expected conduct, organization and staffing of the audit. (AU § 311.02). The overall audit strategy +should consider areas of higher risks of material misstatement and determine which resources +should be assigned to the audit and how the resources are to be managed, directed and supervised. +(AU § 311.14-15). Once the audit strategy has been established, the auditor should develop a more +detailed audit plan to achieve the audit objectives. (AU § 311.17). The audit plan should include a +description of the nature, timing and extent of planned risk assessment procedures sufficient to +assess the risks of material misstatement and further procedures at the relevant assertion level for +each material class of transactions, account balance and disclosure and any other audit procedures in +order to comply with GAAS. (AU § 311.21). Planning is not a discrete phase of the audit, but rather +an iterative process. If, as a result of performing planned audit procedures, the auditor obtains +disconfirming evidence, the auditor may need to revise the overall audit strategy. (AU § 311.03). +15. As engagement partner, Purwin led planning and staffing of the audit work for the +ClearPath Funds audits, before he went on medical leave. The Funds’ predecessor auditor sent +ClearPath a resignation letter in October 2011 stating that it could not complete the audits for the +year ended December 31, 2009 because it had “…not received satisfactory documentation to +support significant audit objectives related to certain investment and partner withdrawal +transactions.” The resignation letter was included in Grassi’s audit workpapers. Purwin had and +documented his discussion with the audit partner from the predecessor firm and noted that the firm +was “concerned about certain transactions” and “uncomfortable” with the valuation of certain +investments. Purwin concluded that Pustorino would be able to perform the audits as “the issues +cited in the [predecessor] auditor letter could be addressed with counsel…these factors will be +considered as part of the risk assessment of the audits.” +16. Audit planning workpapers, prepared after the fraud brainstorming discussion led by +Purwin, highlighted the risk of asset misappropriation and Ponzi schemes, and that “the entity’s +assets could be stolen,” and based on the prior auditor’s resignation, assessed audit risk related to +the Investments and Equity accounts and disclosures as “significant.” However, the audit plans did +not include sufficient audit procedures whose nature, timing and extent were appropriately +responsive to the assessed risks. +17. The audit planning workpapers also did not address the risk presented by the Funds’ +series structure. The ClearPath Funds were organized as series funds. Each series within each +Fund generally invested in one investment (e.g., limited partnership interests, secured debt +instruments, or private equity). Limited partners, through their subscription agreements, designated +in which specific series they wanted to invest. The Limited Partnership Agreements for each of the +Funds established the series structure and how each series was intended to stand alone: +“The Partnership’s assets shall be divided into separate series…and each Series shall +generally be accounted for as a ‘sub-partnership’ for purposes of this Agreement…the +interests in any Series shall be considered a separate Series from interests in any other +Series…the debts, liabilities and obligations incurred, contracted for or otherwise existing + +7 + +with respect to any one Series shall be enforceable against the assets of such Series only and +not against the assets of the Partnership generally or of any other Series.” +18. Despite the fact that the Funds’ governing documents specified that each series must +be accounted for as a sub-partnership, Purwin failed to identify inter-series commingling as an audit +risk. +19. In 2010 and 2011, ClearPath and Churchville caused a series of transactions in +which they misappropriated money from the Funds, then transferred assets among several series and +between the Funds. In part because the audit plan did not require it, the Grassi engagement team +did not perform procedures to test for inter-series and inter-fund transactions undertaken in violation +of fund governing documents. As a result, Purwin and the Grassi audit team failed to identify +millions of dollars of ClearPath’s and Churchville’s misappropriations and inter-fund transfers, +which were reflected on bank statements, brokerage statements and cash activity schedules +reviewed by Grassi, but which were not correctly reflected in the Funds’ accounting records. +20. Grassi’s audit plan also failed to appropriately address the elevated risk of inflated +valuations of hard to value securities, which was an issue highlighted by the Funds’ predecessor +auditor. ClearPath used methodologies relying on Level 3 inputs to value a significant portion of +the Funds’ assets for the year ended December 31, 2011.5 According to the 2011 audited financial +statements for MSF III and MSF II, approximately 85% and 49% of the Funds’ portfolio +investments relied on Level 3 inputs, respectively. The majority of these assets were secured loans +to Receivable Partners LLC (“Receivable Partners”), a New Jersey LLC, purportedly for the +purchase of healthcare receivable portfolios. The audit plan for the MSF II and MSF III audits for +2011 did not include procedures sufficient to test ClearPath’s assertion of fair value. Among +other things, related to the auditing of the Receivable Partners loans, Purwin failed to develop audit +plans that included sufficient procedures to test the existence, valuation, rights and access to or the +transferability of the collateral underlying the loans despite the importance of the collateral to the +fair value of the loans asserted by management. Notwithstanding these failures, Purwin approved +for release audit reports expressing an unqualified opinion on the Fund’s 2011 financial +statements based on audits that did not comply with the auditing standards. +21. Finally, each audit plan was not properly revised in light of the audit evidence that +was either insufficient or contradicted management’s assertions in the Funds’ financial statements. + +For the reasons set forth above, Purwin failed to properly plan the failed ClearPath Fund audits. +Purwin Violated Audit Standards Requiring Due Professional Care and Professional +Skepticism and Audit Standards for Supervision, Review and Documentation +Purwin Failed to Exercise Due Professional Care and Professional Skepticism in the Course of +the ClearPath Audit Work (AU §§ 230, 316) + +5 In the fair value hierarchy under GAAP, the best evidence of fair value are quoted prices in active markets (Level +1), followed by evidence based on inputs other than quoted prices that are observable for the asset, either directly or +indirectly (Level 2). The least reliable valuations are those based on unobservable inputs reflecting the r eporting +entity’s own assumptions (Level 3). (Financial Accounting Standards Board Accounting Standards Codification +820-10-35). + +8 + +22. GAAS requires auditors to exercise due professional care in the performance of the +audit. (AU § 230.01). Auditors should be assigned to tasks and supervised commensurate with +their level of knowledge, skill, and ability so that they can evaluate the audit evidence they are +examining. The auditor with final responsibility for the engagement should know, at a minimum, +the relevant professional accounting and auditing standards and should be knowledgeable about the +client. (AU § 230.06). Auditors must maintain an attitude of professional skepticism, which +includes a questioning mind and a critical assessment of audit evidence. (AU § 230.07). Auditors +should consider the competency and sufficiency of the evidence and exercise professional +skepticism throughout the audit process. (AU § 230.08). An auditor should not be satisfied with +less than persuasive evidence because of a belief that management is honest (AU §§ 230.09 and +316.13), and should: (1) perform an ongoing questioning of whether the information and evidence +obtained suggests that a material misstatement due to fraud has occurred; and (2) conduct the +engagement with a mindset that recognizes that a material misstatement due to fraud could be +present, regardless of past experience with the entity and the auditors’ belief about management’s +honesty and integrity. (AU § 316.13). +23. At or near the completion of fieldwork, the auditor should evaluate whether the +accumulated results of auditing procedures and other observations affect the assessment of the risks +of material misstatement due to fraud made earlier in the audit. This evaluation primarily is a +qualitative matter based on the auditor's judgment. Such an evaluation may provide further insight +about the risks of material misstatement due to fraud and whether there is a need to perform +additional or different audit procedures. As part of this evaluation, the auditor with final +responsibility for the audit should ascertain that there has been appropriate communication with the +other audit team members throughout the audit regarding information or conditions indicative of +risks of material misstatement due to fraud. (AU § 316.74). +24. There were many red flags throughout the failed audits of the ClearPath Funds that +should have been recognized and addressed by an engagement team exercising due professional +care and appropriate professional skepticism. Several facts should have heightened Purwin’s +concerns about potential fraud, including: ClearPath was a new client to the audit firm; the +ClearPath Funds’ previous audit firm resigned due to its inability to gather sufficient appropriate +audit evidence; the Funds had not been audited since 2009; there were numerous material +transactions among the Funds and their series as well as with ClearPath that were outside the normal +course of business for the Funds, lacked appropriate business rationale, or otherwise should have +appeared to be unusual; and the largest investment in two of the Funds went into default during +2012. +25. The 2010 audited financial statements for MSF III reflected a material +discrepancy of nearly $1 million between the capital balance for the DD1 series and the +associated portfolio investment. Despite the $1 million discrepancy evident on the face of the +financial statements, Purwin did not inquire about the discrepancy and authorized the release of +Grassi’s audit report containing an unqualified opinion on MSF III’s 2010 financial statements. +26. Purwin also failed to respond appropriately to the apparent lack of audit evidence +and scope limitations in the course of the MSF III and MSF II audits for 2011. In January 2013, +when Purwin had returned from leave and was working as the engagement partner, Grassi +requested additional evidence concerning the valuation and performance of underlying collateral + +9 + +for $20 million of the secured debt investments with Receivable Partners that defaulted during +2012. Churchville emailed Purwin and two other Grassi auditors attaching what Churchville +claimed were collateral files that ClearPath was negotiating to have assigned to it in lieu of +payment by Receivable Partners. The collateral files were nearly two years old and Churchville +did not provide any information that linked the collateral to Receivable Partners. The Grassi +engagement team, including Purwin, emailed Churchville to ask to speak to Receivable Partners +to discuss the collateral files, but Churchville, citing “legal negotiations,” claimed there was no +one at Receivable Partners who would be “forthcoming with any more information until we +reach an agreement or they resume payments and make us whole (which they are still claiming +they will do ASAP).” Purwin knew about this scope limitation, but did not properly address it +by raising the level of audit risk, insisting that the audit team perform alternative procedures to +verify Churchville’s claims, or qualifying or disclaiming the opinion on the financial statements +(AU § 508.22). +27. As the subsequent investigation showed, there was never any collateral underlying +these investments, which had a reported fair value in excess of $20 million on the 2011 audited +financial statements for MSF III and MSF II. Limited partners in the Receivable Partners series in +MSF III and MSF II incurred losses in excess of $16 million. +6 +Purwin Failed to Properly Supervise the Engagement Team (AU § 311) +28. GAAS requires that auditors 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 audit is responsible for the assignment of +tasks to assistants. (AU § 230.06). The auditor with final responsibility is required to supervise the +audit assistants, including firm personnel other than the engagement partner. (AU § 311.01). +Supervision involves directing the efforts of assistants who are involved in accomplishing the +objectives of the audit and determining whether those objectives were accomplished. (AU § +311.28). The auditor with final responsibility for the audit should communicate with members of +the audit team regarding the susceptibility of the entity's financial statements to material +misstatement due to error or fraud, with special emphasis on fraud. (AU § 311.29). The auditor +with final responsibility for the audit should direct assistants to bring to his or her attention +accounting and auditing issues raised during the audit that the assistant believes are of significance +to the financial statements or auditor's report so the auditor with final responsibility may assess their + +6 Receivable Partners was a sham organization, founded in early 2011 through the collusive efforts of Churchville and +Jonathan E. Rosenberg. The ClearPath Funds had prior investments in healthcare receivables instruments with another +Rosenberg entity which began deteriorating in 2010. In order to mask the collapse of the prior investments, Churchville +and Rosenberg colluded to raise capital for a purported new venture, Receivable Partners. During 2011 Churchville and +ClearPath raised over $20 million from new limited partners in MSF III and MSF II for secured loans to Receivable +Partners. However, instead of purchasing healthcare receivable portfolios, with Churchville’s knowledge and direction, +Receivable Partners used the cash to make the final payments on the earlier, unrelated investments. The last several +rounds of capital raised for the Receivable Partners investments were used to fund “interest” payments on the earlier +loans. Receivable Partners never used any of the cash raised from MSF III or MSF II investors to purchase any +healthcare receivables portfolios. Rosenberg pleaded guilty to conspiracy to commit wire fraud in connection with a +complex scheme to defraud investors and lenders by selling fraudulent investment portfolios of debts purportedly +owed by hospital patients. United States v. Shusterman, Crim. No. WDQ-13-0460 (U.S. Dist. Ct. D. Md.); see also +https://www.justice.gov/usao-md/pr/new-jersey-man-guilty-148-million-investment-fraud-scheme +. + +10 + +significance. (AU § 311.30). The work performed by each assistant, including the audit +documentation, should be reviewed to determine whether it was adequately performed and +documented and to evaluate the results, relative to the conclusions to be presented in the auditor's +report. (AU § 311.31). +29. Purwin failed to staff the engagement with a team that had the requisite experience +and competency to complete the audit work in accordance with GAAS. Between May and August +2012, the majority of the workpapers for the 2010 and 2011 audits of the Funds were prepared by a +junior auditor who had never worked on a fund audit and was not yet a CPA. Despite the fact that +the junior auditor had no prior fund auditing experience, Purwin gave the auditor a great deal of +responsibility while providing little supervision. +30. In particular, Purwin did not properly review workpapers himself as part of his +engagement partner responsibilities before authorizing the release of the 2011 ClearPath Fund audit +reports and thereby did not have a reasonable basis for his opinion that the audits had been +performed in accordance with GAAS. With respect to the two ClearPath Fund audits with the +most significant errors, Grassi’s workpapers showed that Purwin signed off on only six of the 94 +workpapers in the Grassi electronic workpaper file for the 2011 MSF I audit and only two of the +134 workpapers for the 2011 MSF III audit. +31. Purwin’s failure to adequately supervise audit personnel, and his failure to review +the audit work performed for sufficient appropriate audit evidence to support the conclusions +reached before authorizing the release of the 2011 audit reports caused him to violate auditing +standards throughout the audits. +32. Failures in the Supervision of Subsequent Events Testing +7 – Purwin did not +properly review the subsequent events testing of the 2011 audit of MSF I as part of his engagement +partner responsibilities and therefore did not recognize several material audit deficiencies. +33. For example, despite the requirements of AU § 560 and Grassi’s own written audit +program, which required that the Grassi auditors consider subsequent events up until the date of the +auditor’s report, the subsequent events memo for the 2011 MSF I audit was dated August 24, 2012, +more than five months before the audit report was issued on January 29, 2013. +34. Purwin also did not detect that Grassi auditors had deviated from their own audit +program and had failed to request or review brokerage statements or capital statements for the +period subsequent to the balance sheet date up until the date of the 2011 auditor’s report. In the +2011 MSF I and CPAI audits, these documents would have revealed events requiring material +changes to the balances reported in the 2011 financial statements and additional disclosures for the +Funds’ largest series investments. For example, the Oppenheimer Public Markets series in MSF I +was invested in short-term U.S. government and agency bonds through an account at Oppenheimer +& Co., Inc., (“OPCO”). In August 2011, Churchville and ClearPath had obtained a $4.1 million +margin loan against the value of the OPCO series and used the cash to purchase Churchville’s + +7 Subsequent events are events or transactions which occur after the balance-sheet date of the financial statements +subject to audit, but prior to the issuance of the financial statements, that have a material effect on the financial +statements and therefore require adjustment to or disclosure in the statements. (AU § 560.01). + +11 + +personal residence overlooking Narragansett Bay in Barrington, Rhode Island, and to cover up +losses from ClearPath’s and Churchville’s misappropriation from MSF III as outlined above. In +April 2012, OPCO applied cash resulting from the redemption of the bonds against the margin loan +balance, which wiped out approximately 85% of the carrying value of the OPCO series in MSF I. +35. Because Purwin did not conduct adequate review, Purwin failed to identify that +auditors failed to obtain and review OPCO account statements as of the date of the audit report. +The 2011 audited financial statements for MSF I made no reference to the existence of the margin +loan or the material related party transaction between MSF I and ClearPath, which resulted in +grossly overstating the partners’ capital balance for the OPCO series. Limited partners in the +ClearPath Funds lost $4.1 million in connection with ClearPath’s and Churchville’s theft of OPCO +assets. +36. In addition, in December 2011, ClearPath and Churchville obtained a line of credit +secured in part by pledging as collateral the assets of the MSF I’s and CPAI’s investments in the +Feingold O’Keeffe Distressed Loan Fund, L.P. (“Feingold O’Keeffe”), which was not disclosed to +investors. By January 9, 2012, ClearPath had borrowed $3.75 million against the line of credit and +used the proceeds to pay for investments that were not recorded in the books and records of any +ClearPath Fund. Purwin failed to identify that Grassi auditors had not obtained or reviewed capital +account statements as of the date of the auditor’s report for the largest investments in MSF I and +CPAI, and so did not discover that the investments in the Feingold O’Keeffe series in both Funds +were liquidated by the end of 2012, and the proceeds had not been credited to the limited partners in +that series but instead had been used to pay down the credit line balance. +37. The 2011 audited financial statements for MSF I and CPAI were materially +misstated because they did not disclose that ClearPath and Churchville established a line of credit +during 2011 using the Feingold O’Keeffe series’ assets as collateral and did not disclose that the line +was drawn down in January 2012. Limited partners in the Feingold O’Keeffe series lost $3.75 +million of their investment due to the unauthorized borrowing on the undisclosed credit line. +38. Failures in the Supervision of the Confirmation Process – Each of the first three +pages of the confirmation response filed in both MSF I and CPAI workpapers included +references indicating that the investments were “pledged.” The face of the confirmation form +bears a handwritten note stating, “note > Account is subject to a pledge agreement dated 2011.” +Purwin reviewed the confirmation response including the “pledged” designation in the CPAI +workpapers. Neither Purwin, nor his audit staff, inquired of ClearPath, its fund administrator, or +Feingold O’Keeffe about the meaning of the term “pledged” to understand the impact on the MSF I +and CPAI financial statements. As a result, Purwin and the audit team did not discover that +ClearPath and Churchville entered into a line of credit as of December 2011 pledging the Feingold +O’Keeffe assets held by MSF I and CPAI as collateral along with a personal guarantee of +Churchville and corporate guarantees of ClearPath and the MSF I general partner. +8 + +8 Purwin’s failure to recognize and address the “pledged” notification on the Feingold O’Keeffe audit confirmation +response that he reviewed is also a failure in exercising due professional care and professional skepticism. (AU §§ +230, 316). + +12 + +39. For the reasons set forth above, Purwin failed to properly supervise the engagement +team in its failed ClearPath Funds audits. +Purwin Failed to Satisfy Himself as to the Proper Documentation of the Audit (AU § 339) +40. GAAS requires auditors to prepare audit documentation in connection with each +engagement in sufficient detail to provide a clear understanding of the work performed (including +the nature, timing, extent, and results of audit procedures performed), the audit evidence obtained +and its source, and the conclusions reached. (AU § 339.03). The auditor should prepare audit +documentation that enables an experienced auditor, having no previous connection to the audit, to +understand, among others, the results of the audit procedures performed and the audit evidence +obtained, and the conclusions reached on significant matters. (AU § 339.10). If the auditor has +identified information that contradicts or is inconsistent with the auditor's final conclusions +regarding a significant finding or issue, the auditor should document how the auditor addressed the +contradiction or inconsistency in forming the conclusion. (AU § 339.16). In documenting the +nature, timing, and extent of audit procedures performed, the auditor should record who performed +the audit work and the date such work was completed, and who reviewed specific audit +documentation and the date of such review. (AU § 339.18). +41. Some examples of insufficient audit documentation exhibited by Purwin and his +engagement team include: +a. Purwin signed off on the designated Supervision, Review and Approval form +for the 2011 MSF I audit indicating that he performed the necessary partner +review procedures, but did not in fact perform all of the procedures, in +violation of AU §§ 339.03, 339.10 and 339.18. +b. For the CPAI audit for 2011, Purwin reviewed and signed off on the +workpaper containing Feingold O’Keeffe’s confirmation response +including the “pledged” designation but failed to identify that the Grassi +auditors did not document how they addressed the contradiction between +the confirmation and the audited financial statements in its workpapers, in +violation of AU § 339.16. +42. For the reasons set forth above, Purwin did not perform sufficient appropriate +procedures to determine that the ClearPath Funds audits were adequately performed and +documented in accordance with the requirements of GAAS. +E. VIOLATIONS + +43. Section 206(2) of the Advisers Act prohibits any 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. A violation of Section 206(2) may rest on a finding of +negligence. SEC v. Steadman, 967 F.2d 363, 643 n.5 (D.C. Cir. 1992) (citing SEC v. Capital +Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). Proof of scienter is not required to +establish a violation of Section 206(2). Id. + + +13 + +44. Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder make it +unlawful for any investment adviser to a pooled vehicle to make any untrue statement of a +material fact or to omit to state 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 to otherwise engage in any act, practice, or course +of business that is fraudulent, deceptive or manipulative with respect to any investor or +prospective investors in the pooled investment vehicle. A violation of Section 206(4) of the +Advisers Act and the rules thereunder does not require scienter. Steadman, 967 F.2d at 647. +45. As a result of the conduct above, Purwin was a cause of ClearPath’s and +Churchville’s violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 +thereunder. +46. Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with +respect to persons licensed to practice as accountants. “Improper professional conduct” includes +two types of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a +violation of professional standards in circumstances in which an accountant knows, or should know, +that heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct, each +resulting in violations of professional standards, that indicate a lack of competence. +47. Based on the foregoing, the Commission finds that Purwin 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. Purwin’s conduct in the 2010 audit of MSF III +and the 2011 audits of MSF I, MSF II, MSF III and CPAI involved repeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards and +indicating a lack of competence to practice before the Commission. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 203(k) of the Advisers Act, Section 4C of the Exchange +Act and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED that: + +A. Purwin shall cease and desist from committing or causing any violations and any +future violations of Sections 206(2) and 206(4) of the Advisers Act, and Rule 206(4)-8 +thereunder. + +B. Purwin 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: + + +14 + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. +Such an application must satisfy the Commission that Respondent’s work in his practice +before the Commission will be reviewed either by the independent audit committee of the +public company for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +2. an independent accountant. Such an application must satisfy the +Commission that: + +a. Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board +(“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and such +registration continues to be effective; + +b. Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify +any criticisms of or potential defects in the respondent’s or the firm’s quality +control system that would indicate that the respondent will not receive appropriate +supervision; + +c. Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board +(other than reinstatement by the Commission); and + +d. Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. + +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + +E. Purwin shall, within 10 days of the entry of this Order, pay a civil money penalty +of $20,000 to the Securities and Exchange Commission. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one of +the following ways: + + +15 + +(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 +Purwin as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Robert B. Baker, Assistant Director, +Asset Management Unit, Securities and Exchange Commission, 33 Arch Street, 24th Floor, +Boston, MA 02110. + +F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the civil penalty referenced in paragraph E. above. Within five business days +of collection in full of the amounts ordered, the Commission shall transfer the Fair Fund to +Stephen F. Del Sesto, Esq., Donoghue Barrett & Singal, P.C., One Cedar Street, Suite 300, +Providence, RI 02903, the court-appointed receiver for ClearPath in Securities and Exchange +Commission v. ClearPath Wealth Management, LLC, Patrick Evans Churchville, as Defendants, +and ClearPath Multi-Strategy Fund I, L.P., ClearPath Multi-Strategy Fund II, L.P., ClearPath +Multi-Strategy Fund III, L.P., and HCR Value Fund, L.P., as Relief Defendants, Civil Action No. +15-cv-00191. 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. + +16 + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3828.txt b/raw/aaer/2016/AAER-3828.txt new file mode 100644 index 0000000000000000000000000000000000000000..0511da0f0cd62247d882b61467df6d72af859414 --- /dev/null +++ b/raw/aaer/2016/AAER-3828.txt @@ -0,0 +1,104 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79393 / November 23, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3828 / November 23, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-14044 + +In the Matter of +Kendall G. Merkley, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On September 13, 2010, Kendall G. Merkley, CPA (“Merkley”) was denied the privilege +of appearing or practicing as an accountant before the Commission as a result of settled public +administrative proceedings instituted by the Commission against Merkley pursuant to Section 4C +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission's Rules of Practice.1 This order is issued in response to Merkley’s application for +reinstatement to appear and practice before the Commission as an accountant. + +Merkley was found to have engaged in improper professional conduct with respect to his +conduct as the engagement partner on KMJ Corbin & Company LLP’s (“KMJ”) audits and +reviews of Home Solutions of America, Inc.’s (“HSOA”) financial statements for the years +ended December 31, 2004 through December 31, 2006. The Commission found that, during the +relevant period, Merkley’s actions during the engagements were unreasonable and failed to +conform to applicable professional standards. Merkley failed to (i) obtain sufficient competent +evidential matter regarding bonuses, revenues, and cost of revenues with respect to KMJ’s 2004, +2005, and 2006 audit engagements; (ii) comply with PCAOB Auditing Standard No. 3, Audit +Documentation; (iii) adequately plan the audit and properly supervise assistants in connection +with the 2006 engagement; and (iv) conduct reviews of interim financial information in +accordance with PCAOB standards and rules. In addition, Merkley was a cause of HSOA’s +violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder and caused KMJ’s violation of Regulation S-X Rule 2-02(b)(1). + +1 See Accounting and Auditing Enforcement Release No. 3185 dated September 13, 2010. Merkley was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + +Merkley has met all of the conditions set forth in the original order and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Merkley attests that he will undertake to have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission, while practicing before the Commission in this capacity. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + + On the basis of the information supplied, representations made, and undertakings agreed +to by Merkley, it appears that he has complied with the terms of the September 13, 2010 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of +Practice, and that Merkley, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Merkley, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Kendall G. Merkley, CPA is hereby reinstated to appear and practice before the Commission as +an accountant. + +By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3829.txt b/raw/aaer/2016/AAER-3829.txt new file mode 100644 index 0000000000000000000000000000000000000000..ad745665a08c78568598d28032d273309e02f6dd --- /dev/null +++ b/raw/aaer/2016/AAER-3829.txt @@ -0,0 +1,114 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79394 / November 23, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3829 / November 23, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-15033 + +In the Matter of +Michael K. Krohn, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On September 18, 2012, Michael K. Krohn, CPA (“Krohn”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Krohn pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice.1 This order is issued in response to Krohn’s +application for reinstatement to appear and practice before the Commission as an accountant +responsible for the preparation or review of financial statements required to be filed with the +Commission. +In a civil action entitled Securities Exchange Commission v. The Companies (TC), LLC, +et al., the court entered an order permanently enjoining Krohn from future violations of Sections +5(a), 5(c), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 (“Securities Act”). In a complaint +filed on August 6, 2012, the Commission alleged, among other things, that from January 2009 +through June 2011, The Companies (TC), LLC (“the Companies”), initiated four unregistered +offerings of securities + +The complaint alleged that Krohn, in violation of the federal securities laws and in +connection with the sale of approximately $11.9 million of securities to approximately 169 investors, +made material misrepresentations and omissions regarding, among other things, the value of +company assets. The alleged misrepresentations and omissions were contained in private placement +memoranda (“PPMs”) used in unregistered offerings. The complaint alleged that Krohn participated + +1 See Accounting and Auditing Enforcement Release No. 3408 dated September 18, 2012. Krohn was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. + + 2 +in drafting and providing content for the PPMs and solicited investors. The complaint further alleged +that the securities were not registered, in violation of the federal securities laws, because the PPMs +wrongfully relied on Regulation D, Rule 506. The complaint alleged that the offerings did not meet +the Regulation D, Rule 506 requirements because the securities were offered through general +solicitation. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Krohn +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Krohn is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Krohn’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Krohn, it appears that he has complied with the terms of the September 18, 2012 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Krohn, by undertaking to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Michael K. Krohn, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3830.txt b/raw/aaer/2016/AAER-3830.txt new file mode 100644 index 0000000000000000000000000000000000000000..10d45dab7cc829e0741b3567872e4835835b1d23 --- /dev/null +++ b/raw/aaer/2016/AAER-3830.txt @@ -0,0 +1,110 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79395 / November 23, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3830 / November 23, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-13190 + +In the Matter of +Mark David Shapiro, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On September 12, 2008, Mark David Shapiro, CPA (“Shapiro”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Shapiro pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice.1 This order is issued in response to +Shapiro’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. +The Commission found that Shapiro had been permanently enjoined by a United States +District Court from future violations of Sections 10(b) and 13(b)(5) of the Securities Exchange +Act of 1934 and Rules 10b-5, 13b2-1, and 13b2-2 promulgated thereunder and from aiding and +abetting violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act +and Rules 10b-5, 13b2-1, 13b2-2, 12b-20, 13a-1, and 13a-13 promulgated thereunder. In its +Complaint in the injunctive action, the Commission alleged, among other things, that Shapiro +engaged in a fraudulent scheme that resulted in Fleming Companies, Inc. (“Fleming”) filing +materially false and misleading financial statements in 2001 and 2002. The Complaint alleged +that Shapiro engaged in a number of improper accounting practices that materially increased +Fleming’s annual and quarterly revenue and net income in a departure from generally accepted +accounting principles. These practices included, among other things, prematurely recognizing +rebates as income. In addition, the complaint alleged that Shapiro made material + +1 See Accounting and Auditing Enforcement Release No. 2876 dated September 12, 2008. Shapiro was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + 2 +misrepresentations to Fleming’s independent auditor about certain of the company’s accounting +practices. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Shapiro +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Shapiro is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Shapiro’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Shapiro, it appears that he has complied with the terms of the September 12, 2008 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Shapiro, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, in +his practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Mark David Shapiro, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3831.pdf b/raw/aaer/2016/AAER-3831.pdf new file mode 100644 index 0000000000000000000000000000000000000000..022d2cd67fdb5251fe51527c7cf392b1244da97f Binary files /dev/null and b/raw/aaer/2016/AAER-3831.pdf differ diff --git a/raw/aaer/2016/AAER-3831.txt b/raw/aaer/2016/AAER-3831.txt new file mode 100644 index 0000000000000000000000000000000000000000..35184e7a0359d224689231e301e50318ab26aef5 --- /dev/null +++ b/raw/aaer/2016/AAER-3831.txt @@ -0,0 +1,93 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79396 / November 23, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3831 / November 23, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-15358 + +In the Matter of +Brian Zucker, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On June 14, 2013, Brian Zucker, CPA (“Zucker”) was denied the privilege of appearing +or practicing as an accountant before the Commission as a result of settled public administrative +proceedings instituted by the Commission against Zucker pursuant to Section 4C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission's +Rules of Practice.1 This order is issued in response to Zucker’s application for reinstatement to +appear and practice before the Commission as an accountant. + +The Commission’s order related to violations of the auditor independence rules by +Rosenberg Rich Baker Berman & Company (“RRBB”), a registered public accounting firm, and +Zucker, a partner at the firm. Zucker performed Financial and Operations Principal (“FINOP”) +services for a broker-dealer client, (the “Broker-Dealer”), while RRBB was serving as the +Broker-Dealer’s auditor. Zucker also arranged for RRBB to pay a contractor who was serving as +the Broker-Dealer’s FINOP and directed an RRBB staff accountant to provide FINOP services to +the Broker-Dealer. As a consequence of this conduct, Zucker and RRBB engaged in improper +professional conduct, violated the auditor independence rules, and caused the Broker-Dealer’s +failure to file an annual report audited by an independent accountant. + +Zucker has met all of the conditions set forth in the original order and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to + +1 See Accounting and Auditing Enforcement Release No. 3464 dated June 14, 2013. Zucker was permitted, pursuant +to the order, to apply for reinstatement after one year upon making certain showings. +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Zucker attests that he will undertake to have his work reviewed by the independent +audit committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + + On the basis of the information supplied, representations made, and undertakings agreed +to by Zucker, it appears that he has complied with the terms of the June 14, 2013 order denying +him the privilege of appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Zucker, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, in +his practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, and that Zucker, by undertaking to comply with all requirements +of the Commission and the Public Company Accounting Oversight Board, including, but not +limited to, all requirements relating to registration, inspections, concurring partner reviews and +quality control standards, in his practice before the Commission as an independent accountant +has shown good cause for reinstatement. Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Brian Zucker, CPA is hereby reinstated to appear and practice before the Commission as an +accountant. + +By the Commission. + + + +Brent J. Fields +Secretary + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)( 3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3832.txt b/raw/aaer/2016/AAER-3832.txt new file mode 100644 index 0000000000000000000000000000000000000000..d1f07553dce063fddda5606523939a3f9c9062b7 --- /dev/null +++ b/raw/aaer/2016/AAER-3832.txt @@ -0,0 +1,112 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79397 / November 23, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3832 / November 23, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-13952 + +In the Matter of +Stephen Hozie + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On June 29, 2010, Stephen Hozie (“Hozie”) was suspended from appearing or practicing +before the Commission as an accountant as a result of settled public administrative proceedings +instituted by the Commission against Hozie pursuant to Rule 102(e)(3)(i) of the Commission's +Rules of Practice.1 This order is issued in response to Hozie’s application for reinstatement to +appear and practice before the Commission as an accountant responsible for the preparation or +review of financial statements required to be filed with the Commission. +In a civil action entitled Securities Exchange Commission v. Strauss, et al., the court +entered a final order permanently enjoining Hozie from future violations of Section 17(a) of the +Securities Act of 1933 (“Securities Act”), Sections 10(b) and 13(b)(5) of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder and from +aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange +Act and Rules 12b-20, 13a-11 and 13a-13 thereunder and barring him from serving as an officer +or director for a period of five years. Hozie was also ordered to pay a $225,000 civil money +penalty and $1 of disgorgement. + +In a complaint filed on April 28, 2009, the Commission alleged, among other things, that +Hozie, fraudulently understated AHM’s first quarter 2007 loan loss reserves by tens of millions of +dollars, converting the Company’s actual loss into a fictional profit. The complaint also alleged + +1 See Accounting and Auditing Enforcement Release No. 3148 dated June 29, 2010. Hozie was permitted, pursuant +to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +that Hozie made misleading disclosures concerning the Company’s financial condition, including +misrepresenting the Company’s liquidity and failing to adequately disclose the riskiness of the +mortgages AHS originated and held. The Complaint further alleged that Hozie misled AHM’s +auditor about the adequacy of the reserves. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Hozie +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Hozie is not, at this time, seeking to appear or +practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Hozie’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Hozie, it appears that he has complied with the terms of the June 29, 2010 order suspending +him from appearing or practicing before the Commission as an accountant, that no information +has come to the attention of the Commission relating to his character, integrity, professional +conduct or qualifications to practice before the Commission that would be a basis for adverse +action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, and that +Hozie, by undertaking to have his work reviewed by the independent audit committee of any +company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)( 1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Stephen Hozie is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3833.pdf b/raw/aaer/2016/AAER-3833.pdf new file mode 100644 index 0000000000000000000000000000000000000000..458ddcfec6520e9acace30db9ae35d4e791e305a Binary files /dev/null and b/raw/aaer/2016/AAER-3833.pdf differ diff --git a/raw/aaer/2016/AAER-3833.txt b/raw/aaer/2016/AAER-3833.txt new file mode 100644 index 0000000000000000000000000000000000000000..17b2f0f61ed94aad38ef751828ccead23cd641bb --- /dev/null +++ b/raw/aaer/2016/AAER-3833.txt @@ -0,0 +1,534 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79454 / December 2, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3833 / December 2, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17705 + + +In the Matter of + +UNITED CONTINENTAL +HOLDINGS, INC., + +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 against United Continental Holdings, Inc. (“United” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“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, 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 Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Securities Exchange Act of 1934 (“Exchange Act”) by United, one of +the world’s largest airlines. + +2. In 2011, United decided to institute a flight route from Newark, New Jersey, to +Columbia, South Carolina (the “South Carolina Route”) that was projected to lose money. +United instituted the South Carolina Route following pressure from David Samson (“Samson”), +then the Chairman of the Board of Commissioners of the Port Authority of New York and New +Jersey (“Port Authority”). The route provided Samson—who exercised authority and influence +as a Port Authority official in matters affecting United’s business interests—with a more direct +route to his house in South Carolina. United’s then chief executive officer (“CEO”) approved +the South Carolina Route (“the Transaction”) outside of United’s normal processes, and United +then scheduled the flight based on Samson’s preference as conveyed to United by one of its +consultants, and United initiated the route despite its poor financial projections. Moreover, the +South Carolina Route’s approval violated applicable United compliance and ethics policies +(“United’s Policies”). + +3. United violated Section 13(b)(2)(B) of the Exchange Act because, despite the +significant potential corruption risks surrounding its dealings with public officials, United failed +to design and maintain a system of internal accounting controls that was sufficient to prevent its +officers from approving the use of United’s assets in connection with the South Carolina Route +in violation of United’s Policies, which prohibited the use of assets for corrupt purposes. The +ethics code in effect in 2011 provided that employees wishing to act in ways prohibited by the +ethics code could request approval for an exception. In this instance, no exception was requested +or granted. Indeed, the CEO was able to approve the South Carolina Route outside United’s +normal process because United lacked adequate controls to reasonably ensure that prior to +authorization of the Transaction an exception was obtained from the Director of Ethics and +Compliance or United’s Board of Directors as required by United’s Policies. The failure to seek +such prior authorization of the Transaction—which required a written submission and any +approval to be in writing—also caused United to violate Section 13(b)(2)(A) of the Exchange +Act because its books and records did not, in reasonable detail, accurately or fairly reflect the +South Carolina Route Transaction. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + + 3 +Respondent + +4. United, headquartered in Chicago, Illinois, is a publicly traded airline holding +company whose stock trades on the New York Stock Exchange under the ticker symbol UAL. +United is the parent company of United Airlines, Inc., which operated after a 2010 merger with +Continental Airlines, Inc. (“Continental”). United’s common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act and the company files annual and +periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. United +reported, on July 14, 2016, that it had reached a Non-Prosecution Agreement with the United +States Attorney’s Office for the District of New Jersey (“USAO”) in connection with the South +Carolina Route. According to United, it has accepted responsibility for, and admitted certain facts +relating to, the establishment of the South Carolina Route; agreed to continue enhancing its anti- +bribery and anti-corruption program; and further agreed to report to the USAO on an annual basis, +for a period of two years, its compliance efforts. United also agreed to pay a financial penalty of +$2.25 million to the USAO. The USAO will not prosecute United for any violations related to the +South Carolina Route provided that United complies with the Non-Prosecution Agreement over a +two-year period. + +Other Relevant Person and Entity + +5. David Samson, aged 77, was nominated to the Port Authority’s Board of +Commissioners in late 2010 and confirmed by the New Jersey Senate on January 25, 2011. +Samson was elected to serve as the Port Authority’s Chairman on February 3, 2011, and served as +Chairman of the Port Authority until his resignation in March 2014. On July 14, 2016, the USAO +announced that Samson pleaded guilty to bribery in connection with the South Carolina Route. + +6. The Port Authority is a municipal corporate instrumentality and political +subdivision of the States of New York and New Jersey, created and existing by virtue of the +Compact of April 30, 1921, made by and between the two states and thereafter consented to by +the Congress of the United States. The two states established the Port Authority to provide +transportation, terminal, and other facilities of commerce within the Port District, which includes +the Cities of New York and Yonkers in New York State, and Newark, Jersey City, Bayonne, +Hoboken, and Elizabeth in New Jersey State, as well as over 200 other municipalities in the two +states. The Port Authority is headquartered in New York City, New York, and is an issuer of +municipal bonds. + +Background + +7. The Port Authority operates, among other facilities, Newark Liberty International +Airport (“Newark Liberty”) under a lease with the City of Newark. Newark Liberty serves as +United’s primary East Coast hub. United leases significant portions of Newark Liberty’s +property, and United flies the majority of passengers on Newark Liberty’s originating and +departing flights. + + + + 4 +8. From in or about February 2011, almost immediately after becoming Chairman of +the Port Authority, Samson, through a United consultant and registered lobbyist (the +“Consultant”), began pressing United concerning the initiation of a non-stop flight route from +Newark, New Jersey to Columbia, South Carolina, or the South Carolina Route. + +9. Prior to the merger that created United, Continental Airlines had previously flown +a route from Newark Liberty to Columbia Metropolitan Airport in South Carolina, but canceled +the route in 2009 due to business reasons, including, among other things, poor financial +performance. + +10. On February 18, 2011, the Consultant wrote to an individual who worked within +United’s Government Affairs Department (“Government Affairs Employee 1”): “Fyi. Samson +has home in columnbia [sic], sc and has asked me repeatedly about flight from newark [sic].” +Government Affairs Employee 1 responded to the Consultant, “[n]ever worked financially, but +will make sure that is still the case.” + +11. On March 18, 2011, United’s CEO was scheduled to have his first call with +Samson. United understood that Samson would be calling the CEO from his home in South +Carolina. The purpose of the call was introductory in nature, and Government Affairs Employee +1’s staff suggested talking points for the CEO relating to United’s priorities in respect to the Port +Authority. + +12. In the summer and fall of 2011, representatives of United and the Port Authority’s +Aviation Department (which manages Newark Liberty) negotiated a proposed agreement that the +Port Authority would lease approximately three acres of land at Newark Liberty to United for the +construction and operation of a wide-body aircraft maintenance hangar (the “Hangar”). The +Hangar would facilitate United’s ability to perform maintenance on its incoming fleet of wide- +body aircraft at Newark Liberty, rather than having to perform such maintenance at a suitable +United facility at another airport. Based on preliminary assessments and using information +available at the time, United estimated that the Hangar would result in efficient routings that +would drive $47.5 million in value to the United network on an annual basis post-construction. + +13. On September 13, 2011, Samson, another Port Authority employee (the “PA +Employee”), and the Consultant met with representatives of United, including the CEO, +Government Affairs Employee 1 and others, for dinner at a restaurant in New York City (the +“September Dinner”). + +14. In preparation for the dinner, Government Affairs Employee 1’s staff again +prepared talking points for the CEO relating to United priorities concerning the Port Authority, +including planned United investments at Newark Liberty. The talking points reflected that those +investments included, among others things, construction of the Hangar. The talking points +reflected a recommendation that United’s CEO tout at the September Dinner the Hangar and +other planned investments as examples of United’s continued investment at Newark Liberty. + + + + 5 +15. During the September Dinner, after discussion of certain of United’s priorities for +Newark Liberty, Samson stated that Continental Airlines used to have a non-stop route between +Newark Liberty and Columbia, South Carolina and asked the CEO to consider re-establishing that +non-stop route. The CEO responded to Samson that United generally stopped flying routes +because they were not profitable, but told Samson that United would look into the South Carolina +Route. + +16. In the following weeks, United personnel in the Network Planning Group +analyzed the projected financial performance of the South Carolina Route. Although United had +no written policies or procedures concerning new route initiation, United’s standard process for +initiating new routes generally included: the preparation and consideration of financial forecasts +and other market data of how the route could be expected to perform, review and approval by +several levels of United’s Network Planning Group, including approval by the Chief Revenue +Officer (“CRO”) or his staff, and thereafter presentation of the route and its details to a group of +senior United executives at a regularly scheduled marketing meeting. + +17. The Network Planning Group’s preliminary financial analysis of the South +Carolina Route revealed that the route would likely lose money. + +18. On September 21, 2011, a managing director in the Network Planning Group +informed an individual in United’s Government Affairs Group (“Government Affairs Employee +2”) that expectations should be that “the service will not be returning anytime soon” and stated +that the route from Newark Liberty to Columbia, South Carolina “was continually one of the +hub’s poorest performing markets” before its cancellation in 2009. + +19. Thereafter, another individual in United’s Government Affairs Group +(“Government Affairs Employee 3”) wrote that, “I talked with [an individual in the Network +Planning Group] and informed him of our interest in this market and why. He understands how +this might be considered to advance our biz objectives. … He is open if we see an oppty.” + +20. On October 13, 2011, the Consultant emailed Government Affairs Employee 1 +with the subject line “Samson called me again on the columbia, sc flight,” and writing “Just need +direction so I can come up with a plan to figure out how to either let him down gently or buy +time.” Around that time, United conveyed to the Consultant that United was not interested in +operating the South Carolina Route. + +21. A short time later, in early November 2011, United personnel expected the lease +agreement relating to United’s proposed Hangar project to be considered by the Port Authority +Board. Prior to the Port Authority Board meeting, Government Affairs Employee 2 reported +hearing “buzzing that the hangar piece has been or may be pulled from” the Port Authority +Board’s agenda. The lease agreement relating to the Hangar was ultimately not included in the +agenda for the Port Authority’s November 15, 2011 Board meeting. On the following day, the +Consultant emailed Government Affairs Employee 1, writing “[o]ne of these days I think I need + + + 6 +to chat with you about the PA and Samson. … I am also worried about samson [sic] view of +company.” + +22. Consideration of the lease relating to United’s proposed Hangar project was on +the Port Authority Board’s December 8, 2011 meeting agenda. In and around the time that the +Port Authority Board was conducting its December 8, 2011 meeting, Government Affairs +Employee 2 reported that she was told that “NY commissioners wanted to pull our hangar +project off of agenda again … Samson … also jumped on the bandwagon in a major way.” +Government Affairs Employee 3 responded, “SC flight influencing this?” + +23. Government Affairs Employee 1, upon learning of this potential development, +met with the CEO and a colleague to discuss whether to cede to Samson’s demands for the +potential initiation of the South Carolina Route. During a brief conversation, the CEO approved +establishment of the South Carolina Route. At no time prior to reinstating the South Carolina +Route, or during the route’s operation, did the CEO, or anyone at his direction, consult with any +legal counsel or compliance personnel about the South Carolina Route. + +24. Notwithstanding United’s standard process for flight initiation outlined above, the +process was not followed in the case of the South Carolina Route. The South Carolina Route did +not receive initial approval from the Network Planning Group or the CRO and was not presented +during a regularly scheduled marketing meeting. Instead, the CEO unilaterally approved the +route outside of United’s normal processes. The route personally benefited Samson and, as +described below, the South Carolina Route was instituted in violation of United’s Policies, and +no corporate record accurately and fairly reflected the authorization to approve the Transaction. + +25. At the time the South Carolina Route was initiated, United’s Code of Business +Conduct +2 provided that “company policy prohibits United employees from directly or indirectly +making bribes, kickbacks or other improper payments to government officials, civil servants or +anyone else to influence their acts or decisions” and that “[n]o gift may be offered or accepted if it +will create a feeling of obligation, compromise judgment or appear to improperly influence the +recipient.” + +26. United’s Code of Business Conduct further provided that “[i]n the extremely +unlikely event that a waiver of the Code for executive officers would be in the best interest of +United, it must be approved by the Audit Committee of the Board of Directors and promptly +disclosed to the SEC or on United’s website.” + +2 Following the merger between Continental and United Airlines, Inc., there were two +documents that comprised United’s Policies: United Airlines, Inc.’s Code of Business +Conduct and Continental’s Ethics and Compliance Guidelines. Those policies were each +dated 2006 and were effective until February 2012, when United, the merged entity, +issued a new single ethics and compliance policy. + + + + 7 + +27. Continental’s Ethics and Compliance Guidelines, which were also in force in the +relevant time period as a result of the merger, similarly provided that employees “cannot entertain, +provide hospitality to or give gifts, loans, and services to a supplier, customer or other person doing +business with Continental that under the circumstances are reasonably considered lavish or +excessive.” It further provided that “[a]ny gift or entertainment that could reasonably be viewed as +an attempt to influence a business decision” is considered lavish or excessive. + +28. Pursuant to these guidelines, exceptions would be granted only in accordance with +the following procedure: + + Generally, requests for exceptions must be submitted in writing to the Director – +Ethics and Compliance Program. Approvals for an exception will also be in +writing and must be obtained in advance of the action requiring the exception. . . +Any exceptions to these Guidelines for executive officers or members of the +Board of Directors may be made only by the Board of Directors or an authorized +Board committee, and must be promptly disclosed to the company’s stockholders. + +29. No one at United sought a waiver of United’s Code of Business Conduct prior to +initiating the South Carolina Route for Samson’s personal benefit. Nor did anyone at United +seek or obtain an exception to Continental’s Ethics and Compliance Guidelines prior to initiating +the South Carolina Route. As a result, no written record reflecting the authorization for the +South Carolina Route was prepared or maintained, as required by United’s Policies. + +30. The South Carolina Route was initiated in violation of United’s Policies. + +31. The Port Authority’s Board approved the lease agreement relating to United’s +Hangar the same day as the CEO approved the initiation of the South Carolina Route. + +32. On January 9, 2012, in connection with actually scheduling the South Carolina +Route approved by the CEO, Government Affairs Employee 1 sent an email to other +Government Affairs employees about the new service stating that United was “testing the +market” and advising them that she believed that “they want it all soft, so no proactive +communications.” + +33. The twice-weekly flight from Newark Liberty to Columbia, South Carolina began +in September 2012. United approved termination of the South Carolina Route in January 2014. +By April 2014, United no longer flew to Columbia, South Carolina from Newark Liberty and had +lost roughly $945,000, including opportunity costs, in operating the South Carolina Route. + + + + 8 +Legal Discussion + +34. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder. + +35. 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 dispositions of the assets of the issuer. + +36. 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 +transactions (i) are executed in accordance with management’s general or specific authorization; +and (ii) are recorded as necessary to (I) 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. + +37. As a result of the conduct described above, United violated Section 13(b)(2)(A) of +the Exchange Act by failing to make and keep records, which, in reasonable detail, accurately and +fairly reflect the Transaction and use of assets in connection with the South Carolina Route. +Contrary to United’s Policies, the required written authorization of the Director - Ethics and +Compliance Program or of the Board of Directors was not requested or obtained before initiating +the South Carolina Route, and, thus, required records were not created or maintained. United +thereby violated Section 13(b)(2)(A) of the Exchange Act. United also violated Section +13(b)(2)(B) by failing to devise and maintain a system of internal accounting controls that was +sufficient to provide reasonable assurances that assets are used, and transactions are executed, only +in accordance with management’s general or specific authorization, including in a manner +consistent with United’s Policies. In particular, United had insufficient internal accounting +controls in place to prevent approval of the South Carolina Route in derogation of United’s +Policies. + +Remedial Efforts + +38. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent. + +39. United has taken a series of remedial actions, including: + +a) separating from certain employees involved in the conduct set forth above; + + + + 9 +b) improving its Ethics and Compliance Office, including creating a new +senior legal position focusing on global corruption risk; + +c) enhancing its global code of conduct and anti-bribery/anti-corruption +policies; + +d) conducting extensive anti-bribery/anti-corruption training; and + +e) developing a third-party due diligence process and anti-bribery/anti- +corruption compliance audit. + +Undertakings + +40. Respondent undertakes to cooperate fully and truthfully with the staff of the +Commission in any and all investigations, litigation, or other proceedings relating to or arising +from the matters described in this Order, regardless of the time period in which cooperation is +required. The full, truthful, and continuing cooperation shall include, but not be limited to, +(a) producing, in a responsive and prompt manner, all non-privileged documents, information, and +other materials to the Commission as requested by the Commission’s staff, wherever located, in +the possession, custody, or control of the Respondent; (b) using its best efforts to cause its +employees to be interviewed by the Commission’s staff at such times as the Commission staff may +reasonably request; and (c) agreeing to use its best efforts to cause its employees to appear and +testify truthfully and completely, without service of a notice of subpoena in such investigations, +depositions, hearings, or trials as may be requested by the Commission’s staff; and Respondent +further agrees that (i) any such notice or subpoena for appearance and testimony may be served by +regular mail, electronic mail, or facsimile on counsel; and (ii) any such notice or subpoena for +appearance and testimony in an action pending in a United States District Court may be served, +and may require testimony, beyond the territorial limits imposed by the Federal Rules of Civil +Procedure. + +41. Respondent undertakes to do the following within one year of the entry of the +Order: + +a) report to the Commission staff, at or before one year after the entry of the +Order, the status of its remediation and implementation of compliance +measures and accounting controls designed to address potential corruption +risks surrounding dealings with domestic and foreign public officials; + +b) should any officer of Respondent become aware of credible evidence, not +already reported to the Commission staff, that questionable or corrupt +transfers of property, interests, or other benefits, have been offered, +promised, paid, or authorized to a domestic or foreign public official by +Respondent, or any entity or person working on behalf of Respondent +(including its affiliates and any agent), or that related inaccurate books and + + + 10 +records have been maintained, Respondent shall promptly report such +conduct to the Commission staff; + +c) train all employees who handle requests from domestic and foreign public +officials for flights, undelaying flights, and other comps or perquisites +(including access to lounges, refunds, and other requests) on United’s +policies and procedures, and code of ethics; + +d) if not provided within the previous twelve months, Respondent shall +provide supplemental, in-person anti-corruption training to personnel in its +(1) Corporate, Community, Government, and Congressional Affairs; +(2) Corporate Real Estate; and (3) Regulatory and Policy groups; + +e) Respondent shall provide, at six months and one year after entry of this +order, a certification that all new flights initiated during the reporting period +were initiated for a proper business purpose; + +f) promptly revise any training materials to reflect updates to its policies +relating to government officials, including its Anti-Bribery / Anti- +Corruption Policy; and + +g) certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertakings, provide written evidence of +compliance in the form of a narrative, and be supported by exhibits +sufficient to demonstrate compliance. The Commission staff may make +reasonable requests for further evidence of compliance, and Respondent +agrees to provide such evidence. The certification and supporting material +shall be submitted to Celeste Chase, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, New +York, NY 1028 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 United’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + + + 11 +A. Respondent shall comply with the undertakings enumerated in Section III. +Paragraph 41 above. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil penalty of +$2,400,000 to the Securities and Exchange Commission for remission to 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 United +Continental Holdings Inc. as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, +Senior Associate Director, Division of Enforcement, Securities and Exchange Commission, 200 +Vesey Street, New York, NY 10281. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, it shall not argue that it is entitled to, nor shall it +benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action +(“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final +order granting the Penalty Offset, notify the Commission’s counsel in this action +and pay the amount of the Penalty Offset to the Securities and Exchange + + + + + 12 +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by +the Commission in this proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3834.txt b/raw/aaer/2016/AAER-3834.txt new file mode 100644 index 0000000000000000000000000000000000000000..5febae556119ccad9f74a6299a92a5e0088dcacf --- /dev/null +++ b/raw/aaer/2016/AAER-3834.txt @@ -0,0 +1,176 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79483 / December 6, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3834 / December 6, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-17709 + + +In the Matter of +KPMG LLP, +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 KPMG LLP (“KPMG” or +“Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”), which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing +Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. +2 + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +A. SUMMARY +At all relevant times, KPMG LLP has served as the independent auditor for The St. Joe +Company (“St. Joe” or “the Company”), an NYSE-listed real estate developer, timberland owner, +and resort operator. In the course of a formal investigation concerning possible misstatements in +the annual and other periodic reports filed by St. Joe with the Commission,2 Commission staff +issued a subpoena to KPMG for the audit workpapers it created during the relevant period, among +other materials. After the staff alerted KPMG that its production appeared to omit certain of its +2008 audit workpapers responsive to the subpoena, KPMG searched for the workpapers in +question, was unable to locate them, and informed the staff that they could not be found. As +detailed below, by failing to retain its 2008 St. Joe audit workpapers in their entirety, KPMG +violated Rule 2-06 of Regulation S-X, which requires auditors to preserve audit workpapers for +seven years after concluding an audit or review of an issuer’s financial statements. +B. RESPONDENT + + KPMG LLP is a Delaware limited liability partnership that is headquartered in New York, +NY. KPMG is an audit, tax and advisory firm and the U.S. member firm of the KPMG network of +independent member firms affiliated with KPMG International Cooperative, a Swiss entity. Since +2003, KPMG has been registered, pursuant to the Sarbanes Oxley Act of 2002, with the Public +Company Accounting Oversight Board (“PCAOB”), to prepare and issue audit reports. KPMG +has served as the independent auditor of St. Joe from 1999 to the present. +C. FACTS + +On June 16, 2011, the staff opened a formal investigation into possible misstatements in +the annual and other periodic reports filed by St. Joe with the Commission, among other issues. On +June 23, 2011, the staff issued an investigative subpoena to KPMG that called for the production of +all KPMG workpapers concerning its audits and interim reviews of St. Joe’s financial statements +from January 1, 2007 through the date of the subpoena, including KPMG’s workpapers associated +with the audit of St. Joe’s financial statements for the year ended December 31, 2008 (the “2008 +Workpapers”). + + +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 Commission has previously instituted settled public administrative and cease-and-desist proceedings +against St. Joe and five of its current and former executives, which imposed remedial sanctions, cease-and-desist +orders, and penalties against these respondents, based on these and other misstatements and misconduct occurring +in 2009 and 2010. See In the Matter of The St. Joe Company et al., SEC Release No. 9967 (Oct. 27, 2015). +3 + +In September 2013, with its investigation ongoing, the staff notified KPMG that it had +identified what appeared to be omissions from KPMG’s production of the 2008 Workpapers. +KPMG undertook to investigate. As reported to the staff, KPMG concluded that the 2008 +Workpapers as originally compiled by the KPMG engagement team included (1) a summary +memorandum describing KPMG’s audit procedures regarding St. Joe’s evaluation of the +recoverability of its investment in its residential development real estate and (2) client-prepared +schedules bearing KPMG audit work testing St. Joe’s evaluations of recoverability of certain of +these properties. KPMG concluded that these workpapers were not included among the 2008 +Workpapers at the time they were collected and produced to the staff and had become lost. While +KPMG located and produced an electronic copy of what it believed to be the final summary +workpaper which would have been printed and included in the 2008 Workpapers, it did not have or +produce an electronic copy of the missing client-prepared schedules. + +In 2015, pursuant to further conversations with the staff regarding the missing workpapers, +and after a second search and further investigation, KPMG informed the staff that (i) the binder +that contained the missing workpapers had been checked out by a junior member of the +engagement team on April 20, 2009; (ii) that when the binder was checked back in to KPMG’s +records center on February 26, 2010, it did not contain the summary memorandum or the +client-prepared schedules bearing KPMG audit work referenced above; and (iii) that all of this +occurred before the commencement of the staff’s investigation. KPMG did not detect for itself +that these pages were missing. Their absence was discovered by the staff in connection with its +investigation years later. + +The subject matter of the missing workpapers was St. Joe’s testing of its real estate +development properties for recoverability and possible impairment in accordance with Financial +Accounting Standard No. 144 (“FAS 144”) and KPMG’s auditing of the same. +D. LEGAL ANALYSIS +Rule 2-06 of Regulation S-X requires that for a period of seven years after an accountant +concludes an audit or review of an issuer’s financial statements to which section 10A(a) of the +Exchange Act applies, the accountant must retain records relevant to the audit or review. See Rule +2-06(a). Thus, KPMG violated Rule 2-06 by failing to retain the complete set of the subject 2008 +Workpapers described above.3 + +3 The Commission has stated that the obligation to retain workpapers is foundational to the successful +operation of our securities markets and therefore critical: +Working papers prepared or collected by auditors in the course of an audit provide the single most important +support for their representation regarding compliance with generally accepted auditing standards. They serve as +the repository for the competent evidential matter necessary to afford the auditors with a reasonable basis for +opining on an issuer’s financial position …. It is therefore imperative that auditors preserve their working papers +in a complete and unaltered form. +Matter of S.D. Leidesdorf & Co. et al., Accounting Series Release No. 209 (Feb. 1977) (emphasis added); see also +Rule 2-06’s Adopting Release (http://www.sec.gov/rules/final/33-8180.htm) at § IV.B. (noting that Rule 2-06 +“preserve[s] evidence reflecting significant accounting judgments” and thus may (i) “provide important evidence + +4 + +OTHER CONSIDERATIONS + +In determining to accept KPMG’s Offer, the Commission considered efforts undertaken by +KPMG beginning in 2010 to enhance its policies and procedures governing the retention of audit +workpapers. The resulting improvements include (i) retention of electronic workpapers in a +central filing system from which they can subsequently be accessed but neither altered nor +removed, and (ii) KPMG’s electronic workpapers being further preserved via back-up storage. + +FINDINGS +Based on the foregoing, the Commission finds that Respondent KPMG violated Rule 2-06 +of Regulation S-X. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Pursuant to Exchange Act Section 21C, Respondent KPMG shall cease and +desist from committing or causing any violations and any future violations of Rule 2-06 of +Regulation S-X. +B. Respondent KPMG shall, within ten (10) days of the entry of this Order, +pay a civil money penalty in the amount of $230,000 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. All payments required by this Order must be made in one of the following +ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission +and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch + +of financial reporting improprieties or deficiencies in the audit process”; (ii) “facilitate greater oversight of audits +and improve audit quality,” and thus (iii) “increase investor confidence in the reliability of reported financial +information”). +5 + +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter +identifying Respondent as a Respondent in these proceedings, and the file number of +these proceedings. A copy of the cover letter and check or money order, or +documentation of whatever other form of payment is used, must be simultaneously +sent to Stephanie Avakian, Deputy Director, Division of Enforcement, Securities +and Exchange Commission, 100 F St., N.E., Washington, DC 20549. +By the Commission. + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3835.txt b/raw/aaer/2016/AAER-3835.txt new file mode 100644 index 0000000000000000000000000000000000000000..2ea228d88eaf467b44b0903d88fccac292839ff2 --- /dev/null +++ b/raw/aaer/2016/AAER-3835.txt @@ -0,0 +1,351 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79650 / December 21, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3835 / December 21, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17742 + + +In the Matter of + +JACK HENRY & +ASSOCIATES, INC. + +Respondent. + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”) +against Jack Henry & Associates, Inc. (“Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + + During the time period from fiscal year ended June 30, 2012 through fiscal year ended June +30, 2014, Jack Henry & Associates, Inc. (“JKHY”), a banking software company, materially +misstated its revenue, net income, and other financial metrics in certain of its annual and quarterly +reports filed with the Commission and in certain of its earnings releases. In particular, JKHY failed +to properly record and report revenue from its software license sales in the correct accounting +periods because it: (1) improperly separated contracts so closely related that they should have been +considered to be parts of a single arrangement; and (2) prematurely recognized revenue from sales +of software given its lack of vendor-specific objective evidence (“VSOE”) of the fair value of +undelivered services related to implementation and post-contract support. JKHY’s failures in these +areas were caused by inadequate internal control surrounding revenue recognition. + + Ultimately, in June 2015, JKHY restated its financial statements for fiscal years June 30, +2012 through June 30, 2014, and in its restatement acknowledged, among other things, material +weaknesses in its internal control over financial reporting. By engaging in the foregoing conduct, +JKHY violated the reporting, books and records, and internal control provisions of the federal +securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules +12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +RESPONDENT + + Jack Henry & Associates, Inc., a Delaware corporation headquartered in Monett, +Missouri, is a provider of core and complementary information processing solutions for banks and +credit unions, including internal and consumer banking software. JKHY’s restated 2014 revenue +was approximately $1.17 billion, and its current market capitalization is approximately $6.4 billion. +At all relevant times, JKHY’s common stock has been registered with the Commission pursuant to +Section 12(b) of the Exchange Act and traded on the NASDAQ Global Select Market. Because +JKHY had stock registered under Section 12, it was required to file reports with the Commission +pursuant to Section 13(a) of the Exchange Act. + +BACKGROUND + +1. During the relevant period, JKHY sold a variety of software to banks and credit +unions. JKHY also offered two key services typically purchased alongside the software licenses: +implementation services and post-contract support. Most contracts signed with customers included +all three of these items, each with their own contracted prices: (1) the software licenses for the +various products purchased; (2) implementation services; and (3) post-contract support. Some +contracts included different products installed over a number of months or even years. + +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 +2. The software products offered by JKHY included core processing platforms (“core +software”) used internally by financial institutions to maintain information relating to customer +accounts. JKHY also offered various software products that integrated with the core software, such +as software for bank tellers, ATM software and online banking software (known as +“complementary software”). These different categories of complementary software were +commonly referred to as “families” of software products, and each family had its own operating +group within JKHY that was responsible for tasks such as sales, installation and support for that +family of products. + +3. Implementation services consisted of JKHY software technicians for each product +family who would install, implement, and integrate the software products into the customer’s +existing software and hardware systems. + +4. Post-contract support consisted of ongoing software patches, tech support, user +support, and other post-installation maintenance of the software programs. The post-contract +support in a customer's initial contract was effective from the software implementation date +through the next June 30th (JKHY’s fiscal year end). As a result, post-contract support in the initial +contracts was almost always provided for less than one year. Customers would then renew their +post-contract support on an annual or multi-year basis as part of a separate contract. These later +contracts for post-contract support were recorded properly and revenue earned from these contracts +was not restated. + +5. Many contracts included licenses for both core software and various +complementary software products. Each software license was accompanied by its own +implementation services and post-contract support, tailored for the particular product and +negotiated and priced separately within an exhibit to the contract form. + +6. When a contract included both core software and complementary software, the core +software was often installed first. Once the core software was fully installed and implemented, then +the other complementary software products would be installed according to a schedule agreed upon +by JKHY and the customer. + +7. In some instances in which the contract included complementary software, the +customer already had a license for a JKHY competitor’s version of contracted-for complementary +software that would not expire for a year or more. In such instances, the customer typically would +still enter into a contract with JKHY for that complementary software. Although the core software +would be installed promptly, the complementary software would not be scheduled for installation +until it was needed, which could be several months or even years after the core software +installation. + +JKHY’S ACCOUNTING ERRORS + +8. In 1997, the American Institute of Certified Public Accountants (“AICPA”) +issued Statement of Position 97-2, Software – Revenue Recognition (“SOP 97-2”), the first +industry specific GAAP guidance on revenue recognition for software and software-related +products. Following the issuance of SOP 97-2, the AICPA also released numerous standards and + 4 +Technical Practice Aids (“TPAs”) clarifying specific aspects of software revenue recognition. In +June 2009, all existing GAAP pronouncements were codified into the Accounting Standards +Codification, effective for periods ending after September 15, 2009. SOP 97-2, its related +amendments and related TPAs were codified at ASC 985-605 (hereinafter “ASC 985-605”). + +9. ASC 985-605 refers to arrangements in which software vendors bundle their +software products with myriad services or other products as “multiple-element arrangements.” +The provisions for license, implementation, and post-contract support in JKHY’s contracts +constituted the elements in these multiple-element arrangements. + +10. Due to the separate negotiation, pricing, and operational support provided for +each product family, JKHY treated the contractual provisions governing the sale and support of +each such family as a separate and distinct arrangement for license revenue recognition purposes. +For example, if a contract included licenses for core software and three complementary software +products, each in a different family, then JKHY treated this as four separate arrangements. As a +result, when the core software was fully installed, JKHY would recognize revenue for that +software license during that quarter. JKHY would then wait to recognize the license revenue for +the other three software products as they were installed. + +11. JKHY’s revenue recognition policy described in the prior paragraph was +inconsistent with ASC 985-605, which requires that all elements of a contract be treated as a +“single arrangement.” JKHY was thus required to wait until all elements of the arrangement were +delivered before recognizing any of the revenue. As a result, in many instances during the +relevant period, JKHY’s revenue recognition policy caused JKHY to recognize revenue from +license sales one or more quarters before it was appropriate to do so. + +12. Further, under ASC 985-605, in order to recognize the residual amount of revenue +from the sale of a software license in the quarter in which the software was delivered, JKHY had +to establish that it had VSOE of fair value to establish market pricing for all undelivered +elements of the bundled services, i.e. both implementation and post-contract support. If JKHY +was unable to establish VSOE of fair value for either undelivered element, it would lack any +objective way to allocate total contract revenues amongst the various elements and would thus be +required to defer recognizing revenue from delivered elements until the last item was delivered. In +this case, the last item to be delivered was generally post-contract support, which was delivered +ratably over the term of the contract. As such, absent VSOE of fair value for post-contract support, +JKHY was required to recognize revenue from the software license ratably over the term of the +services agreement as post-contract support was ultimately delivered. + +13. According to its revenue recognition policies, JKHY claimed VSOE of fair value +for the pricing of its implementation and post-contract support services. Because JKHY claimed +VSOE of fair value, it could recognize the VSOE-supported price of its license sale as revenue +once the software was delivered, even if the implementation and post-contract support services +were not yet delivered. For example, if software was installed in October of a given year, the +post-contract support would be provided through June 30th of the following year. In such a +scenario, JKHY, claiming VSOE of fair value, could recognize the license and implementation + 5 +services revenue as each element was delivered. This is in fact how JKHY recognized its +revenue. + +14. In reality, JKHY could not produce sufficient data to establish that VSOE of fair +value existed for either implementation or post-contract support services. As a result, for fiscal +years 2012 through 2014, JKHY improperly recognized license revenue before it was +appropriate to do so for many of its contracts. For these contracts, JKHY should have instead +recognized revenue for license sales ratably over the period between the time of delivery and +when the last element was delivered, often the end of the post-contract support services under the +contract, but sometimes when complementary software was installed months or years later. + +15. As a result of the three above accounting errors (incorrect “single arrangement” +contract treatment, insufficient VSOE of fair value for implementation, and insufficient VSOE of +fair value for post-contract support services), JKHY’s revenue was materially misstated for the +fiscal years ending June 30, 2013 and June 30, 2014. None of the revenue recognized by JKHY +during that timeframe was illegitimate – only the timing of recognizing that revenue was incorrect. + +THE RESTATEMENT + +16. On June 25, 2015, JKHY restated its financial statements for fiscal years 2012 +through 2014. JKHY originally misstated its revenues, gross profit, net income, and other financial +metrics in these reporting periods. Because the accounting errors caused revenue to be prematurely +recognized, this decreased reported revenue and increased deferred revenue during the reported +periods. The chart below summarizes JKHY’s misstatements on its Income Statement: + +Table 1: Changes to Financials from Restatement + +Fiscal year (ending June 30) +in $000s 2012 2013 2014 + Revenue Originally Reported 1,027,109 1,129,386 1,210,053 +Revenue Restated 1,017,667 1,107,524 1,173,173 +Revenue Over Statement 9,442 21,862 36,880 +Percentage Over Statement 0.92% 1.94% 3.05% + Gross Profit Originally Reported 423,730 476,992 518,629 +Gross Profit Restated 418,823 461,394 493,801 +Gross Profit Over Statement 4,907 15,598 24,828 +Percentage Over Statement 1.16% 3.27% 4.79% + Net Income Originally Reported 154,984 176,645 201,136 +Net Income Restated 152,040 167,610 186,715 +Net Income Over Statement 2,944 9,035 14,421 +Percentage Over Statement 1.90% 5.11% 7.17% + + 6 +Diluted EPS Originally Reported $ 1.78 $ 2.04 $ 2.36 +Diluted EPS Restated $ 1.74 $ 1.94 $ 2.19 +Diluted EPS Over Statement $ 0.04 $ 0.10 $ 0.17 +Percentage Over Statement 2.30% 5.15% 7.76% + +17. In its restatement, JKHY identified the following deficiencies in the design and +operating effectiveness of internal control over financial reporting that JKHY concluded +constituted a material weakness taken together, which resulted in the misstatements: +A. The lack of training and continuing education related to multiple element software +arrangements led to a lack of knowledge of the individuals tasked with understanding +various technical accounting matters associated with JKHY’s multiple element +arrangement revenue recognition policies; +B. Appropriate accounting and reporting policies and procedures related to bundled multiple +element arrangements were not designed and implemented; +C. Appropriate internal accounting controls over financial reporting for bundled multiple +element arrangements were not designed and implemented; and +D. Monitoring, including use of internal audit, was not appropriately designed to identify +errors in accounting for revenue recognition for multiple element software arrangements. + +VIOLATIONS + +18. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Act and upon any other person that is, was, or would be a cause of the violation, due to an act +or omission the person knew or should have known would contribute to such violation. + +19. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of annual, +current, and quarterly reports, respectively. In addition to the information expressly required to be +included in such reports, Rule 12b-20 of the Exchange Act requires issuers to add such further +material information, if any, as may be necessary to make the required statements, in the light of +the circumstances under which they are made not misleading. + +20. 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.” + +21. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit the preparation of financial statements in conformity with +generally accepted accounting principles. + +22. By engaging in the conduct above, Respondent violated Section 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + 7 + +23. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent, including its enhancement of internal accounting controls, retention of +additional accounting personnel, and cooperation with the staff’s investigation. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b- +20, 13a-1, 13a-11, and 13a-13 thereunder. + + B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $780,000 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 Jack +Henry & Associates, 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 Robert J. Burson, +Division of Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd. Suite 900, +Chicago, IL 60604. + + 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 + 8 +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + + By the Commission. + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3836.txt b/raw/aaer/2016/AAER-3836.txt new file mode 100644 index 0000000000000000000000000000000000000000..f6126afc64d403ad44e9aa3c1e885aa5e152bc9a --- /dev/null +++ b/raw/aaer/2016/AAER-3836.txt @@ -0,0 +1,471 @@ + + +1 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79668 / December 22, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3836 / December 22, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17745 + + + : ORDER INSTITUTING PUBLIC +In the Matter of : ADMINISTRATIVE AND CEASE-AND- + : DESIST PROCEEDINGS PURSUANT + : TO SECTIONS 4C AND 21C OF THE +ALOK SARAF, CA : SECURITIES EXCHANGE ACT OF 1934 + : AND RULE 102(e) OF THE + : COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND +Respondent. : 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 Alok +Saraf, CA (“Saraf” or “Respondent Saraf”) pursuant to Sections 4C1 and 21C of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C(a) provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is +found…(1) not to possess the requisite qualifications to represent others; (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to +have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + + + 2 + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves issues of auditor independence and improper professional conduct +related to personal dealings between Alok Saraf, a KPMG India audit employee, and Anup Agarwal +(“Agarwal”), an accountant for Wipro Limited (“Wipro”). Beginning in December 2007 and +continuing through October 2009, Saraf accepted money from Agarwal,4 who was at that time +embezzling funds from Wipro. During this period, Saraf was responsible for KPMG India’s audit +procedures around Agarwal’s work related to Wipro’s foreign exchange and derivatives accounting. + +2. Agarwal hid his embezzlement through fraudulent accounting entries in one of Wipro’s +Exchange Rate Fluctuation (“ERF”) accounts.5 Agarwal disguised his theft as a series of foreign +currency losses. During the same time period, two of Agarwal’s supervisors at Wipro also caused + +The Commission may…deny, temporarily or permanently, the privilege of appearing or practicing +before it…to any person who is found…to have engaged in unethical or improper professional +conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 Saraf accepted money not only from Agarwal, but also from another Wipro accountant whose job focused on +matters relating to internal controls. Saraf also shared an apartment with the latter individual during the relevant time. + +5 Agarwal embezzled more than $4 million from Wipro from 2006 through 2009. Saraf maintains that he +believed the payments from Agarwal were either loans or, in one instance, investment proceeds that Agarwal had +collected for him. Saraf paid some money to Agarwal before the embezzlement was uncovered, which Saraf +characterizes as a loan repayment. + + + + 3 + +other erroneous accounting entries to be made in Wipro’s foreign currency exchange accounts. +These errors contributed to Wipro’s financial statements being misstated in eleven periodic reports +that Wipro filed with or furnished to the SEC during fiscal years 2008, 2009, and 2010. + +3. Saraf’s actions compromised his independence from Wipro, and therefore impaired KPMG +India’s independence from Wipro, its audit client. As a result, Saraf caused KPMG India to violate +Rule 2-02(b)(1) of Regulation S-X, 17 C.F.R. § 210.2-02(b)(1), and further caused Wipro’s +violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. Saraf’s work on the +Wipro engagement also failed to comply with numerous Public Company Accounting Oversight +Board (“PCAOB”) Auditing Standards, and his conduct, as further described below, constituted +improper professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice and Section 4C of the Exchange Act. + +RESPONDENT + +4. Alok Saraf, CA,6 age 32, is a citizen of the Republic of India. In 2005, Saraf became a +member of the Institute of Chartered Accountants of India (“ICAI”). Saraf was employed by +KPMG India from March 2006 through May 2010. Saraf joined the Wipro engagement team in +September 2006, began performing audit and review procedures relating to Wipro’s derivatives +and foreign exchange activities in September 2007, and, in or around December 2008, assumed +primary responsibility for auditing these accounts. He became an Audit Manager in October +2009. Due to the events described herein, he ceased work on the Wipro engagement in or around +late December 2009. + +OTHER RELEVANT INDIVIDUAL AND ENTITIES + +5. KPMG India is an Indian Registered Partnership and a member of the KPMG network +of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. +KPMG India audited Wipro’s consolidated financial statements and internal control over +financial reporting during the time period relevant to this proceeding. KPMG India is registered +with the PCAOB.7 + +6. Wipro Limited is an information technology service company incorporated in the +Republic of India with its principal executive office in Bangalore, India. Wipro’s American +Depositary Shares (“ADSs”), each represented by one equity share, are registered with the +Commission pursuant to Section 12(b) of the Exchange Act. Wipro’s ADSs trade on the New +York Stock Exchange. As a foreign private issuer, Wipro files annual reports with the + +6 The designation “CA” (Chartered Accountant) is used in India by members of the ICAI. + +7 KPMG India’s PCAOB registration application and the firm’s annual reports filed with the PCAOB list the +firm’s legal name as “KPMG.” + + + + 4 + +Commission on Form 20-F, and furnishes interim financial statements to the Commission on +Form 6-K. Through fiscal year 2009, Wipro included in its annual and interim reports financial +statements denoted as having been prepared in accordance with U.S. Generally Accepted +Accounting Principles (“U.S. GAAP”). Starting in fiscal year 2010, Wipro began providing +financial statements denoted as having been prepared in accordance with International Financial +Reporting Standards (“IFRS”). + +7. Anup Kumar Agarwal, CA, (1983 – 2009), was a citizen of the Republic of India. +Agarwal served as an accountant in the company’s Controllership Division from 2006 until April +2009, where he was responsible for foreign exchange accounting, investment and banking +operations, and treasury support activities. Agarwal transferred into Wipro’s mergers and +acquisitions (“M&A”) group in April 2009. Agarwal took his own life on or about December 23, +2009. + +FACTS + +Saraf Accepted Payments While Working on the Wipro Engagement. + +8. Between December 2007 and October 2009, Agarwal and another Wipro accountant8 +gave at least 715,000 Indian rupees, or approximately $15,543, to Saraf, who was responsible for +auditing the company’s derivatives and foreign exchange accounts. These funds equaled more +than 5% of Saraf’s annual earnings in fiscal year 2008, nearly 19% of his annual earnings in +fiscal year 2009, and over 50% of his earnings in fiscal year 2010. + +9. Saraf used the money for expenses associated with his and his brother’s weddings, a +down payment on his home, and as seed money for his father’s new business. + +10. In the summer of 2009, Saraf asked Agarwal to buy and sell on Saraf’s behalf the +securities of a publicly traded company operating in the banking sector. + +11. In August 2009, Agarwal deposited 96,000 Indian rupees, or approximately $2,086, into +a Saraf account as purported trading profits. In actuality, the funds for the deposit were not +trading profits, since Agarwal never executed the trades Saraf had requested.9 + +12. Agarwal later confessed that he paid Saraf money for the purpose of “maintaining good +relationship.” + + +8 Saraf shared an apartment with this individual for a portion of the time that Saraf worked on the Wipro +engagement. + +9 When Agarwal confessed, he revealed that he had similarly given embezzled money to eleven Wipro +employees under the guise of being purported profits from certain investments he had supposedly made for them. + + + 5 + +13. During the relevant time, KPMG India’s risk management policies stated: “When a +member of the audit team accepts gifts or hospitality, unless the value is clearly insignificant, the +threats to independence cannot be reduced to an acceptable level[,]” consequently, “a member of +the audit team should not accept such gifts or hospitality.” The policies further provided that +8,000 Indian rupees, or approximately $174, “represents a notional benchmark as to what could +be considered to be an insignificant amount.” + +14. Despite knowing that his firm prohibited the payments, Saraf submitted multiple Annual +Independence and Compliance Confirmations to KPMG India representing, among other things, +that: (a) neither he nor any member of his immediate or close family received a gift or had a +special arrangement with an audit client worth more than 8,000 Indian rupees; and (b) he had +maintained his independence in accordance with KPMG India policies and the applicable rules +of external regulators. + +15. Saraf later told KPMG India that he knew that accepting the money was wrong: +“Whether I have violated firm’s rule – yes I did, I took it very lightly. …I had…shortage of +cash…. Timing was issue….”10 + +16. Saraf lacked independence with respect to Wipro as a result of these activities during +Wipro’s fiscal years 2008, 2009, and 2010. The Commission promulgated Rule 2-01, +Qualification of Accountants, codified within 17 C.F.R. Part 210 – Regulation S-X, to implement +auditor independence requirements established by the Exchange Act and the Sarbanes-Oxley Act.11 +Rule 2-01(b) states that “[t]he 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….” 17 C.F.R. § 210.2-01(b).12 Rule 2-01(b) further states that +“[in] determining whether an accountant is independent, the Commission will consider all +relevant circumstances, including all relationships between the accountant and the audit client, + +10 After Agarwal’s confession, Saraf provided banking and other records to KPMG India. Saraf also repaid +Wipro the extent of the money that Agarwal claimed he gave Saraf. Saraf had previously paid some funds to +Agarwal before the misconduct was uncovered, which Saraf maintains was in repayment of a loan. + +11 The Corporate and Auditing Accountability, Responsibility, and Transparency Act, Pub. L. No. 107 -204, +116 Stat. 745 (2002) (codified in sections of 11, 15, 18, 28, and 29 U.S.C.). + +12 A crucial component of the regulatory reforms enacted in the wake of the stock market crash of 1929 and +ensuing Great Depression was, and remains, the requirement that all public companies have their financial reports +audited by independent certified public accountants. Accordingly, the Congress, the Supreme Court, and the +Commission have long insisted that auditors must maintain both independence in fact, and independence in +appearance, from the public companies they audit, lest public faith in the reliability of financial statements be +shaken. See, e.g., United States v. Arthur Young & Co., 465 U.S. 805, 819 n.15 (1984) (“Public faith in the +reliability of a corporation’s financial statements depends upon the public perception of the outside auditor a s an +independent professional.”). + + + + 6 + +and not just those relating to reports filed with the Commission.” Id. (Emphasis added.) In +considering Rule 2-01(b), the Commission looks in the first instance to “whether a relationship +or the provision of a service…creates a mutual or conflicting interest between the accountant and +the audit client.” Preliminary Note to Rule 2-01, ¶ 2. Saraf’s conduct was inconsistent with the +standards of Rule 2-01(b). + +17. At all relevant times, KPMG India had policies and quality control procedures in place +designed to provide reasonable assurance that its professional personnel maintained their +independence relative to KPMG India’s audit clients, and it represented that it was independent +in the Report of Independent Registered Public Accounting Firm (“audit reports”) that it +provided to Wipro for its fiscal years 2008, 2009, and 2010. In these audit reports, KPMG India +stated that it had performed the audits in accordance with the standards of the PCAOB, which, +among other things, require an auditor to be independent of its client.13 As a result of Saraf’s +conduct, KPMG India’s audit reports were inaccurate. + +18. Wipro then filed annual reports with the Commission that included KPMG India’s audit +reports. + +Saraf Used an Incomplete Population for Deriving Samples. + +19. Wipro’s auditors did not have access to complete general ledger details for the currency +fluctuation account that Agarwal used in the embezzlement (the “ERF Account”), which also +contained other accounting errors and unsubstantiated journal entries not derived from the +embezzlement.14 Agarwal lied to Saraf, telling him that it was not possible to extract the +complete ERF Account details from Wipro’s general ledger. + +20. Saraf then used an incomplete population to derive samples for testing the ERF Account. +In conducting the audit of the ERF Account, Saraf requested a download of the SAP general +ledger data so that he could perform testing procedures on the account balance population. Upon +receiving Saraf’s request, Agarwal informed Saraf that it was not possible to provide him with +the SAP general ledger data for the account. In response, and at the suggestion of Agarwal, +Saraf elected to instead use the derivatives contract register, which was a sub-population of the + +13 PCAOB Auditing Standards state that “[i]n all matters relating to the assignment, an independence in +mental attitude is to be maintained by the auditor or auditors.” AU § 150.02. PCAOB Auditing Standards further +state that independent auditors should “not only be independent in fact” but that they should “avoid situations that +may lead outsiders to doubt their independence.” AU § 220.03. + +14 After Agarwal’s embezzlement came to light, Wipro officials learned of other accounting errors and +unsubstantiated journal entries that did not stem from the embezzlement and that were present in multiple ERF +accounts as well as certain outstanding liability accounts during a nine quarter period from the fourth quarter of +fiscal year 2008 through the fourth quarter of fiscal year 2010. In November 2010, Wipro filed its annual report for +fiscal year 2010, which incorporated disclosures related to its foreign exchange accounting errors, the absolute value +of which totaled nearly $67 million and impacted eleven periodic reports filed with or furnished to the Commission. + + + + 7 + +total ERF Account, as the population from which to perform his audit testing of the ERF +Account. Saraf knew or should have known that the derivatives contract register was not a +complete population of all ERF Account entries, as evidenced by the fact that he had originally +requested the correct population from Agarwal and the fact that the sub-population which he +ultimately used did not reconcile to Wipro’s financial statements. In addition, Saraf did not +document in the workpapers Agarwal’s claim regarding the unavailability of the ERF general +ledger data and KPMG India’s modification to the audit procedures as a result. + +21. Agarwal’s embezzlement and other errors in Wipro’s ERF accounts did not affect the +register of derivative contracts—the only source of data that Saraf used for audit sampling—and +were therefore insulated from possible detection during the sampling process.15 + +VIOLATIONS + +22. Based on his conduct described above, Saraf caused KPMG India to violate Rule 2- +02(b)(1) of Regulation S-X, which requires that an accountant’s report state whether the audit +was conducted in accordance with generally accepted auditing standards (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” SEC Release No. 34- +49708. Thus, an auditor violates Rule 2-02(b)(1) of Regulation S-X if it issues a report stating +that it had conducted its audits in accordance with PCAOB standards, which incorporate +independence requirements, when it had not. Saraf knew or should have known that his conduct +would cause KPMG India to violate this rule. + +23. KPMG India’s failure, as a result of Saraf’s conduct, to comply with Rule 2-02(b)(1) of +Regulation S-X in turn caused Wipro to file annual reports with the Commission on Forms 20-F +that failed to include financial statements audited by an independent accountant as required by +Exchange Act Section 13(a) and Rule 13a-1 thereunder. As a result of his conduct, Saraf caused +Wipro to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder on this ground. +Saraf knew or should have known that his conduct would cause Wipro to violate those +provisions. + +24. PCAOB Auditing Standards state that “due professional care is to be exercised in the +planning and performance of the audit and the preparation of the report.” AU § 230.01, Due +Professional Care in the Performance of Work.16 Due professional care requires the auditor to +exercise professional skepticism. AU § 230.07. In exercising professional skepticism, the +auditor “should not be satisfied with less than persuasive evidence because of a belief that + +15 After the discovery of the embezzlement, KPMG India deployed a new audit team to conduct further +testing procedures for the period from 2008 through 2010 for the general ledger accounts that S araf had audited. + +16 All references herein to PCAOB Auditing Standards are to those that were in effect at the relevant time. + + + 8 + +management is honest.” AU § 230.09. PCAOB Auditing Standards also require that auditors +obtain sufficient competent evidential matter concerning the assertions in an issuer’s financial +statements, see AU §§ 326.01 and 326.02, and state that an “auditor’s substantive procedures +must include reconciling the financial statements to the accounting records.” AU § 326.19, +Evidential Matter. When planning a particular sample for a substantive test of details, the +auditor should consider, among other items, the “characteristics of the population, that is, the +items comprising the account balance or class of transactions of interest.” AU § 350.16, Audit +Sampling. Additionally, the auditor “should determine that the population from which he draws +the sample is appropriate for the specific audit objective.” AU § 350.17. “Sample items should +be selected in such a way that the sample can be expected to be representative of the population. +Therefore, all items in the population should have an opportunity to be selected.” AU § 350.24. +To do this, an 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 [GAAS],” as this “helps the auditor +in assessing conditions under which accounting data are produced, processed, reviewed, and +accumulated within the organization.” AU § 311.06, Planning and Supervision. + +25. In light of Saraf’s conduct set forth above, including his use of an incomplete population +to derive a testing sample for the ERF Account, Saraf failed to exercise due care and to obtain +sufficient competent evidential matter in violation of AU §§ 230, 311, 326, and 350. + +26. PCAOB Auditing Standard No. 3, Audit Documentation, establishes general requirements +for documentation that an auditor should prepare and retain in connection with audits of financial +statements and reviews of interim financial information. AS 3.1. Because it is the written record +supporting the auditor’s representations in the auditor’s reports, audit documentation should, +among other things, “[s]upport the basis for the auditor’s conclusions concerning every relevant +financial statement assertion,” and “[d]emonstrate that the underlying accounting records agreed +or reconciled with the financial statements.” AS 3.5. Additionally, the auditor “must document +significant findings or issues,” such as “[c]ircumstances that cause significant difficulty in +applying auditing procedures.” AS 3.12. + +27. By his conduct discussed above, Saraf did not prepare adequate work paper +documentation in violation of PCAOB Auditing Standard No. 3. + +28. Finally, as a result of the conduct described above, Saraf 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. For accountants, improper professional conduct includes +“intentional or knowing conduct, including reckless conduct, that results in a violation of +applicable professional standards.” Rule 102(e)(1)(iv)(A). In addition, 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,” as well as “repeated instances of unreasonable conduct, each resulting in a violation +of applicable professional standards,” also constitute improper professional conduct. Rule +102(e)(1)(iv)(B)(1)-(2). Saraf intentionally and knowingly violated KPMG India’s risk +management policies by taking the payments described above from Wipro employees, and he + + + 9 + +submitted multiple false Annual Independence and Compliance Confirmations to his firm, all of +which constituted improper professional conduct under Rule 102(e)(1)(iv)(A). These same +actions also implicate Rule 102(e)(1)(iv)(B)(1), insofar as they were highly unreasonable and +pertinent to independence requirements, an area of heightened scrutiny. Further, Saraf’s conduct +was improper pursuant to Rule 102(e)(1)(iv)(B)(2) due to his multiple violations of PCAOB +Auditing Standards governing non-independence-related audit matters. + +FINDINGS + +29. Based on the foregoing, the Commission finds that Saraf: (i) caused KPMG India to +violate Rule 2-02(b)(1) of Regulation S-X; (ii) caused Wipro to violate Exchange Act Section +13(a) and Exchange Act Rule 13a-1; and (iii) engaged in improper professional conduct pursuant +to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. + +IV. + +30. In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Saraf’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Saraf shall cease and desist from committing or causing any violations +and any future violations of Rule 2-02(b)(1) of Regulation S-X and Section 13(a) of the Exchange +Act and Rule 13a-1 promulgated thereunder. + + B. Saraf is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After three years from the date of this Order, Saraf 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 +Saraf’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: + + + + 10 + + (a) Saraf, 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) Saraf, 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 Saraf’s or +the firm’s quality control system that would indicate that Saraf will +not receive appropriate supervision; + + (c) Saraf 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) Saraf acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Saraf to resume appearing or +practicing before the Commission provided that his chartered accountant license is current and +he has resolved all other disciplinary issues with the ICAI. However, if licensure is dependent +on reinstatement by the Commission, the Commission will consider an application on its other +merits. The Commission’s review may include consideration of, in addition to the matters +referenced above, any other matters relating to Saraf’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3837.txt b/raw/aaer/2016/AAER-3837.txt new file mode 100644 index 0000000000000000000000000000000000000000..402360b0b498bbf6923ea5f5e8922a7f666fc7f6 --- /dev/null +++ b/raw/aaer/2016/AAER-3837.txt @@ -0,0 +1,776 @@ + + +1 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79669 / December 22, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3837 / December 22, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17746 + + + : ORDER INSTITUTING PUBLIC +In the Matter of : ADMINISTRATIVE AND CEASE-AND- + : DESIST PROCEEDINGS PURSUANT +BADREE KOMANDUR, ACA, : TO SECTIONS 4C AND 21C OF THE +SATISH ARUNACHALAM, CA, : SECURITIES EXCHANGE ACT OF +AND WIPRO LIMITED, : 1934 AND RULE 102(e) OF THE + : COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, AND +Respondents. : IMPOSING REMEDIAL SANCTIONS, + : A CEASE-AND-DESIST ORDER, AND A + : CIVIL PENALTY + + I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted against Wipro Limited (“Wipro” or +“Respondent Wipro”) pursuant to Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Badree Komandur, ACA (“Komandur” or “Respondent Komandur”) and Satish +Arunachalam, CA (“Arunachalam” or “Respondent Arunachalam,” and, together with Wipro and +Komandur, “Respondents”) pursuant to Sections 4C1 and 21C of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C(a) 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 + + + + 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 each of them respectively and +the subject matter of these proceedings, which are admitted, all 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, a Cease- +and-Desist Order, and a Civil Penalty (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. From 2006 through 2009, an accountant in Wipro’s Controllership Division, Anup Agarwal, +embezzled money from Wipro and was involved in other misconduct, including personal +transactions with his supervisors, Badree Komandur and Satish Arunachalam. Komandur and +Arunachalam, who served as Wipro’s Corporate Controller and Wipro’s Assistant Controller and +General Manager of Finance, respectively, and KPMG India Audit Manager, Alok Saraf (“Saraf”), +who was responsible for KPMG India’s audit procedures around Agarwal’s work related to Wipro’s +foreign exchange and derivatives accounting, each accepted money from Agarwal during this time +period.4 + +character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to +have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may…deny, temporarily or permanently, the privilege of appearing or practicing +before it…to any person who is found…to have willfully violated, or willfully aided and abetted +the violation of any provision of the Federal securities laws or the rules and regulations +thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 Komandur, Arunachalam and Saraf maintain that they were unaware of Agarwal’s embezzlement, and that they +believed the payments from Agarwal were either investment proceeds that Agarwal had collected for them, or, in some +cases, loans. Saraf paid some money to Agarwal before the embezzlement was uncovered, which Saraf characterizes +as a loan repayment. + + + + 3 + +2. Agarwal embezzled 228 million Indian rupees, or more than $4 million, from Wipro5 while +hiding his conduct through fraudulent accounting entries in one of Wipro’s Exchange Rate +Fluctuation (“ERF”) accounts. Agarwal disguised his theft as a series of foreign currency losses. +During the same time period, Komandur and Arunachalam also caused other erroneous accounting +entries to be made in Wipro’s foreign currency exchange accounts. + +3. The totality of these events, which Wipro uncovered in the course of multiple investigations, +caused the company’s financial statements to be misstated in eleven periodic reports that Wipro +filed with or furnished to the SEC during fiscal years 2008, 2009, and 2010. Wipro’s internal +accounting controls failed to detect the misconduct. + +4. By the conduct described above, Wipro violated the reporting, books and records and +internal controls provisions of the Exchange Act in connection with the misstatements. Komandur +and Arunachalam caused Wipro’s violations. Komandur and Arunachalam also willfully violated +certain internal controls provisions of the federal securities laws, specifically, Section 13(b)(5) of +the Exchange Act and Rule 13b2-1 thereunder. By virtue of their willful actions, Komandur and +Arunachalam are subject to the provisions set forth in Rule 102(e)(1)(iii) and Section 4C of the +Exchange Act. + +RESPONDENTS + +5. Wipro Limited is an information technology service company incorporated in the +Republic of India with its principal executive office in Bangalore, India. Wipro’s American +Depositary Shares (“ADSs”), each represented by one equity share, are registered with the +Commission pursuant to Section 12(b) of the Exchange Act. Wipro’s ADSs trade on the New +York Stock Exchange. As a foreign private issuer, Wipro files annual reports with the +Commission on Form 20-F, and furnishes interim financial statements to the Commission on +Form 6-K. Through fiscal year 2009, Wipro included in its annual and interim reports financial +statements denoted as having been prepared in accordance with U.S. Generally Accepted +Accounting Principles (“U.S. GAAP”). Starting in fiscal year 2010, Wipro began providing +financial statements denoted as having been prepared in accordance with International Financial +Reporting Standards (“IFRS”). + +6. Badree Komandur, ACA,6, 7 age 45, is a citizen of the Republic of India. Komandur +joined Wipro in June 1998 as a Manager of Finance, thereafter became a Vice President of + + Saraf also accepted money from another Wipro accountant besides Agarwal whose job focused on matters +relating to internal controls. Saraf shared an apartment with this other accountant during the relevant time. + +5 Wipro was able to recover a substantial portion of the stolen funds once it discovered the emb ezzlement. + +6 The designation “ACA” (Associate Chartered Accountant) is a qualification gained through the Institute of +Chartered Accountants in England and Wales. Komandur is also an Associate Member of the Institute of Company +Secretaries of India, having completed specialized training in the area of corporate law. Additionally, he attained + + + + 4 + +Finance, and then ascended to the Corporate Controller position in or around mid-2005, a role +that he held until his resignation from the company in February 2010. + +7. Satish Arunachalam, CA,8 age 44, is a citizen of the Republic of India. In 1996, +Arunachalam became a member of the Institute of Chartered Accountants of India (“ICAI”). +That same year, he also joined Wipro, where he worked until his resignation from the company +in February 2010. Arunachalam was Wipro’s Assistant Controller and General Manager of +Finance during the relevant period. + +OTHER RELEVANT INDIVIDUALS AND ENTITY + +8. Alok Saraf, CA, age 32, is a citizen of the Republic of India. In 2005, Saraf became a +member of the ICAI. Saraf was employed by KPMG India from March 2006 through May 2010. +Saraf joined the Wipro engagement team in September 2006, began performing audit and review +procedures relating to Wipro’s derivatives and foreign exchange activities in September 2007, +and, in or around December 2008, assumed primary responsibility for auditing this area. He +ceased work on the Wipro engagement in or around late December 2009. + +9. Anup Kumar Agarwal, CA, (1983 – 2009), was a citizen of the Republic of India. +Agarwal served as an accountant in the company’s Controllership Division from 2006 until April +2009, where he was responsible for foreign exchange accounting, investment and banking +operations, and treasury support activities. Agarwal transferred into Wipro’s mergers and +acquisitions (“M&A”) group in April 2009. Agarwal took his own life on or about December 23, +2009. + +10. KPMG India is an Indian Registered Partnership and a member of the KPMG network +of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. +KPMG India audited Wipro’s consolidated financial statements and internal control over +financial reporting during the time period relevant to this proceeding. KPMG India is registered +with the PCAOB.9 + + + +membership in the Institute of Chartered Accountants of India and the Institute of Cost Accountants of India early in +his career. + +7 All of the individual respondents reside overseas in either South Asia or Southeast Asia, and all of them +lived abroad during the entirety of the SEC’s investigation. + +8 The designation “CA” (Chartered Accountant) is used in India by members of the ICAI. + +9 KPMG India’s PCAOB registration application and the firm’s annual reports filed with the PCAOB list the +firm’s legal name as “KPMG.” + + + + 5 + +FACTS + +The Embezzlement and Other Foreign Exchange Accounting Errors + +11. From November 2006 through mid-December 2009, Agarwal embezzled more than $4 +million from Wipro via transfers from Wipro’s bank accounts to a personal bank account under +his control.10 Agarwal used banking passcodes belonging to various Controllership Division +employees to authorize a number of the payments. Agarwal had access to others’ banking +passcodes and computer passwords because this information was shared by certain employees +during the relevant time. + +12. Agarwal concealed the embezzlement by recording fictitious currency exchange rate +losses in a general ledger account at Wipro (the “ERF Account”). The ERF Account was +intended to be used to capture the impact of currency exchange rate fluctuations (ERF), as well +as gains and losses on related hedges.11 Agarwal, however, created fictitious losses in the +account to disguise the majority of the embezzlement payments. In a few instances, he hid his +theft by making false entries in a balance sheet liability account. + +13. Agarwal was able to create fictitious accounting entries, initiate bank fund transfers and +act as a “maker” for certain bank payments, and oversee bank reconciliations relating to certain +bank accounts because of insufficient segregation in the duties assigned to him. Agarwal +exploited this control weakness. + +14. Wipro uncovered the embezzlement in December 2009 when Agarwal made an +especially large transfer to a personal bank account under his control, which overdrew one of +Wipro’s bank accounts. The overdraft prompted a Wipro employee to scrutinize the payment +and to discover its true nature. + +15. Company officials confronted Agarwal in mid-December 2009. Agarwal immediately +admitted his crimes. Two weeks later, he took his own life. When Agarwal confessed, he +revealed that he had given embezzled money to Komandur, Arunachalam, Saraf, and nine other +Wipro employees under the guise of being purported profits from certain investments he had +supposedly made for them. Komandur’s and Arunachalam’s financial dealings with Agarwal, +which undisputedly involved tens of thousands of dollars, violated a conflict of interest policy at +Wipro. + + +10 The embezzlement alone did not have a material impact on Wipro’s financial statements during any single +reporting period during the relevant period. + +11 Wipro enters into forward exchange contracts, also referred to as derivatives or hedges, to minimize the +impact of currency fluctuations on its profits. + + + + 6 + +16. Around the same time that Wipro officials were probing Agarwal’s fictitious +embezzlement entries, they also learned that there were other accounting errors and +unsubstantiated journal entries that were not derived from the embezzlement. + +17. These accounting errors and unsupported journal entries were present in multiple ERF +accounts, including the ERF Account used in the embezzlement, as well as outstanding liability +accounts from the fourth quarter of fiscal year 2008 through the fourth quarter of fiscal year +2010. Some of the errors were similar in nature to Agarwal’s embezzlement entries, in that they +involved transfers from the ERF Account to a balance sheet liability account. Such errors +impacted Wipro’s reported operating income and operating margin,12 and they were recorded by +employees with Komandur’s and Arunachalam’s knowledge. + +18. Komandur and Arunachalam, in their supervising capacities as Corporate Controller and +Assistant Controller, also presided over other errors in the company’s books and records. During +the fourth quarter of fiscal year 2009, Agarwal discovered an incorrect intercompany balance, +which he raised to Komandur and Arunachalam. The erroneous balance related to incorrect +currency conversions that had been carried out on a periodic basis beginning in at least March +2008 between Wipro’s business process outsourcing services business (BPO) and its Cyprus +company. The incorrect conversions caused both overstatements and understatements of +Wipro’s reported profit before interest and tax over multiple reporting periods.13 + +19. After Agarwal identified the error, Komandur and Arunachalam failed to undertake +timely corrective action, and were aware that the error was not corrected for multiple quarters. +This error remained on the books for the next four quarters and was fully corrected only in +November 2010. KPMG India working papers reflect that Komandur and Arunachalam +represented to KPMG India staff that the company’s interim financial statements in fiscal years +2009 and 2010 were prepared in conformity with GAAP and that no unusual journal entries or +other adjustments had been recorded, despite the persistence of the error from the incorrect +conversions. + + + + +12 Gains and losses for Wipro’s ERF Account were recorded in the company’s income statement, and thus +affected operating income and operating margin. By transferring a portion of gains and losses from the ERF +Account to a balance sheet liability account, these errors improperly impacted the current period profit. + +13 As a result, this metric was overstated by approximately 130 million Indian rupees, or approximately $3.25 +million, in the fourth quarter of Wipro’s fiscal year 2008, contained a net understatement of approximately 551 +million Indian rupees, or approximately $11 million, for Wipro’s fiscal year 2009, and was either overstated or +understated by various amounts ranging from approximately 6 million Indian rupees, or approximately $124,766, to +approximately 385 million Indian rupees, or approximately $8.6 million, in each quarter of Wipro’s fiscal year 2010, +resulting in a net overstatement of 36 million Indian rupees, or approximately $800,000, for the end of that fiscal +year. The error was fully corrected in Wipro’s annual report for fiscal year 2010. + + + + 7 + +Agarwal’s Payments to KPMG India Auditor Saraf + +20. Between December 2007 and October 2009, Agarwal and another Wipro accountant14 +gave at least 715,000 Indian rupees, or approximately $15,543, to Saraf, who was responsible for +auditing the company’s derivatives and foreign exchange accounts. These funds equaled more +than 5% of Saraf’s annual earnings in fiscal year 2008, nearly 19% of his annual earnings in +fiscal year 2009, and over 50% of his earnings in fiscal year 2010. + +21. In the summer of 2009, Saraf asked Agarwal to buy and sell on Saraf’s behalf the +securities of a publicly traded company operating in the banking sector. + +22. In August 2009, Agarwal deposited 96,000 Indian rupees, or approximately $2,086, into +a Saraf account as purported trading profits. In actuality, the funds for the deposit were not +trading profits, since Agarwal never executed the trades Saraf had requested. + +23. Agarwal later confessed that he paid Saraf money for the purpose of “maintaining good +relationship.” + +Agarwal Claimed that Complete Ledgers for the ERF Account Were Not Available. + +24. Wipro’s auditor did not have access to complete ERF Account details while Agarwal’s +embezzlement was ongoing. Agarwal lied to Saraf that it was not possible to extract the +complete ERF Account details from Wipro’s general ledger. Agarwal informed Arunachalam of +the misrepresentation to Saraf at least as early as the second quarter of fiscal year 2010. +Arunachalam did not object or take steps to clarify the matter. + +25. Saraf then used an incomplete population to derive samples for testing the ERF Account. +In conducting the audit of the ERF Account, Saraf requested a download of the SAP general +ledger data so that he could perform testing procedures on the account balance population. Upon +receiving Saraf’s request, Agarwal informed Saraf that it was not possible to provide him with +the SAP general ledger data for the account. In response, and at the suggestion of Agarwal, +Saraf elected to instead use the derivatives contract register, which was a sub-population of the +total ERF Account, as the population from which to perform his audit testing of the ERF +Account. Saraf did not document in the workpapers Agarwal’s claim regarding the +unavailability of the ERF general ledger data and KPMG India’s modification to the audit +procedures as a result. + + +14 Saraf shared an apartment with this individual for a portion of the time that Saraf worked on the Wipro +engagement. + + + + 8 + +26. Agarwal’s embezzlement and other errors in Wipro’s ERF accounts did not affect the +register of derivative contracts—the only source of data that Saraf used for audit sampling—and +were therefore insulated from possible detection during the sampling process.15 + +Wipro Revises its Financial Statements. + +27. On November 12, 2010, Wipro filed its annual report for fiscal year 2010, which +incorporated disclosures related to foreign exchange accounting errors from the fourth quarter of +fiscal year 2008 through the fourth quarter of fiscal year 2010.16 The absolute value of the total +of these errors was nearly $67 million and impacted eleven periodic reports filed with or +furnished to the Commission.17 The errors affected several financial statement balances. + +28. The errors had the largest impact on the company’s fiscal year 2009 quarterly reporting. +The reported profit before tax was overstated by 4.9% in one quarter, and understated in amounts +ranging from 3.4% to 6.0% in the other quarters. The reported profit after tax was overstated by +5.3% in one quarter, and understated in amounts ranging from 3.6% to 6.2% in the other +quarters. The reported operating income for Wipro’s IT Services reporting segment in fiscal +year 2009 was overstated by 4.1% during the third quarter of fiscal year 2009, and understated +by 4.7%, 7.7%, and 5.9% in the first, second, and fourth quarters, respectively, of fiscal year +2009.18 + +29. Wipro’s IT Services segment was Wipro’s core business during the second quarter of +fiscal year 2009, when Wipro understated the operating income for its IT Services by 7.7% under +U.S. GAAP. This segment comprised approximately 75% of the company’s consolidated +revenue in fiscal year 2009, and made up 94% of Wipro’s overall operating income. The +operating income of this segment was highlighted in Wipro’s earnings releases during the +relevant period. + + +15 After the discovery of the embezzlement, KPMG India deployed a new audit team to conduct further +testing procedures for the period from 2008 through 2010 for the general ledger accounts that Saraf had audited. + +16 The revised financial results reflected: (a) foreign exchange accounting errors identified in a review +undertaken by an outside law firm in response to Agarwal’s confession; (b) errors made as part of the embezzlement +scheme; and (c) other reporting errors. + +17 For context, the company recorded approximately $6.05 billion in total revenues for fiscal year 2010, and +its net income that year was approximately $1.02 billion. + +18 In the company’s fiscal year 2009 annual report, the reported operating income for Wipro’s IT Services +segment was understated by 3.4% under U.S. GAAP. + + + 9 + +30. In investigating the causes of the errors, Wipro identified and disclosed in its fiscal year +2010 annual report the following material weaknesses in internal control over financial reporting +that existed as of the end of fiscal year 2009:19 + +(a) sharing of online banking access passwords and internal +accounting system passwords both internally and with +personnel responsible for external financial reporting; + +(b) lack of effective controls over recording of journal entries; + +(c) lack of timely and adequate reconciliation and review of +period-end reinstatement of foreign currency inter-company +unit balances, including the recording of appropriate +adjustments; and + +(d) insufficient segregation of duties in relation to recording and +initiating certain banking payments. + +The company’s recognition of material weaknesses was triggered by the embezzlement and the +foreign exchange accounting errors subsequently uncovered. + +Wipro Undertakes Remedial Measures. + +31. In the wake of the embezzlement and the accounting failures, Wipro took several steps +intended to remediate weaknesses associated with its foreign exchange and derivatives +accounting: it conducted an internal investigation and used the results for remedial purposes; +engaged an external law firm and external accountants to conduct an investigation and likewise +used the results of that process for remedial purposes; hired additional accounting and finance +personnel; voluntarily produced documents and information to Commission staff about the +events described in this Order; and developed and adopted new policies and processes based +upon recommendations by internal auditors and an outside consultant. + +32. The consultant has produced multiple reports regarding Wipro’s currency risk management +operations, its procurement to payment processes, and its financial reporting system, resulting in the +company’s adoption of, among other things, password compliance declarations and controls, +segregation of duties policies, and enhanced training. + +33. Wipro also disciplined thirty-five individuals who were involved in the control failures and +false accounting or who engaged in financial transactions with Agarwal. + +19 Wipro also concluded that its previously issued report on Internal Control Over Financial Reporting +(ICOFR), as of March 31, 2009, should no longer be relied upon. Likewise, KPMG India concluded that its audit +opinion on ICOFR as of March 31, 2009 should also no longer be relied upon. + + + 10 + +VIOLATIONS + +Wipro + +34. Exchange Act Section 13(a) and Rule 13a-16 under the Exchange Act require foreign +private issuers to furnish to the Commission on Form 6-K information required by that form, +including, in Wipro’s case, information from quarterly reports, promptly after the information is +made public.20 Rule 12b-20 under the Exchange Act, which applies to all reports filed or +furnished pursuant to Section 13, requires disclosure of such additional material information as +may be necessary to make the required statements not misleading. Implicit in these provisions is +the requirement that the information reported be true, correct, and complete. See SEC v. Kalvex, +Inc., 425 F. Supp. 310, 315-16 (S.D.N.Y. 1975); see also SEC v. Koenig, 469 F.2d 198, 200 (2d +Cir. 1972). + +35. Wipro violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-16 +thereunder when it furnished to the Commission its interim report for the second quarter of fiscal +year 2009. That interim report materially understated the operating income of Wipro’s IT +Services segment by 7.7% under U.S. GAAP. + +36. Wipro 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. Because Wipro improperly +recorded gains and losses from its derivatives and foreign currency transactions, its books, +records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions +and dispositions of assets. + +37. Lastly, as a result of the conduct described above, Wipro violated Section 13(b)(2)(B) of +the Exchange Act, which requires all reporting companies to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. + +Komandur and Arunachalam + +38. By their conduct described above, Komandur and Arunachalam caused Wipro’s +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 +and 13a-16 thereunder. + +20 Form 6-K requires, among other things, a foreign private issuer to furnish to the Commission on that form +whatever information the company “(i) makes or is required to make public pursuant to the law of the jurisdiction of +its domicile or in which it is incorporated or organized….” Form 6-K, General Instruction B. Wipro furnishes +reports to the Commission on Form 6-K each quarter because it must file quarterly reports with its local regulator. + + + + 11 + + +39. Based on the conduct described above, Komandur and Arunachalam willfully violated +Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.21 + +40. Due to their willful violations of the law, as set forth above, Komandur and Arunachalam +are subject to the provisions set forth in Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +FINDINGS + +41. Based on the foregoing, the Commission finds that Wipro violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-16 promulgated +thereunder. + +42. Based on the foregoing, the Commission finds that Komandur and Arunachalam: (i) +willfully violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; (ii) caused +Wipro’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and +Rules 12b-20 and 13a-16 promulgated thereunder; and (iii) are subject to the provisions set forth +in Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + +CORPORATE UNDERTAKINGS + + In addition to the remedial actions taken by Respondent Wipro to date, Wipro has +undertaken to: + +43. Conduct a comprehensive review and prepare and submit to Commission staff, within +180 calendar days of the entry of this Order, a written report (“Initial Report”) regarding Wipro’s +policies, procedures, practices and internal controls related to accounting for foreign currency +transactions, including derivatives and hedging activities (collectively, its “forex accounting +program”). The Initial Report shall include a complete description of Wipro’s forex accounting +program and any proposals for improving, modifying, or supplementing the forex accounting +program, and must be certified in writing by the audit committee of Wipro’s board of directors +(“Audit Committee”). The Initial Report and the Audit Committee certification shall be +transmitted to Gregory G. Faragasso, Assistant Director, Division of Enforcement, United States + +21 These provisions 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. 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)). + + + + 12 + +Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549. Wipro shall +also provide a copy of the Initial Report to its external auditors. Wipro may extend the time +period for issuance of the Initial Report with prior written approval of the Commission staff. + +44. Wipro shall undertake at least one follow-up review in the nine months after submission +of its Initial Report to Commission staff, incorporating any comments provided by the +Commission staff on the previous report, to further monitor and assess whether its forex +accounting program is reasonably designed and capable of detecting violations of the federal +securities laws and other applicable accounting principles related to accounting for foreign +currency transactions (the “Follow-up Report”). In the Follow-up Report, which must be +certified in writing by the Audit Committee, Wipro shall also provide the Commission staff with +its assessment of its forex accounting program. + +45. The Follow-up Report shall be completed by no later than 270 days after the Initial +Report. Wipro shall also provide a copy of the Follow-up Report to its external auditors. If, +after the submission of the Follow-up Report, the Commission staff requests Wipro to undertake +a second follow-up review of its forex accounting program, incorporating any comments from +the Commission staff regarding the Follow-up Report, Wipro shall complete this review no later +than 270 days after the date of the Commission staff’s request (“Second Follow-up Report”). +The Second Follow-up Report, if one is requested, must: be certified in writing by the Audit +Committee; be provided to Wipro’s external auditors; and shall provide the Commission staff +with an updated assessment of Wipro’s forex accounting program. Wipro may extend the time +period for issuance of the Follow-up Report and the Second Follow-up Report, if one is +requested, with prior written approval of the Commission staff. The Follow-up Report and the +Second Follow-up Report, if one is requested, and the Audit Committee certification(s) shall be +transmitted to Gregory G. Faragasso at the address listed above. + +46. The periodic reviews and reports submitted by Wipro 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) if otherwise required by law. + +47. Wipro shall certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertakings, provide written evidence of compliance in the form of +a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting material shall be +submitted to Gregory G. Faragasso, 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. + + + + 13 + +IV. + +48. In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Wipro shall cease and +desist from committing or causing any violations and any future violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-16 thereunder. + +B. Wipro shall comply with the undertakings enumerated in Section III., paragraphs 43 +- 47, above. + +C. Wipro shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amount of $5 million (U.S.) to the United States 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) Wipro may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Wipro 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) Wipro 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 +Wipro Limited as a respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Gerald Hodgkins, Associate +Director, Division of Enforcement, United States Securities and Exchange Commission, 100 F +St., NE, Washington, DC 20549. + + + + + 14 + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Wipro 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 Wipro’s payment of a civil penalty +in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Wipro 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 Wipro by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +E. Wipro acknowledges that the Commission is not imposing a civil penalty in +excess of $5 million (U.S.) based upon its cooperation in a Commission investigation. If at any +time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Wipro knowingly provided materially false or misleading information +or materials to the Commission or in a related proceeding, the Division may, at its sole discretion +and with prior notice to Wipro, petition the Commission to reopen this matter and seek an order +directing that Wipro pay an additional civil penalty. Wipro 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. + + F. Respondent Komandur 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-16, and 13b2-1 promulgated thereunder. + + G. Komandur is denied the privilege of appearing or practicing before the +Commission as an accountant. + + H. After four years from the date of the Order, Komandur 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 +Komandur’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 + + + 15 + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Komandur, 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) Komandur, 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 +Komandur’s or the firm’s quality control system that would +indicate that Komandur will not receive appropriate supervision; + + (c) Komandur 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) Komandur acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the +PCAOB, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +I. The Commission will consider an application by Komandur to resume appearing +or practicing before the Commission provided that his chartered accountant license is current and +he has resolved all other disciplinary issues with the ICAI, the Institute of Chartered Accountants +of England and Wales, and the Institute of Cost Accountants of India. However, if licensure is +dependent on reinstatement by the Commission, the Commission will consider an application on +its other merits. The Commission’s review may include consideration of, in addition to the +matters referenced above, any other matters relating to Komandur’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + +J. Respondent Arunachalam 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-16, and 13b2-1 promulgated thereunder. + + K. Arunachalam is denied the privilege of appearing or practicing before the +Commission as an accountant. + + + + 16 + + L. After four years from the date of the Order, Arunachalam 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 +Arunachalam’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) Arunachalam, 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) Arunachalam, 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 +Arunachalam’s or the firm’s quality control system that would +indicate that Arunachalam will not receive appropriate supervision; + + (c) Arunachalam 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) Arunachalam acknowledges his responsibility, as long as he +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission +and the PCAOB, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and +quality control standards. + +M. The Commission will consider an application by Arunachalam to resume appearing or +practicing before the Commission provided that his chartered accountant license is current and + + + + + + 17 + +he has resolved all other disciplinary issues with the ICAI. However, if licensure is dependent +on reinstatement by the Commission, the Commission will consider an application on its other +merits. The Commission’s review may include consideration of, in addition to the matters +referenced above, any other matters relating to Arunachalam’s character, integrity, professional +conduct, or qualifications to appear or practice before the Commission. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3838.txt b/raw/aaer/2016/AAER-3838.txt new file mode 100644 index 0000000000000000000000000000000000000000..1d4da0e1df18f5dd180380e831af35709fc4aac2 --- /dev/null +++ b/raw/aaer/2016/AAER-3838.txt @@ -0,0 +1,116 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79691 / December 27, 2016 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3838 / December 27, 2016 +ADMINISTRATIVE PROCEEDING +File No. 3-9135 + +In the Matter of +Philip Greifeld, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On February 20, 1997, Philip Greifeld, CPA (“Greifeld”) was denied the privilege of +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Greifeld pursuant to Rule +102(e)(1)(ii) of the Commission's Rules of Practice.1 This order is issued in response to +Greifeld’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements filed with the +Commission. +In an Order Making Findings and Imposing Sanctions, dated February 20, 1997 (the +“Order”), the Commission found, among other things, that Greifeld engaged in unethical or +improper professional conduct when he failed to comply with several of the tenets of generally +accepted auditing standards (“GAAS”). The Commission found that Greifeld signed the audit +reports for A.S. Goldmen & Co., Inc. (“Goldmen”) and Middlegate Securities, Ltd. +(“Middlegate”), without performing audit procedures in connection with the audits. The +Commission found that another accountant conducted field work for the audits and prepared +workpapers, and that accountant brought the workpapers to Greifeld’s home, where Greifeld +reviewed the workpapers and signed the audit reports. Greifeld did so because the other + +1 See Accounting and Auditing Enforcement Release No. 888 dated February 20, 1997. Pursuant to the order, +Greifeld was permitted to apply for reinstatement as a preparer or reviewer, or a person responsible for the +preparation or review, of financial statement of a public company to be filed with the Commission, after two years +upon making certain showings. + + 2 +accountant, a friend and former co-worker, was not yet certified and because his employer +discouraged moonlighting. + +In the Order, the Commission found that Greifeld never met with any of the principals of +Goldmen or Middlegate in connection with the audits and he did not receive any compensation from +Goldmen or Middlegate. The other accountant received several thousand dollars per audit and paid +Greifeld the nominal sum of $150 per audit for his services. The Commission also found that +Greifeld’s CPA registration was not current during the time period related to certain of the audit +reports. In addition, Greifeld failed to inquire as to any facts or circumstances that might have +impaired the other accountant’s independence as an auditor. As a result, Greifeld failed to discover +that the other accountant had become an employee of Goldmen while engaged on the audit. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Greifeld +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Greifeld is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Greifeld’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Greifeld, it appears that he has complied with the terms of the February 20, 1997 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of +Practice, and that Greifeld, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +statements required to be filed with the Commission, has shown good cause for reinstatement. +Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Philip Greifeld is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3839.txt b/raw/aaer/2016/AAER-3839.txt new file mode 100644 index 0000000000000000000000000000000000000000..cbef8b19cd3f203b4fa31eda88f21c2150407a3b --- /dev/null +++ b/raw/aaer/2016/AAER-3839.txt @@ -0,0 +1,129 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79698 / December 27, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3839 / December 27, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17753 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + DAVID A. LOPPERT, : 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 David +A. Loppert (“Respondent” or “Loppert”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +II. + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any attorney . . . who has been by name (A) [p]ermanently enjoined +by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the Commission, +from violating or aiding and abetting the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder; or (B) [f]ound by any court of competent jurisdiction in an action brought by the +Commission to which he or she is a party … to have violated (unless the violation was found not to have been +willful) or aided and abetted the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + 2 + + 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 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. Loppert, age 62, is a charted accountant in South Africa, but has never been a +licensed certified public accountant in the United States. He served as Global Digital Solutions +Inc.’s (“Global Digital”) Executive Vice President and Chief Financial Officer from approximately +August 2013 until April 2015. + + 2. Global Digital, previously known as Creative Beauty Supply, Inc., is a former +beauty products supply company incorporated in New Jersey, with its principal place of business +located in West Palm Beach, Florida. It is purportedly in the “cyber arms manufacturing” and +“security and technology solutions” industry. Global Digital became a reporting company on +October 10, 2013. Its securities are registered under Section 12(g) of the Exchange Act and its +common stock is quoted on the OTC Link (formerly ‘Pink Sheets’) operated by OTC Markets +Group, Inc. under the symbol “GDSI.” According to its Form 10-K for the fiscal year ended +December 31, 2013, filed on March 28, 2014, Global Digital sold stock in private placements and +upon warrant exercises. + + 3. On August 11, 2016, the Commission filed a complaint against Loppert and others +in SEC v. Global Digital Solutions Inc., et al., Civil Action No. 9:16-cv-81413-RLR (S.D. Fla.). +On December 20, 2016, the court entered an order permanently enjoining Loppert, by consent, +from future violations of Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”) and +Sections 10(b) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b- +5(b), 13a-14, and 16a-3 thereunder; and aiding and abetting Global Digital’s violations of Section +17(a)(2) of the Securities Act and Section 10(b) and 13(a) of the Exchange Act and Rules 10b-5(b), +12b-20, 13a-1, and 13a-11 thereunder. Loppert was also ordered to pay a $90,000 civil money +penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. §77t(d)], and Section 21(d)(3) of +the Exchange Act [15 U.S.C. §78u(d)(3)]; was barred from serving as an officer or director of any +issuer that has a class of securities registered pursuant to Exchange Act Section 12 [15 U.S.C. +§781], or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § +78o(d)], pursuant to Section 20(e) of the Securities Act [15 U.S.C. §77t(e)] and Section 21(d)(2) of +the Exchange Act [15 U.S.C. § 78u(d)(2)]. Loppert was also barred from participating in any + 3 +offering of penny stock, pursuant to Section 20(g) of the Securities Act [15 U.S.C. § 77t(g)], and +Section 21(d)(6) of the Exchange Act [15 U.S.C. § 78u(d)(6)]. + + 4. The Commission’s complaint alleged, among other things, the following: that from +October 2013 through March 2014, Loppert, in conjunction with Defendants Global Digital and +Global Digital’s former Chairman and CEO, issued misleading press releases and filings +regarding Global Digital’s operations, revenue projections and proposed acquisitions of various +companies. These public announcements affected the stock’s trading price and volume. Loppert +reviewed and edited press releases pertaining to unsubstantiated projected revenue run rates for +the upcoming fiscal year and a purported $1.082 billion acquisition by Global Digital of one of +the country’s largest arms manufacturers. Loppert signed Global Digital’s Form 8-K (current +report) and Form 10-K (annual report) filings with the Commission, which contained the same +misleading information concerning the acquisition of the arms manufacturer, even though +Loppert was aware that the arms manufacturer had previously rejected Global Digital’s offer and +that Global Digital lacked the ability to conclude the proposed transaction. Furthermore, +Loppert was aware that Global Digital’s website contained the aforementioned misleading press +releases. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Loppert’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + + Loppert is suspended from appearing or practicing before the Commission as an +accountant. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2016/AAER-3840.txt b/raw/aaer/2016/AAER-3840.txt new file mode 100644 index 0000000000000000000000000000000000000000..6d491864c2c78fab6ede8b93f5168e0b1e1c645b --- /dev/null +++ b/raw/aaer/2016/AAER-3840.txt @@ -0,0 +1,396 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79702 / December 29, 2016 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3840 / December 29, 2016 + +ADMINISTRATIVE PROCEEDING +File No. 3-17754 + + +In the Matter of + +GENERAL CABLE +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 General Cable Corporation (“GCC” 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, Respondent admits the jurisdiction over it and the subject matter of these proceedings, and +consents to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section +21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist +Order (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that +Summary + +1. This matter concerns improper inventory accounting and disclosure violations by +GCC, a global manufacturer of copper, aluminum, and fiber optic wire and cable products based in +Highland Heights, Kentucky. +2. From 2008 to the second quarter of 2012, GCC materially misstated its financial +statements due to improper inventory accounting at its Brazil subsidiary that went undetected due +to the company’s internal accounting controls failures. During this period, certain Brazilian +accounting employees manipulated the company’s accounting systems, which GCC executives +knew were highly manual and presented financial reporting risks, by entering false entries for +inventory values to cover up missing copper inventory from the subsidiary’s manufacturing plants. +When the improper accounting was reported to GCC’s then-Rest of World (“ROW”) segment +Chief Executive Officer and Chief Financial Officer in January 2012, they actively concealed the +inventory overstatement from GCC’s executive management. Instead, the ROW CEO and ROW +CFO overrode internal accounting controls and issued or passed on directives to employees to +destroy documents about the missing inventory, signed false sub-certifications of financial +statements, and failed to take corrective action to ensure that the accounting errors did not +continue. +3. In October 2012, GCC announced that it had identified these inventory accounting +issues, and in March 2013, GCC restated its financial statements from 2008 to the second quarter +of 2012. During this period, the missing inventory in Brazil caused GCC to materially overstate its +inventory by $46.7 million and overstate its net income available to common shareholders by +21.6%, 11.3%, and 29.8% for the annual periods ended December 31, 2011, 2010, and 2009, and +8.8% and 13.8% for the quarterly periods ended June 30 and March 31, 2012, respectively. +Respondent +4. GCC is a publicly traded company headquartered in Highland Heights, Kentucky. +GCC is a global manufacturer of copper, aluminum, and fiber optic wire and cable products. +During the relevant period, GCC maintained operations in three segments, North America, Europe +& Mediterranean (“E&M,” now known as the Europe segment), and ROW (split into the Latin +America and Asia Pacific segments in 2014). GCC’s common stock is registered with the +Commission under Section 12(b) of the Exchange Act, and GCC files annual and quarterly reports +under Section 13(a) of the Exchange Act and related rules. GCC’s common stock trades on the +New York Stock Exchange under the ticker symbol “BGC.” + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in these or any other proceedings. + 3 +Relevant Entities +5. General Cable Brasil Indústria e Comércio de Condutores Elétricos Ltda. +(current name of Phelps Dodge Brasil Ltda., acquired in 2007), and General Cable do Brasil +Ltda. (“GC Brasil”) are indirect subsidiaries of GCC in its ROW (from 2007 to 2014) and Latin +America (from 2014 to present) segments, and manufacture and sell GCC’s products for its +domestic market. In this Order GCC’s Brazil operations through these two subsidiaries are +referred to collectively as “GCC Brazil.” + +Facts +GCC Brazil’s Improper Inventory Accounting +6. In October 2007, following the acquisition of Phelps Dodge International Corp. +(“PDIC”), GCC created the ROW reporting segment, with ROW’s management based in Doral, +Florida. GCC Brazil, as part of ROW’s Latin America operations, was one of the largest and +most significant operations that were reported in ROW’s financial statements. During the +relevant period, GCC Brazil maintained two manufacturing facilities, Serra and Poços de Caldas +(“Poços”). +7. From at least 2008 to mid-2012, GCC Brazil materially understated cost of sales +and overstated copper inventory balances on its books and records, which were consolidated into +GCC’s financial statements. The inventory overstatement, leading to material financial reporting +errors, was due to both missing inventory and accounting errors within GCC Brazil’s enterprise +resource planning (“ERP”) system and its implementation. In covering up the missing inventory, +certain cost accounting personnel, who controlled entries into GCC Brazil’s general ledger as well +as controlled the accounting for inventory, manipulated the ERP system to reflect inventory that +did not exist. +8. After conducting an internal investigation, GCC determined that the inventory +accounting errors at GCC Brazil were material and would require a restatement of certain of its +previously issued financial statements. For the years ended December 31, 2011, 2010, 2009, and +2008, and for the three months ended March 30, 2012 and six months ended June 29, 2012, cost of +sales was understated by $17.9 million, $8.3 million, $5.6 million, $7.1 million, $2.7 million and +$6.2 million, respectively. As of December 31, 2011, 2010, 2009 and 2008, March 30, 2012 and +June 29, 2012 inventory balances were overstated by $40.0 million, $27.0 million, $17.4 million, +$8.7 million, $43.7 million, and $43.5 million, respectively. In addition, due to accounting errors +at one of the Brazilian facilities that occurred before GCC’s acquisition of PDIC in 2007, GCC +also overstated inventory in its allocation of the purchase price among assets acquired, resulting in +an understatement of goodwill. The understated goodwill and overstated inventory associated with +the acquisition of PDIC in the fourth quarter of 2007 was $3.4 million. +9. The inventory accounting errors at GCC Brazil caused GCC to overstate its net +income available to common shareholders by 21.6%, 11.3%, and 29.8% for the annual periods +ended December 31, 2011, 2010, and 2009, and 8.8% and 13.8% for the quarterly periods ended +June 30 and March 31, 2012, respectively. + 4 +10. GCC Brazil’s improper inventory accounting went undetected by GCC for several +years because its inventory accounting systems were highly manual and decentralized, and lacked +adequate controls. As a result, the lapses in the systems were exploited by certain GCC Brazil cost +accounting personnel. Although GCC Brazil’s inventory accounting systems were centralized in +its ERP system, its cost accounting personnel were able to falsify GCC Brazil’s general ledger by +manually calculating inventory values in a spreadsheet module and then feeding those values into +the general ledger. The general ledger, therefore, contained falsely overstated inventory values. +Those values were not reconciled with GCC Brazil’s actual inventory (e.g., reels of raw copper +metal and finished goods). These actions enabled the cost accounting personnel to make improper +entries in the general ledger without appropriate review by GCC Brazil’s management. The false +entries were designed to conceal accounting errors and missing inventory, resulting in overstated +inventory balances on the general ledger. +11. The lack of segregation of responsibilities for making and approving manual +journal entries further enabled the manipulation to occur and go undetected. Although GCC +executive management was unaware that inventory accounting for Brazil was overstated during the +relevant period, it was aware that the ERP system, which was widely used by several countries +within ROW, was highly manual, unevenly implemented throughout ROW, and was not subject to +centralized oversight, creating financial reporting risks. +12. In late 2011, while completing newly required tax documentation for local +regulators, GCC Brazil’s Controller (“Brazil Controller”) discovered significant inconsistencies +between GCC Brazil’s general ledger and supporting documentation for intercompany sales. The +Brazil Controller, in consultation with GCC Brazil’s CFO (“Brazil CFO”), reviewed intercompany +sales in 2011 and concluded in December 2011 that GCC Brazil’s inventory was overstated and +suspected it was due to accounting errors and an inventory theft involving the primary Brazil cost +accountant. +13. A number of deficient internal accounting and risk management controls prevented +GCC Brazil from detecting this scheme for years: (a) physical controls at Serra to account for or +protect inventory were inadequate; (b) access to IT systems in GCC Brazil was not effectively +controlled; (c) GCC Brazil failed to properly reconcile inventory values to the general ledger +balance; and (d) GCC Brazil lacked proper segregation of duties as cost accounting personnel +manually made entries to the inventory sub-ledger without further review or verification by other +personnel. +ROW Executives Overrode Controls and Concealed the Inventory Errors +14. From at least January 26, 2012 to September 28, 2012, ROW’s CEO and CFO +overrode controls and concealed these issues from GCC’s executive management, and internal and +external auditors, and instructed others at GCC Brazil to do the same, despite evidence that the +magnitude of the potential accounting errors was increasing. As a result of their concealment, +GCC filed its Form 10-K for the fiscal year ended December 31, 2011, and Forms 10-Q the fiscal +quarters ended March 31, 2012, and June 29, 2012, that included materially false financial +information. + 5 +15. On a video conference call in late January 2012, the Brazil CFO and Brazil +Controller (collectively “Brazil Finance Managers”) reported to ROW’s CEO and CFO that they +had conducted an investigation and had found evidence that GCC Brazil’s inventory, valued at +$103.78 million as of December 31, 2011, was overstated by at least $12 million, a material +shortfall for Brazil’s financial reporting. The Brazil Finance Managers further reported that they +believed the overstatement was due to accounting errors and/or the theft of inventory by GCC +Brazil cost accounting personnel, which had occurred throughout 2011 and possibly in prior +periods. +16. On the video call, following the disclosure by the Brazil Finance Managers, ROW’s +CEO informed the participants that he would not disclose the accounting errors or potential theft to +GCC’s executive management and instructed them to keep the matter confidential. ROW’s CEO +and CFO failed to take any significant remedial or corrective action to ensure that GCC Brazil’s +financial statements were accurate or to address the concern that cost accounting personnel had +circumvented GCC’s internal accounting controls. +17. From February to September 2012, ROW’s CEO and CFO took affirmative steps to +mislead or conceal GCC Brazil’s inventory accounting errors from GCC’s executive management, +and internal and external auditors, including, for example, the following: (a) issuing or supporting +a directive to destroy all relevant company records concerning the missing inventory; (b) +submitting to GCC false sub-certifications of ROW’s financial statements for the quarters ended +December 31, 2011, March 31, 2012, and June 29, 2012, and instructing the Brazil CFO to do the +same; (c) instructing the Brazil Finance Managers not to disclose the inventory accounting errors to +members of GCC’s Internal Audit, who were onsite in early 2012; (d) with respect to ROW’s +CEO, failing to include the accounting errors in monthly reports submitted to GCC executive +management; and (e) failing, until May 2012, to provide necessary support to investigate the +inventory overstatement reported by Brazil Finance Managers. +18. In mid-May 2012, ROW’s CFO eventually authorized a ROW cost accountant +(located outside Brazil) to assist the Brazil Finance Managers’ ongoing investigation of the +inventory accounting issues. In less than two weeks of analysis, the accountant not only +corroborated the Brazil Finance Managers’ findings, but reported to ROW’s CFO that inventory +was improperly overstated by a significant magnitude. The accountant, in this regard, notified +ROW’s CFO, in both an e-mail and on a videoconference call including the Brazil Finance +Managers, that the magnitude of the inventory accounting errors was approximately $30 million. +19. Despite this increasing magnitude of the overstatement and its material impact on +GCC’s financial statements, ROW’s CFO continued to disregard the mounting evidence and +merely instructed the cost accountant to reassess and report back in six weeks. +20. On July 10, 2012, the cost accountant submitted a written report to ROW’s CFO +confirming that GCC Brazil’s inventory was overstated by $29 million due to significant +accounting errors and internal control deficiencies. ROW’s CEO and CFO, however, continued to +conceal the inventory errors from GCC’s executive management and, on August 3, 2012, GCC +filed its Form 10-Q for the quarter ended June 30, 2012, which again materially understated costs +of sales and overstated inventory. + 6 +21. Given the decentralized reporting structure of GCC’s ROW segment, over which +GCC’s executive management had little actual oversight, the Brazil Finance Managers regarded +ROW’s CEO and CFO as the highest level to whom they could report their concerns, and believed +that they did not have direct access to GCC executive management. ROW’s CEO and CFO further +reinforced this belief by discouraging the country-level financial managers, including the Brazil +Finance Managers, from reporting issues outside of their direct reporting chain. +22. In late September 2012, the Brazil CFO informed the ROW CEO and CFO that, +despite the ROW CEO and CFO’s continued protests, she intended to disclose the accounting +overstatement to GCC’s executive management and external auditors, who were preparing for the +upcoming fiscal year audit. Faced with no other choice, the ROW CEO reported the matter to +GCC’s executive management, who immediately directed an internal investigation of the inventory +issues. +Restatement No. 1 +23. On October 29, 2012, GCC announced that it had identified inventory related +accounting errors within the ROW segment, and that its previously issued financial statements +for fiscal years 2009 through 2011, and for the interim periods ended March 31 and June 30, +2012, should not be relied upon. On March 1, 2013, GCC, after completing the internal +investigation, restated its financial statements as follows: For the annual periods ended +December 31, 2011, 2010, 2009, and 2008, and for the quarterly periods ended March 30 and +June 29, 2012, cost of sales was understated by $17.9 million, $8.3 million, $5.6 million, $7.1 +million, $2.7 million and $6.2 million, respectively. For the same periods above, inventory +balances were overstated by $40.0 million, $27.0 million, $17.4 million, $8.7 million, $43.7 +million, and $43.5 million, respectively. +Restatement No. 2 +24. GCC Brazil also failed to implement and maintain sufficient internal accounting +controls relating to revenue recognition, which ultimately caused GCC to restate its financial +statements a second time in January 2014. Following the detection and internal investigation of +GCC Brazil’s inventory accounting errors, GCC identified inappropriate revenue recognition +practices with regard to bill and hold sales at GCC Brazil. Specifically, GCC found evidence that +revenue recognition criteria under U.S. Generally Accepted Accounting Principles with respect to +bill and hold sales were not met in a number of instances. +25. On October 15, 2013, GCC concluded that due to the accounting errors related to +(i) revenue recognition in connection with historical bill and hold transactions for aerial +transmission projects in Brazil and (ii) value added tax (“VAT”) assets, GCC’s previously issued +consolidated financial statements for the fiscal years 2008 through 2012 and the interim periods +during those years, and the interim financial statements as of and for the three months ended +March 29, 2013 should no longer be relied upon. On January 21, 2014, GCC restated its results +for the relevant quarters and fiscal year-ends. + + + 7 +Legal Standards and Violations +26. Under Section 21C(a) of the Exchange Act, 15 U.S.C. § 78u-3(a), if the +Commission finds that any person is violating, has violated, or is about to violate any provision of +the Exchange Act, or any rule or regulation thereunder, the Commission may publish its findings +and enter an order requiring such person, and 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, to cease and desist from committing or causing such violation and any future +violation of the same provision, rule, or regulation. +27. As a result of the conduct described above, GCC violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder, which require an issuer to file with +the Commission accurate annual, current, and quarterly reports. 15 U.S.C. § 78m; 17 C.F.R. §§ +240.13a-1, 13a-11 & 13a-13. GCC also violated Exchange Act Rule 12b-20, 17 C.F.R. § 240.12b- +20, which requires an issuer in its periodic reports to add such further material information, if any, +as may be necessary to make the required statements, in light of the circumstances under which +they are made, not misleading. +28. GCC further violated Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. +§ 78m(b)(2)(A), under which every issuer which has a class of securities registered pursuant to +Section 12 of the Exchange Act is required 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. +29. GCC further violated Section 13(b)(2)(B) of the Exchange Act, 15 U.S.C. § +78m(b)(2)(B), under which every issuer which has a class of securities registered pursuant to +Section 12 of the Exchange Act is 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. +GCC’s Self-Reporting, Cooperation, and Remedial Efforts +30. In determining to accept GCC’s Offer, the Commission considered GCC’s self- +reporting, substantial cooperation, and remedial efforts. GCC promptly self-reported the +potential inventory accounting errors in October 2012 after it retained outside counsel to conduct +an internal investigation. GCC also self-reported other accounting issues as its investigation +progressed, and regularly updated the staff on the investigation. +31. GCC further provided complete and timely cooperation with the staff by +providing detailed presentations on the key findings of the investigation, and promptly producing +all relevant documents and information (including thousands of documents translated into +English), chronologies, key document binders, interview downloads, and forensic accounting + 8 +analyses. GCC also made its current or former employees available for interviews by the staff +upon request, including facilitating certain employees to travel to the United States from abroad +for interviews. +32. GCC also undertook extensive remediation. GCC has terminated or taken +disciplinary actions against employees who were involved in the accounting issues. All of +GCC’s executive management during the relevant time period has been replaced. GCC has +restructured its financial reporting to require its regional finance departments to report directly to +GCC’s CFO and Controller. +33. Finally, GCC restructured its compliance policies and programs by appointing a +Chief Compliance Officer who reports directly to GCC’s CEO and Audit Committee. Under this +restructuring, GCC has enhanced its training of sales and accounting personnel on compliance +policies and expectations, implemented regular reviews of accounting adjustments, improved the +inventory reconciliation process and security procedures, developed a global information +technology strategy for risk assessment and control for financial reporting, and instituted +evaluations for compliance performance through performance indicators and audits. +Undertakings +34. Respondent has undertaken to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described in +this Order. In connection with such cooperation, Respondent shall: +1. Produce, without service of a notice or subpoena, any and all non- +privileged documents and other information requested by the Commission staff subject to +any restrictions under the law of any foreign jurisdiction; +2. Use its best efforts to cause its current or former officers, employees, and +directors to be interviewed by Commission staff at such times and places as the staff +reasonably may direct; +3. Use its best efforts to cause its current or former officers, employees, and +directors to appear and testify without service of a notice or subpoena in such +investigations, depositions, hearings, or trials as may be requested by the Commission +staff; and +4. In connection with any testimony of Respondent’s officers, employees, +and directors to be conducted at deposition, hearing, or trial pursuant to a notice or +subpoena, Respondent +a. Agrees that any such notice or subpoena for the appearance and +testimony of Respondent’s officers, employees, and directors may be served by +regular or electronic mail on: Christian J. Mixter, Esq., Morgan, Lewis & Bockius +LLP, 1111 Pennsylvania Avenue, N.W., Washington, DC 20004, +christian.mixter@morganlewis.com, with a copy to Emerson C. Moser, Esq., +Senior Vice President, General Counsel and Corporate Secretary, General Cable + 9 +Corporation, 4 Tesseneer Drive, Highland Heights, KY 41076-9753, +emoser@generalcable.com; +b. Agrees that any such notice or subpoena for the appearance and +testimony of Respondent’s officers, employees, and directors in any action +pending in a United States District Court may be served, and may require +testimony, beyond the territorial limits imposed by the Federal Rules of Civil +Procedure. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, GCC 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. GCC shall, within 30 days of the date of entry of this Order, pay a civil monetary +penalty of $6,500,000 to the Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment of the civil monetary +penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +C. Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(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 General Cable Corporation as a Respondent in these proceedings, and +the file number of these proceedings; a copy of the cover letter and check or money +order must be sent to Gerald W. Hodgkins, Division of Enforcement, Securities and +Exchange Commission, 100 F Street, N.E., Washington, DC 20549. + 10 +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, Respondent shall not argue that Respondent is entitled to, nor shall Respondent 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 Respondent shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's +counsel in this action and pay the amount of the Penalty Offset to the Commission. Such a +payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related +Investor Action” means a private damages action brought against Respondent by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3842.pdf b/raw/aaer/2017/AAER-3842.pdf new file mode 100644 index 0000000000000000000000000000000000000000..89e4be00739562a42dfad44cdf74594b220daa08 Binary files /dev/null and b/raw/aaer/2017/AAER-3842.pdf differ diff --git a/raw/aaer/2017/AAER-3842.txt b/raw/aaer/2017/AAER-3842.txt new file mode 100644 index 0000000000000000000000000000000000000000..730bac87b4b8dd775cacaf3dddd77c4614e4e9d5 --- /dev/null +++ b/raw/aaer/2017/AAER-3842.txt @@ -0,0 +1,114 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79765 / January 10, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3842 / January 10, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-14558 + +In the Matter of +Larry Lee Crawford, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On September 21, 2011, Larry Lee Crawford, CPA (“Crawford”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against him pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice. +1 This order is issued in response to +Crawford’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. +The Commission found that Crawford had been permanently enjoined by a United States +District Court from future violations of Sections 10(b) and 13(b)(5) of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder, and +from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. In its Complaint in the +injunctive action, the Commission alleged, among other things, that Crawford, through his +conduct as the Chief Financial Officer of Escala Group, Inc. (“Escala”) violated the antifraud +and reporting provisions of the federal securities laws by: (1) failing to disclose the related-party +status of the company that owned and published the Brookman Catalogue, resulting in control of +that Catalogue, and failing to disclose the revenues obtained by virtue of Escala’s former parent +and its former CEO’s control of the prices in the Brookman Catalogue for stamp collections that +Escala sold to its former parent; (2) falsely representing that Escala sold its former parent + +1 See Accounting and Auditing Enforcem ent Release No. 3322 dated September 21, 2011. Crawford was permitted, +pursuant to the order, to apply for reinstatem ent after three years upon making certain showings. + + 2 +company several large stamp archives at prices determined by reference to independent stamp +Catalogues and appraisals when in fact Escala’s former CEO set the Catalogue prices and +influenced and edited the appraisals; and (3) improperly booking the sale of certain antiques. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Crawford +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Crawford is not, at this time, seeking to +appear or practice before the Commission as an independent accountant. If he should wish to +resume appearing and practicing before the Commission as an independent accountant, he will +be required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Crawford’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.” +2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Crawford, it appears that he has complied with the terms of the September 21, 2011 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Crawford, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, has shown good cause for reinstatement. +Therefore, it is accordingly, + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule m ay be m ade at any tim e, and the applicant m ay, in the Com m ission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Com m ission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Larry Lee Crawford, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3843.txt b/raw/aaer/2017/AAER-3843.txt new file mode 100644 index 0000000000000000000000000000000000000000..dcb621520ff901985b1f386e0b05ed70ecb319c6 --- /dev/null +++ b/raw/aaer/2017/AAER-3843.txt @@ -0,0 +1,805 @@ +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79780 / January 12, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3843 / January 12, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17771 + + +In the Matter of + +Biomet, 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 Biomet, Inc. (“Biomet” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as +set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + Summary + +1. These proceedings arise from violations of the Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. 78dd] by Respondent Biomet, Inc., a global medical device +company with operations around the world. From approximately 2008 through 2013, Biomet, +through its subsidiary and third party customs brokers, made unlawful payments to Mexican +customs officials to facilitate the importation of Biomet’s unregistered and mislabeled dental +products into Mexico. In addition, from 2009 to 2013, Biomet improperly recorded transactions +with a known prohibited distributor in Brazil as transactions with another distributor. Biomet had +prohibited the use of the distributor after determining the distributor made improper payments to +public doctors in Brazil from 2000 to August 2008 to obtain sales of Biomet products, which was +the subject of Biomet’s 2012 settlement with the Commission and criminal authorities for FCPA +violations. Biomet could not account for the prohibited distributor’s use of certain funds nor +determine if the prohibited distributor had continued the same improper conduct. Biomet failed to +appropriately record the transactions in Mexico and Brazil in its books and records. Biomet also +failed to devise and maintain a sufficient system of internal accounting controls. +Respondent + +2. Biomet, Inc. is a medical device company headquartered in Warsaw, Indiana that +sells medical device and dental products. Prior to 2008, Biomet’s common stock was registered +with the Commission pursuant to Section 12(b) of the Exchange Act. In September 2007, Biomet +was acquired by a group of private equity funds and went private. Biomet subsequently filed a +Form S-1 that went effective in May 2008 and was therefore required pursuant to Rule 15(d) to file +periodic reports with the Commission. + +3. In a March 2012 settlement with the Commission, Biomet consented to a +permanent injunction against future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act, as well as the appointment of an independent compliance monitor for a period of +three years, for FCPA violations in multiple countries. + +4. In June 2015, Biomet was acquired by Zimmer Holdings, Inc. (“Zimmer”), and the +combined companies were renamed Zimmer Biomet Holdings, Inc. The new company remained +headquartered in Warsaw, Indiana. Zimmer Biomet began trading on the New York Stock +Exchange and the SIX Swiss Exchange under the ticker symbol “ZBH” on June 29, 2015. Zimmer + +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 +Biomet operates in more than 100 countries, has approximately 17,000 employees, and in fiscal +year 2015, reported revenue of $ 6 billion. + +Relevant Entities +5. Biomet 3i LLC (“Biomet 3i”) is a wholly owned subsidiary of Biomet, Inc., +located in Palm Beach Gardens, Florida, that sold dental implants in various countries, including +Brazil and Mexico. Biomet 3i’s books and records were consolidated into the books and records of +Biomet. + +6. Biomet 3i Mexico (“3i Mexico”) is a Mexico City, Mexico based business +operation of Biomet 3i, a U.S. subsidiary of Biomet, Inc. Biomet 3i conducted all of its sales in +Mexico through 3i Mexico. 3i Mexico’s books and records were ultimately consolidated into +Biomet’s books and records. + +7. Biomet International Corporation (“Biomet International”) is a Delaware +corporation and a wholly-owned subsidiary of Biomet. Biomet conducts sales of Biomet products +in Brazil through Biomet International. Biomet International’s books and records are consolidated +into Biomet’s books and records. + +8. Mexican Customs Broker is a private company registered in Mexico that acted as +3i Mexico’s primary customs broker from April 2010 to October 2013. 3i Mexico did not have a +written contract or fee schedule with Mexican Customs Broker during this time. + +9. Texas Customs Broker is a private company based in Mission, Texas. Texas +Customs Broker served as 3i Mexico’s customs broker until mid-2009. Texas Customs Broker +was not a licensed customs broker, and 3i Mexico did not have a written contract or fee schedule +with the company. + +10. Prohibited Brazilian Distributor was the individual owner of a Brazilian +company that served as Biomet’s exclusive authorized distributor for reconstructive products in +Brazil until 2008, when Biomet terminated the relationship due to prior FCPA violations. + +Prior Commission Action + +11. In March 2012, the SEC filed a settled injunctive action against Biomet for +violations of the anti-bribery, books and records, and internal controls provisions of the federal +securities laws. The complaint alleged that, from 2000 through August 2008, Biomet, through four +subsidiaries, paid bribes to public doctors employed by public hospitals and agencies in Argentina, +Brazil, and China. One of the largest schemes involved Biomet’s sales of medical devices in +Brazil through its U.S. subsidiary, Biomet International. Biomet International employees engaged +in a scheme in which its Brazilian distributor, through his company, paid bribes to doctors +employed by state-owned hospitals in the form of “commissions” of 10-20% of the value of +medical devices purchased by the doctors, since as early as 2001. As part of its settlement with the +SEC, Biomet agreed to terminate its relationship with the distributor (“Prohibited Brazilian + + 4 +Distributor”). In 2009, Biomet re-entered the Brazilian market and hired new Brazilian distributors +to sell its medical implants. Biomet subsequently notified the Commission staff that sales of +Biomet products into Brazil would be done by these new authorized distributors. + +12. Biomet paid $5.5 million in disgorgement and prejudgment interest, and was +ordered to retain an independent compliance monitor to review its compliance program. At the +same time, Biomet entered into a deferred prosecution agreement (“DPA”) with the Department of +Justice that imposed a criminal fine of $17,280,000 and the appointment of a monitor. + +13. After the settlement and pursuant to the monitor’s recommendations, Biomet took +steps to enhance its compliance program, including conducting trainings, hiring additional +compliance resources, and implementing new policies and controls. Biomet reported its remedial +steps to Commission staff and the monitor on a periodic basis. In 2013, Biomet reported to the +Commission staff and the monitor suspected instances of continued anti-bribery violations, +including conduct in Brazil and Mexico. Biomet retained outside counsel to conduct an +investigation. Subsequently, in June 2015, Biomet was acquired by Zimmer, and Zimmer began a +process to fully integrate the legacy Biomet entity into a newly combined compliance program. +Despite extending the monitorship by one year, the monitor ultimately was unable to certify that +the legacy Biomet entity had a fully operational and effective compliance program as a result of the +acquisition and the recurring compliance issues in Brazil and Mexico. The monitorship terminated +in March 2016. + +Biomet Continues Use of Prohibited Brazilian Distributor +14. Despite telling the government that it had terminated its relationship with +Prohibited Brazilian Distributor in 2008, Biomet continued to sell goods into Brazil through +Prohibited Brazilian Distributor through 2013. Biomet International recorded the transactions with +Prohibited Brazilian Distributor on its books and records as if they were transactions with their +authorized distributor. Biomet did not take any action to stop the conduct until it received a +whistleblower complaint at the end of 2013, and initiated an internal investigation. + +15. As early as 2009, Biomet conducted an internal audit of its Brazilian distributors +that identified a relationship between its authorized distributor and Prohibited Brazilian +Distributor’s company. The draft audit report recommended that the authorized distributor needed +to be fully separated from Prohibited Brazilian Distributor’s company. However, the +recommendation and references to Prohibited Brazilian Distributor’s company were removed from +the final report by a member of Biomet’s legal team and the issue was not tracked for follow up by +anyone in Biomet’s legal, compliance, or internal audit departments, thereby allowing the +relationship to continue for several more years. + +16. By at least April 2010, Biomet became aware that the owner of one of Biomet’s +authorized distributors had given over control of the company to Prohibited Brazilian Distributor.2 + +2 At the time that Biomet entered into distribution agreements with the new Brazilian distributors, Biomet +was aware that each of these new distributors was owned and operated by former partners of Prohibited Brazilian + + 5 +A Biomet employee even described the relationship in documents as the “[authorized distributor] = +[Prohibited Brazilian Distributor]”. Further, in June 2010, Prohibited Brazilian Distributor entered +into a consulting agreement with the authorized distributor. The Prohibited Brazilian Distributor’s +compensation under the agreement was tied to increases in Biomet product sales. Certain Biomet +senior employees were aware of this consulting relationship as early as June 2010 and failed to +take steps to stop the relationship. + +17. Thereafter, in July 2010, the authorized distributor informed Biomet that it faced +importation restrictions in Brazil, but suggested a means to work around the restrictions by +arranging for Prohibited Brazilian Distributor, which continued to hold Biomet product +registrations, to directly import Biomet products on behalf of the authorized distributor. Biomet +approved the proposed importation arrangement. With Biomet’s knowledge and consent, the +authorized distributor placed product orders with Biomet and provided cash to Prohibited Brazilian +Distributor to cover the customs, duties, and product costs. Prohibited Brazilian Distributor used a +portion of the cash to pay customs and transferred the rest to his personal bank account. Biomet +then received wire transfers from Prohibited Brazilian Distributor’s personal bank account relating +to the shipments, but credited the payments to invoices issued to the authorized distributor. + +18. In addition, between July 2012 and September 2013, the authorized distributor paid +Prohibited Brazilian Distributor and/or his company approximately $3 million in product +purchases, $2 million for which Biomet could not determine the purpose, and $30,000 for an +apartment used by Prohibited Brazilian Distributor in Sao Paulo. Furthermore, despite knowing of +the prohibition against further dealings with Prohibited Brazilian Distributor, certain Biomet +employees continued to meet with Prohibited Brazilian Distributor for business purposes, and +allowed Prohibited Brazilian Distributor to attend several Biomet sales events between 2010 and +2013. + +19. Despite clear knowledge that Prohibited Brazilian Distributor was acting as its +distributor since 2009, Biomet recorded the business transactions as if they were transactions with +their authorized distributor. From July 2009 to September 2013, Biomet obtained over $3,168,000 +in profits from the transactions involving the Prohibited Brazilian Distributor. + +Sale of Unregistered and Mislabeled Products into Mexico +20. Until mid-2009, both 3i Mexico and another Biomet subsidiary, Biomet Mexico, +imported products into Mexico via Laredo, Texas, using Texas Customs Broker. Texas Customs +Broker was an unlicensed customs broker and Biomet did not have a written contract or fee +schedule with the broker. In January 2009, Biomet 3i employees received emails indicating that 3i +Mexico planned to import unregistered product into Mexico through Laredo. One such email from +the head of 3i Mexico, a Mexican national based in Mexico, stated “In the airport of Mexico, + +Distributor. Biomet failed to appropriately assess the risks posed by the connection between Prohibited Brazilian +Distributor and his former partners and did not take steps to monitor changes in the ownership structure of the new +distributors. + + 6 +customs are stricter and the importing is more complicated. At the Texas border, since it is a land +border, it is less strict and they do not request all the documents.” +21. Subsequently, Biomet investigated the Texas Customs Broker as part of a broader +compliance assessment to be performed by an outside auditing firm. The auditor’s report noted +that “Biomet Mexico was found to still be using a certain customs consultant ([Texas Customs +Broker]) for expediting Biomet products through the Mexico/US border that was previously +determined by Biomet Corporate to be of higher risk.” The auditor’s report also noted that Biomet +lacked “due diligence procedures regarding distributors and custom agents/consultants and a +formal process related to their selection,” causing internal controls risks. The report recommended +that Biomet establish formal policies and procedures regarding vendor due diligence. + +22. Biomet Mexico senior management were aware that Texas Customs Broker was +able to “import limited quantities of certain instruments without obtaining a Mexican product +license…” and that the Texas Customs Broker would simply “physically cross the border in [his] +own vehicles with Biomet’s product.” The Texas Customs Broker was essentially smuggling the +goods over the border. + +23. Based on the findings in the auditor’s report, which alerted Biomet to significant +red flags about the ongoing use of an unlicensed customs broker circumventing customs +requirements for the purpose of importing unregistered products, Biomet instructed Biomet +Mexico and 3i Mexico to cease working with Texas Customs Broker. + +24. In April 2010, to replace Texas Customs Broker, 3i Mexico hired Mexican +Customs Broker as its primary customs broker, but again did not enter into a written contract or fee +schedule. Mexican Customs Broker served as 3i Mexico’s primary customs broker through +October 2013. + +25. In early 2010, 3i Mexico began experiencing problems importing product at the +Mexico City International Airport because of missing registrations and incorrect labels on +products. Biomet 3i Mexico senior management suggested shipping such products through +Laredo, Texas instead. Senior Biomet and Biomet 3i personnel across multiple departments, +including legal, regulatory, compliance, and finance, were aware of the problems importing goods +through Mexico City. Senior Biomet 3i employees approved a proposed solution to ship through +Laredo because of its more lax customs procedures. Biomet 3i Mexico began working with +Mexican Customs Broker to import the unregistered and mislabeled products from Biomet 3i’s +Palm Beach Gardens location into Mexico through Laredo, Texas. Despite subsequently +confirming in July 2012 with its regulatory consultant that it was illegal both to import into Mexico +and sell within Mexico unregistered product, Biomet 3i allowed certain shipments to continue +after July 2012, as well as permitted the sale of unregistered product that had already entered +Mexico. + + + 7 +26. To address these importation issues, with the knowledge of the head of 3i Mexico, +Mexican Customs Broker divided shipment items based on whether they had valid registrations +and proper labeling. Mexican Customs Broker imported the registered products through the +Mexico City airport, while hiring sub-agents to smuggle the unregistered and mislabeled product +through Laredo by paying bribes to Mexican customs officials at the border. Once the divided +items entered Mexico, Mexican Customs Broker would recombine them and deliver the complete +shipment to 3i Mexico. + +27. Mexican Customs Broker through its sub-agents made improper payments to +Mexican customs officials when necessary to import the sub-agent shipments with the knowledge +and approval of the head of 3i Mexico. To facilitate these payments, Mexican Customs Broker +provided separate invoices to Biomet 3i Mexico for services rendered by Mexican Customs Broker +and by its sub-agents. A Biomet 3i Mexico employee based in Mexico omitted references to the +sub-agents when entering the payments into Biomet’s accounting system, and recorded the +payments to the sub-agents as though they were payments to Mexican Customs Broker. + +28. From approximately April 2010 to September 2013, Biomet paid Mexican Customs +Broker approximately $549,000 and its sub-agents $981,000. The payments to Mexican Customs +Broker’s sub-agents were unusually large and lacked supporting documentation, containing only +one-line invoices for unspecified “Professional Services” or “Consulting and Logistics.” Mexican +Customs Broker’s invoices, which were not supported by any fee schedule agreed upon between 3i +Mexico and Mexican Customs Broker or any other details, included simply line items such as +“Servicio Especial” or “Servicio Extraordinario” (Special or Extraordinary Service), “Cruce de +Puente” (Bridge Crossing Fee), or “Cuenta Americana,” (American Account). These unsupported +and/or improper charges from Mexican Customs Broker and its sub-agents were improperly +recorded under a Costo de Fletes (Freight Cost) account. + +29. From 2008 to 2013, Biomet obtained $2,652,100 in profits from the transactions +involved in the Mexico scheme. + +Anti-Bribery Violations + +30. Biomet subsidiary 3i Mexico engaged Mexican Customs Broker and certain sub- +agents to pay bribes to Mexican customs officials for the purpose of circumventing Mexican +customs laws regarding importing unregistered and improperly labeled products into Mexico. +Biomet the parent saw numerous red flags indicating that the Mexican subsidiary’s customs agents +were using bribes to resolve the known Mexican customs issues. Biomet had already instructed +Biomet Mexico and 3i Mexico to terminate a relationship with Texas Customs Broker after +numerous red flags were identified indicating Texas Customs Broker was likely smuggling +unregistered products over the border. 3i Mexico subsequently failed to conduct adequate due +diligence in the hiring of Mexican Customs Broker and its sub-agents as a replacement, or to +require a written contract or fee schedule. Further, Biomet employees across multiple levels and +departments were aware of importation issues arising in Mexico and failed to question how +Mexican Customs Broker was managing to overcome such issues while other Biomet employees + + 8 +based in Mexico knew that bribes were being paid at the border. Biomet was on notice of +substantial compliance risks based in part on the outside auditor report since as early as 2008, and +failed to take steps to detect and prevent the ongoing bribery. As a result of the bribery of Mexican +customs officials, Biomet violated Section 30A of the Exchange Act. + +Failure to Maintain Accurate Books and Records + +31. In Brazil, over the period July 2009 to September 2013, Biomet improperly +recorded in its books and records payments to Prohibited Brazilian Distributor as payments to +another authorized distributor. In Mexico, a Biomet subsidiary engaged two agents, one who was +unlicensed, to smuggle goods across the border. One of the agents paid bribes to Mexican +customs officials. Biomet improperly recorded payments to both agents between 2010 and 2013 in +excess of $1.5 million, including $981,000 in payments to sub-agents that was actively concealed +in Biomet’s books and records. The payments were recorded as freight cost and as other legitimate +costs, which did not reflect the true nature of those payments. Biomet violated Section 13(b)(2)(A) +by improperly recording the transactions and payments in Brazil and Mexico in its accounting +books and records. + +Failure to Maintain Sufficient Internal Accounting Controls + +32. Biomet failed to implement internal accounting controls sufficient to detect or +prevent bribery and to ensure the accuracy of its books and records. Biomet’s ongoing business +ties to Prohibited Brazilian Distributor were known to Biomet employees as early as December +2009 and Biomet failed to take appropriate steps to stop the continued prohibited relationship. +Biomet improperly recorded its business transactions with Prohibited Brazilian Distributor as +transactions with its authorized distributor. Biomet violated Section 13(b)(2)(B) of the Exchange +Act by failing to have internal controls in place to detect and prevent Biomet’s improper recording +of transactions with the Prohibited Brazilian Distributor. + + 33. Biomet further failed to devise and maintain internal accounting controls to prevent +and detect 3i Mexico’s payments to Texas Customs Broker and Mexican Customs Broker to get +product without valid registrations or proper labeling into Mexico, including improper payments to +Mexican customs officials made by Mexican Customs Broker. Biomet directed 3i Mexico to +terminate its arrangement with Texas Customs Broker and to hire a new broker. However, 3i +Mexico failed to conduct due diligence on Mexican Customs Broker and failed to get a written +contract or fee schedule. Biomet failed to address the numerous red flags that bribery was +occurring to import its goods into Mexico. Biomet’s internal accounting controls did not prevent +and detect the improper payments totaling approximately $981,000 between 2010 and 2013. + +Legal Standards and Violations +34. As a result of the conduct described above, Biomet violated Section 30A of the +Exchange Act, which makes it unlawful for an issuer with securities registered under Section 12 of +the Exchange Act or which is required to file reports under Section 15(d) of the Exchange Act, or +any employee or agent acting on its behalf, to make use of the mails or any means or + + 9 +instrumentality of interstate commerce corruptly in furtherance of an effort to pay or offer to pay +anything of value to foreign officials for the purpose of influencing their official decision-making, +in order to assist in obtaining or retaining business. +35. Further, as a result of the conduct described above, Biomet violated Section +13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of the assets of the issuer. + 36. In addition, as a result of the conduct described above, Biomet violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions are +recorded as necessary (I) to permit preparation of financial statements in conformity with generally +accepted accounting principles or any other criteria applicable to such statements, and (II) to +maintain accountability for assets; (iii) access to assets is permitted only in accordance with +management’s general or specific authorization; and (iv) the recorded accountability for assets is +compared with the existing assets at reasonable intervals and appropriate action is taken with respect +to any differences. + +Remedial Actions and Undertakings + + 37. In determining to accept the Offer, the Commission considered Respondent’s +cooperation and remedial acts. + + 38. Respondent undertakes to engage an Independent Compliance Monitor pursuant to +the provisions set forth in Attachment A of the Order. + + 39. Respondent undertakes to require the Independent Compliance Monitor to enter +into an agreement that provides that for the period of engagement and for a period of two years +from completion of the engagement, the Independent Compliance Monitor shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity. The agreement will also provide that the Independent Compliance +Monitor will require that any firm with which he/she is affiliated or of which he/she is a member, +and any person engaged to assist the Independent Compliance Monitor in performance of his/her +duties under this Order shall not, without prior written consent of the Division of Enforcement, +enter into any employment, consultant, attorney-client, auditing or other professional relationship +with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity as such for the period of the engagement and for a period of two years after +the engagement. + + 40. 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 + + 10 +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 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, 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. + + + 41. 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. + +Deferred Prosecution Agreement + + 42. Zimmer Biomet will enter into a deferred prosecution agreement with the +Department of Justice that acknowledges responsibility for criminal conduct relating to the +findings in the Order. Specifically, Zimmer Biomet acknowledges responsibility for Biomet’s +violations of the internal controls provisions of the Foreign Corrupt Practices Act of 1977 +(“FCPA”), as amended, 15 U.S.C. §§ 78m(b)(2)(B), 78m(b)(5), and 78ff(a). Further, Jerds +Luxembourg Holding, S.AR.L., the direct parent company of Biomet 3i Mexico, will enter into a +guilty plea for causing violations of the FCPA’s books and records provisions, 15 U.S.C. §§ +78m(b)(2)(A). Zimmer Biomet has agreed to pay a criminal fine of $17,460,300 in connection +with the deferred prosecution agreement. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Biomet’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Biomet cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A), +13(b)(2)(B) and 30A of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B), and 78dd-1]. + + 11 + + B. Respondent will comply with its Undertakings as enumerated in paragraphs 38 to 41 +above. + + C. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement +of $5,820,100, prejudgment interest of $702,705, and a civil penalty of $6,500,000, for total +payment of $13,022,805 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If payment of +disgorgement and prejudgment interest is not made by the date the payment is required by this +Order, additional interest shall accrue pursuant to SEC Rule of Practice 600, and if payment of the +civil penalty is not made by the date the payment is required by this Order, 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 +Biomet 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. + + + By the Commission. + + + + Brent J. Fields + Secretary +1 + +Attachment A +Independent Compliance Monitor +Retention of Monitor and Term of Engagement + 1. Zimmer Biomet (“Company”) shall engage an independent compliance monitor +(the “Monitor”) not unacceptable to the staff of the Commission within sixty (60) calendar days of +the issuance of the Order. The Monitor shall have, at a minimum, the following qualifications: (i) +demonstrated expertise with respect to the FCPA and other applicable anti-corruption laws, +including experience counseling on FCPA issues; (ii) experience designing or reviewing corporate +compliance policies, procedures, and internal accounting controls, including FCPA and anti- +corruption policies and procedures; (iii) the ability to access and deploy resources as necessary to +discharge the Monitor’s duties; and (iv) sufficient independence from the Company to ensure +effective and impartial performance of the Monitor’s duties. The Commission staff may extend the +Company’s time period to retain the Monitor, in its sole discretion. If the Monitor resigns or is +otherwise unable to fulfill the obligations herein, the Company shall within forty-five (45) days +retain a successor Monitor that has the same minimum qualifications as the original monitor and +that is not unacceptable to the Commission staff. + 2. The Company shall retain the Monitor for a period of not less than thirty-six (36) +months, unless the Commission staff finds, in its sole discretion, that there exists a change in +circumstances sufficient to eliminate the need for the Monitor, in which case the Monitorship may +be terminated early (the “Term of the Monitorship”). The term of the Monitorship can be extended +as set forth in Paragraph 26, below. The Company shall provide the Commission staff with a copy + + 2 +of the agreement detailing the scope of the Monitor’s responsibilities within thirty (30) days after +the Monitor is engaged. + 3. During the Term of the Monitorship and for a period of two years from the +conclusion of the Monitorship, neither the Company nor any of its then-current or former affiliates, +subsidiaries, directors, officers, employees, or agents acting in their capacity as such shall enter +into, or discuss the possibility of, any employment, consultant, attorney-client, auditing, or other +professional relationship with the Monitor. +Company’s Obligations + 4. The Company shall cooperate fully with the Monitor and provide the Monitor with +access to all non-privileged information, documents, books, records, facilities, and personnel as +reasonably requested by the Monitor; such access shall be provided consistent with the Company’s +and the Monitor’s obligations under applicable local laws and regulations, including but not limited +to, applicable data privacy and national security laws and regulations. The Company shall use its +best efforts, to the extent reasonably requested, to provide the Monitor with access to the +Company’s former employees, third party vendors, agents, and consultants. The Company does +not intend to waive the protection of the attorney work product doctrine, attorney-client privilege, +or any other privilege applicable as to third parties. + 5. The parties agree that no attorney-client relationship shall be formed between the +Company and the Monitor. In the event that the Company seeks to withhold from the Monitor +access to information, documents, books, records, facilities, current or former personnel of the +Company, its third-party vendors, agents, or consultants that may be subject to a claim of attorney- +client privilege or to the attorney work-product doctrine, or where the Company reasonably + + 3 +believes production would otherwise be inconsistent with the applicable law, the Company shall +work cooperatively with the Monitor to resolve the matter to the satisfaction of the Monitor. If, +during the Term of the Monitorship, the Monitor believes that the Company is unreasonably +withholding access on the basis of a claim of attorney-client privilege, attorney work-product +doctrine, or other asserted applicable law, the Monitor shall notify the Commission staff. + 6. Upon entry of this Order and during the Term of the Monitorship, should the +Company learn of credible evidence or allegations of corrupt payments, false books, records, or +accounts, or the failure to implement adequate internal accounting controls, the Company shall +promptly report such evidence or allegations to the Commission staff. Any disclosure by the +Company to the Monitor concerning potential corrupt payments, false books and records, or +internal accounting control issues shall not relieve the Company of any otherwise applicable +obligation to truthfully disclose such matters to the Commission staff. +Monitor’s Mandate + 7. The Monitor shall review and evaluate the effectiveness of the Company’s policies, +procedures, practices, internal accounting controls, recordkeeping, and financial reporting +(collectively, “Policies and Procedures”), with a focus on the Company’s legacy Biomet operations +as integrated into Zimmer Biomet, as they relate to the Company’s current and ongoing +compliance with the anti-bribery, books and records, and internal accounting controls provisions of +the FCPA and other applicable anti-corruption laws (collectively, “Anti-corruption Laws”), and +make recommendations reasonably designed to improve the effectiveness of the Company’s +internal accounting controls and FCPA corporate compliance program (the “Mandate”). This +Mandate shall include an assessment of the Board of Directors’ and senior management’s + + 4 +commitment to, and effective implementation of, the FCPA corporate compliance program. In +carrying out the Mandate, to the extent appropriate under the circumstances, the Monitor may +coordinate with the Company personnel, including in-house counsel, compliance personnel, and +internal auditors. To the extent the Monitor deems appropriate, it may rely on the Company’s +processes, and on sampling and testing methodologies. The Monitor is not expected to conduct a +comprehensive review of all business lines, all business activities, and all markets. Any disputes +between the Company and the Monitor with respect to the Work Plan shall be decided by the +Commission staff in its sole discretion. + 8. During the term of the Monitorship, the Monitor shall conduct three reviews (First +Review, Second Review, and Third Review), issue a report following each review (First Review +Report, Second Review Report, and Third Review Report), and issue a Final Certification Report, +as described below. The Monitor’s Work Plan for the First Review shall include such steps as are +reasonably necessary to conduct an effective First Review. It is not intended that the Monitor will +conduct its own inquiry into historical events. In developing each Work Plan and in carrying out +the reviews pursuant to such plans, the Monitor is encouraged to coordinate with the Company’s +personnel, including auditors and compliance personnel. +First Review and Report + 9. The Monitor shall commence the First Review no later than one hundred twenty +(120) calendar days from the date of the engagement of the Monitor (unless otherwise agreed by +the Company, the Monitor, and the Commission staff). Promptly upon being retained, the +Monitor shall prepare a written Work Plan, which shall be submitted to the Company and the +Commission staff for comment no later than sixty (60) days after being retained. + + 5 +10. In order to conduct an effective First Review and to understand fully any existing +deficiencies in the Company’s internal accounting controls and FCPA corporate compliance +program, the Monitor’s Work Plan shall include such steps as are reasonably necessary to +understand the Company’s business and its global anti -corruption risks. The steps shall include: +(a) inspection of relevant documents, including the internal accounting +controls, recordkeeping, and financial reporting policies and procedures as +they relate to the Company’s compliance with the books and records, +internal accounting controls, and anti-bribery provisions of the FCPA and +other applicable anti-corruption laws; +(b) onsite observation of selected systems and procedures comprising the +Company’s FCPA corporate compliance program, including anti- +corruption compliance procedures, internal accounting controls, +recordkeeping, due diligence, and internal audit procedures, including at +sample sites; +(c) meetings with, and int erviews o f, as relevant, the Company employees, +officers, di rectors, and, where appropriate and feasible, its thi rd-party +vendors, agents, or consultants and other persons at mutually convenient +times and places; and +(d) risk-based analyses, studies, and testing of the Company’s FCPA +corporate compliance program. +11. The Monitor may take steps as reasonably necessary to develop an understanding +of the facts and circumstances surrounding prior FCPA violations that gave rise to this action + + 6 +or violations of other applicable anti -corruption laws , but shall not conduct his or her own +inquiry into those historical events. +12. After receiving the First Review Work Plan, the Company and Commission staff +shall provide any comments concerning the First Review Work Plan within thirty (30) days to the +Monitor. Any disputes between the Company and the Monitor with respect to the First Review +Work Plan shall be decided by the Commission staff in its sole discretion. Following comments +by the Company and Commission staff, the Monitor will have fifteen (15) days to submit a Final +First Review Work Plan. +13. The First Review shall commence no later than one hundred twenty (120) days +from the date of the engagement of the Monitor (unless otherwise agreed by the Company, the +Monitor, and the Commission staff). The Monitor shall issue a written report within one hundred +fifty (150) days of commencing the First Review, setting forth the Monitor’s assessment and, if +necessary, making recommendations reasonably designed to improve the effectiveness of the +Company’s internal accounting controls and FCPA corporate compliance program as they relate +to the Company’s compliance with the FCPA and other applicable anti-corruption laws. The +Monitor should consult with the Company concerning his or her findings and recommendations +on an ongoing basis and should consider the Company’s comments and input to the extent the +Monitor deems appropriate. The Monitor may also choose to share a draft of his or her report with +the Company and Commission staff prior to finalizing it. The Monitor shall provide the report to +the Board of Directors of the Company and contemporaneously transmit a copy to Commission +staff. + + 7 +14. Within one hundred fifty (150) days after receiving the Monitor’s First Review +Report, the Company shall adopt and implement all recommendations in the report, provided, +however, that as to any recommendation that the Company considers unduly burdensome, +impractical, costly, or inconsistent with applicable law or regulation, the Company need not adopt +that recommendation at that time, but may submit in writing to the Monitor and the Commission +staff within sixty (60) days of receiving the report, an alternative policy, procedure, or system +designed to achieve the same objective or purpose. +15. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal, the Company shall promptly consult with the Commission staff. Any +disputes between the Company and the Monitor with respect to the recommendations shall be +decided by the Commission staff in its sole discretion. The Commission staff shall consider the +Monitor’s recommendation and the Company’s reasons for not adopting the recommendation in +determining whether the Company has fully complied with its obligations. Pending such +determination, the Company shall not be required to implement any contested recommendation(s). +16. With respect to any recommendation that the Monitor determines cannot +reasonably be implemented within one hundred and fifty (150) days after receiving the report, the +Monitor may extend the time period for implementation with prior written approval of the +Commission staff. +Second Review +17. Within one hundred twenty (120) days after the issuance of the First Review +Report, the Monitor shall submit a written Work Plan for the Second Review to the Company and +Commission staff. the Company and Commission staff shall provide any comments concerning + + 8 +the Work Plan within thirty (30) days in writing to the Monitor. Any disputes between the +Company and the Monitor with respect to the written Work Plan shall be decided by the +Commission staff in its sole discretion. Following comments by the Company and Commission +staff, the Monitor will have fifteen (15) days to submit a Final Second Review Work Plan. +18. The Second Review shall commence no later than one hundred eighty (180) days +after the issuance of the First Review Report (unless otherwise agreed by the Company, the +Monitor, and the Commission staff). The Monitor shall issue a written Second Review Report +within one hundred twenty (120) days of commencing the Second Review. The Second Review +Report shall set forth the Monitor’s assessment of, and any additional recommendations regarding, +the Company’s internal accounting controls and FCPA corporate compliance program as they +relate to the Company’s compliance with the FCPA and other applicable anti-corruption laws; the +Monitor’s assessment of the implementation by the Company of any recommendations made in +the First Review Report; and the Monitor’s assessment of the commitment of the Company’s +Board of Directors and senior management to compliance with anti-corruption laws. +19. Within one hundred twenty (120) days after receiving the Monitor’s Second +Review Report, the Company shall adopt and implement all recommendations in the report, +provided, however, that as to any recommendation that the Company considers unduly +burdensome, impractical, costly, or inconsistent with applicable law or regulation, the Company +need not adopt that recommendation at that time, but may submit in writing to the Monitor and the +Commission staff within thirty (30) days of receiving the report, an alternative policy, procedure, +or system designed to achieve the same objective or purpose. + + 9 +20. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) days, the Company shall promptly consult with the +Commission staff. Any disputes between the Company and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff shall consider the Monitor’s recommendation and the Company’s reasons for +not adopting the recommendation in determining whether the Company has fully complied with +its obligations. Pending such determination, the Company shall not be required to implement any +contested recommendation(s). +Third Review +21. The Monitor shall commence a Third Review no later than one hundred fifty (150) +days after the issuance of the Second Review Report (unless otherwise agreed by the Company, the +Monitor, and the Commission staff). The monitor shall issue a written Third Review Report within +one hundred twenty (120) days of commencing the Third Review, setting forth the Monitor’s +assessment and, if necessary, making recommendations in the same fashion as with the prior +reviews. +22. Within one hundred twenty (120) days after receiving the Monitor’s Third Review +Report, the Company shall adopt and implement all recommendations in the report, provided, +however, that as to any recommendation that the Company considers unduly burdensome, +impractical, costly, or inconsistent with applicable law or regulation, the Company need not adopt +that recommendation at that time, but may submit in writing to the Monitor and the Commission +staff within thirty (30) days of receiving the report, an alternative policy, procedure, or system +designed to achieve the same objective or purpose. + + 10 +23. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) days, the Company shall promptly consult with the +Commission staff. Any disputes between the Company and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff shall consider the Monitor’s recommendation and the Company’s reasons for +not adopting the recommendation in determining whether the Company has fully complied with +its obligations. Pending such determination, the Company shall not be required to implement any +contested recommendation(s). +Certification + +24. No later than sixty (60) days after implementation of the recommendations in the +Monitor’s Third Review Report, the Monitor shall certify whether the Company’s compliance +program, including its policies and procedures, is reasonably designed and implemented to prevent +and detect violations of the FCPA and is functioning effectively. Such certification shall be +supported by a written Final Certification Report that certifies the Company’s compliance with its +obligations under the Final Judgment, and which shall set forth an assessment of the sustainability +of the Company’s remediation efforts and may also recommend areas for further follow-up by the +Company. +25. The monitor shall orally notify the Commission staff at least fourteen (14) days prior to +the issuance of the Final Certification Report whether he or she expects to be able to certify as +provided herein. In the event the Monitor is unable to certify within the three year term of the +monitor period, the following extension provisions shall be in effect. + + 11 +Extension of Monitor Period +26. If, as informed by the Monitor’s inability to certify that the Company’s compliance +program, including its policies and procedures, is reasonably designed and implemented to prevent +and detect violations of the FCPA and is functioning effectively, the Commission staff concludes +that the Company has not successfully satisfied its obligations under the Monitorship, the Monitor +Period shall be extended for a reasonable time. +27. Under such circumstances, the Monitor shall commence a Fourth Review no later +than sixty (60) days after the Commission staff concludes that the Company has not successfully +satisfied its compliance obligations under the Final Judgment (unless otherwise agreed by the +Company, the Monitor, and the Commission staff). The Monitor shall issue a written Fourth +Review Report within ninety (90) days of commencing the Fourth Review in the same fashion as +set forth in Paragraph 13 with respect to the First Review and in accordance with the procedures +for follow-up reports set forth in Paragraphs 17 to 21. A determination to terminate the +Monitorship shall then be made in accordance with Paragraph 24. +28. If, after completing the Fourth Review the Monitor is unable to certify, the +Monitorship shall be extended, and the Monitor shall commence a Fifth Review (unless otherwise +agreed by the Company, the Monitor, and the Commission staff). The Monitor shall issue a +written Fifth Review Report within ninety (90) days of commencing the Fifth Review in the same +fashion as set forth in Paragraph 13 with respect to the First Review and in accordance with the +procedures for follow-up reports set forth in Paragraphs 17 to 21. These reviews shall continue +until the Monitor is able to certify, or unless as otherwise agreed by the Company and +Commission staff. + + 12 +Discovery of Potential or Actual Misconduct +29. Throughout the Term of the Monitorship, the Monitor shall disclose to the +Commission staff any credible evidence that corrupt or otherwise suspicious transactions +occurred, or payments or things of value were offered, promised, made, or authorized by any +entity or person within the Company, or any entity or person working directly or indirectly for or +on behalf of the Company, or that related false books and records may have been maintained by +or on behalf of the Company or that relevant internal accounting controls were circumvented or +were not reasonably designed or implemented. The Monitor shall contemporaneously notify the +Company’s General Counsel, Chief Compliance Officer, or Audit Committee for further action +unless at the Monitor’s discretion he or she believes disclosure to the Company would be +inappropriate under the circumstances. The Monitor shall address in his or her reports the +appropriateness of the Company’s response to all improper activities, whether previously +disclosed to the Commission staff or not. +Certification of Completion +30. No later than sixty (60) days from date of the completion of the undertakings with +respect to the Monitorship, the Company shall certify, in writing, compliance with the undertakings +set forth above. The certification shall identify the undertakings, provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. The Commission staff may make reasonable requests for further evidence of +compliance, and the Company agrees to provide such evidence. + + 13 +Extensions of Time + 31. Upon request by the Monitor or the Company, the Commission staff may extend +any procedural time period set forth above for good cause shown. +Confidentiality of Reports +32. The reports submitted by the Monitor and the periodic reviews and reports +submitted by the Company will likely include confidential financial, proprietary, competitive +business, or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations, or undermine the objective +of the reporting requirement. For these reasons, among others, the reports and the contents +thereof are intended to remain and shall remain non-public, except (i) pursuant to court order, (ii) +as agreed to by the parties in writing, (iii) to the extent that the Commission determines in its +sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (iv) as is otherwise required by law. +Address for All Written Communications and Reports + + 33. All reports or other written communications by the Monitor or the Company +directed to the Commission staff shall be transmitted to Tracy L. Price, Assistant Director, FCPA +Unit, Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE, +Washington D.C. 20549. + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3844.txt b/raw/aaer/2017/AAER-3844.txt new file mode 100644 index 0000000000000000000000000000000000000000..84655c6e582d98a8ce16e02a2d4b7929a684c9a7 --- /dev/null +++ b/raw/aaer/2017/AAER-3844.txt @@ -0,0 +1,282 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79772 / January 11, 2017 + +ACCOUNTING AND AUDIT ENFORCEMENT +Release No. 3844 / January 11, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17769 + +In the Matter of + +L3 Technologies, 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 L3 Technologies, Inc. (“L3” or “Respondent”) +(formerly known as “L-3 Communications Holdings, Inc.”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant to Section 21C of the Exchange Act, Making Findings, and +Imposing a Cease-and-Desist Order (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +SUMMARY +1. These proceedings arise out of L3’s failure to maintain books, records and accounts +that accurately reflected the transaction and dispositions of its assets, and for failing to maintain a +sufficient system of internal accounting controls. These failures relate to L3’s Army Sustainment +Division (“ASD”) improperly recording $17.9 million in revenue at the time based on invoices +associated with unresolved claims against the U.S. Army that were created in L3’s internal +accounting system but not delivered to the customer. +2. Employees aware of creating these invoices immediately reported concerns +regarding potential violations of L3’s accounting policies and internal accounting controls to L3’s +internal ethics department, which undertook a prompt review. But the review was not conducted in +a sufficient and effective manner due in part to a failure by ethics investigators to adequately +understand the billing process involved and their misinterpretation of statements made by +witnesses. +3. As a consequence, it was not until June 2014 that L3 discovered the invoices that +ASD had created in connection with unresolved claims but that had not been delivered. Based on a +subsequent internal investigation, L3 concluded it had material weaknesses in its Internal Control +Over Financial Reporting (“ICFR”) for the fiscal year ended December 31, 2013 and the end of the +fiscal quarter ended March 28, 2014, and the company revised its financial statements from 2011 +through 2014. +RESPONDENT +4. L3, a Delaware corporation based in New York, New York, is a prime contractor +for various foreign and U.S. Government agencies, including the U.S. Department of Defense. +L3’s securities are registered with the Commission pursuant to Section 12(b) of the Exchange Act, +and its securities trade on the New York Stock Exchange under the symbol LLL. +FACTS +The C-12 Contract +5. L3 contracted to maintain, through its subsidiary Vertex and later ASD, a fleet of +approximately 100 fixed-wing C-12 airplanes for the U.S. Army at bases in the United States and +around the world pursuant to a contract referred to as the “C-12 Contract.” The C-12 Contract had +an approximately five-year term, commencing on June 2, 2010, and ending on January 31, 2015. +In 2013, executives at ASD, the L3 division that managed the contract, realized that it had low +margins, and in mid-2013, they realized that the contract was projected to lose money for the fiscal + +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 +year, putting ASD at risk of not making its annual operating plan. The executives also determined +that work had been performed on the C-12 Contract that was not billed to the U.S. Army. +The Revenue Recovery Initiative +6. In or around August 2013, executives at ASD developed a “Revenue Recovery +Initiative,” which had the purpose of identifying work performed under the C-12 Contract but that +had not been billed to the U.S. Army, and then developing a plan to bill the U.S. Army for that +work. By November 2013, ASD determined that approximately $50 million in work had been +performed on the C-12 Contract but not billed. +7. Because of the complicated nature of the services performed under the contract, and +the need for the U.S. Army to verify the work performed, L3 and the U.S. Army did not reach an +agreement on payment of the unbilled items by the end of 2013. +Creation of Invoices +8. Facing pressure from certain supervisors, in December 2013, the VP of Finance at +ASD requested that certain ASD employees generate approximately 69 invoices on performed but +unbilled work related to the C-12 Contract, but refrain from delivering them to the U.S. Army. +ASD recognized an additional $17.9 million in revenue at the time based on the undelivered +invoices, enabling ASD to barely satisfy the target required in order to qualify for management +incentive bonuses. +9. L3’s revenue recognition policy, consistent with Generally Accepted Accounting +Principles (“GAAP”), set forth four requirements that must generally be met before revenue can be +realized and earned: (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. +10. As of the end of 2013, collectability was not reasonably assured with respect to the +invoices because the invoices corresponded to claims L3 was asserting or intended to assert against +the U.S. Army but which the customer had not reviewed or agreed to resolve. +11. ASD’s financial statements roll up into L3’s consolidated financial statements, +causing L3 to improperly recognize revenue related to the C-12 Contract. +Reports to Ethics +12. While deliberate steps were taken by an individual to evade L3’s internal +accounting controls and to mislead L3’s external auditors, L3’s internal accounting controls failed +to detect and prevent the improper recognition of revenue on the C-12 Contract. In November +2013, an employee at L3 filed an ethics report concerning certain aspects of the C-12 Contract. In +response to the report, L3’s internal ethics department commenced an investigation of the +allegations. + 4 +13. In December 2013, when the 69 invoices on unbilled work related to the C-12 +Contract were created, an additional specific report was raised to L3’s internal ethics department, +which promptly conducted several interviews to investigate the report. +14. However, the ethics investigators failed to identify the improper revenue +recognition issue because they did not adequately understand the billing process for the C-12 +Contract, and misinterpreted statements made to them by witnesses. As a consequence, the invoice +issue was not timely raised to the Audit Committee of L3’s Board of Directors. +L3’s Internal Investigation and Disclosures +15. In June 2014, when L3 discovered the invoices that had been generated in +December 2013 but not delivered to the U.S. Army, L3 conducted an internal investigation using +outside advisors, which determined that ASD improperly recognized revenue on invoices that were +generated but never delivered to the customer, in violation of L3’s revenue recognition policy and +GAAP. +16. On July 31, 2014, L3 issued a press release reporting its preliminary unaudited +financial results for the second quarter of 2014, which explained that the company was conducting +an internal review of accounting matters at its Aerospace Systems segment. The press release +noted that L3 expected to incur a pre-tax charge against operating income and a related reduction +in net sales for periods prior to 2014 and the first half of 2014, primarily as a result of certain +contract cost overruns that were inappropriately deferred and overstatements of net sales, both of +which were related to a fixed price maintenance and logistics support government contract referred +to as the “C-12 Contract.” +17. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A for the first quarter of 2014. The amendments disclosed that, +following the internal review of the Aerospace Systems segment, L3 identified material +weaknesses in the company’s ICFR, and that, as a result, the company’s ICFR and disclosure +controls and procedures were not effective as of the end of the fiscal year ended December 31, +2013, or the end of the fiscal quarter ended March 28, 2014. The 2013 10-K/A and 1Q:14 10-Q/A +specifically reported that: +(1) the Company did not maintain an effective control environment at its +Aerospace Systems segment with respect to: (i) inadequate execution of +existing controls around the annual review and approval of contract (revenue +arrangement) estimates; (ii) not following established Company accounting +policies, controls and procedures, and (iii) intentional override of numerous +transactional and monitoring internal controls at our Army Sustainment +division; and (2) Company personnel did not perform reviews of certain +employee concerns regarding violations of our accounting policies and ICFR in +a sufficient and effective manner. [2013 10-K/A at 35; 1Q:14 10-Q/A at 39.] +18. The amended filings further disclosed that with respect to its Aerospace Systems +group, L3 identified and recorded pre-tax charges of $60 million for 2013; $25 million for 2012; + 5 +$5 million for 2011; $4 million for periods prior to 2011; $20 million for 1Q:14; and $55 million +for 2Q:14, for a total of $169 million in the group. The adjustments identified in Aerospace +Systems group related to the Logistics Solutions and Platform Solutions sectors, with aggregate +adjustments of $117 million for Logistics Solutions, and $52 million for the Platform Systems. +19. Of the $117 Logistics Solutions adjustments, $69 million were attributable to the C- +12 Contract due to “cost overruns inappropriately deferred, sales invoices inappropriately prepared, +and the failure to timely and accurately perform contract estimates at completion and valuation +assessments of inventories and receivables” at the Army Sustainment Division of Logistics +Solutions, as well as $48 million attributable to “accounting errors . . . in connection with the +valuation inventories and receivables, as well as the correction for certain accruals on other +logistics support contracts” [2013 10-K/A at 35; 1Q:14 10-Q/A at 40.] +20. The $52 million Platform Systems sector adjustments were related to losses of $37 +million on two aircraft modification contracts and two contracts for rotary wing sub-assemblies +and parts, and write-offs of deferred costs of $15 million to design and test aerostructures for a new +commercial aircraft. +21. The amended filings further disclosed that, unrelated to the review at the Aerospace +Systems segment, L3 evaluated the accounting treatment related to a sales-type lease transaction +with the U.S. Army for rotary wing flight simulator systems. Based on the results of this +evaluation, L3 revised its previously issued financial statements to increase interest income +accretion for the first six months of 2014, 2013, 2012, and periods prior to 2011 by an aggregate +amount of $25 million, and an aggregate decrease in sales by $15 million for 2013 and the first six +months of 2014, and aggregate decrease in the cost of sales of $19 million for the first six months +of 2014, 2013 and periods prior to 2011. +22. The amended filings further disclosed that L3 revised its previously issued financial +statements to correct for certain errors recorded in the company’s financial statements in order to +reflect them in the appropriate periods. +23. Approximately $69 million of the pre-tax adjustments related to the C-12 Contract, +and of that amount, approximately $15.4 million in pre-tax income was the result of misconduct by +certain executives in ASD in connection with the invoices. +VIOLATIONS +24. By virtue of the conduct described above, L3’s books, records and accounts did not, +in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. +25. Also by virtue of the conduct described above, L3 failed to implement internal +accounting controls sufficient to provide reasonable assurances that its accounts were accurately +stated in accordance with generally accepted accounting principles. +26. As a result of the conduct described above, L3 violated Section 13(b)(2)(A) of the +Exchange Act, which requires reporting companies to make and keep books, records, and accounts + 6 +which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their +assets. +27. Also as a result of the conduct described above, L3 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, among other things, +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles. +L3’s REMEDIAL ACTS AND COOPERATION +28. In its 10-K issued for fiscal year 2015, L3 disclosed that it had undertaken certain +steps to remediate its material weaknesses in its ICFR, and that it had tested these controls and +determined them to be effective. In determining to accept the Offer, the Commission considered +extensive remedial acts promptly undertaken by Respondent, including conducting an internal +investigation, terminating a number of employees associated with the conduct in question, and self- +reporting the matter to the Commission; and the cooperation afforded the Commission staff. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent L3’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent L3 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. L3 shall, within 30 days of the entry of this Order, pay a civil money penalty in +the amount of $1.6 million to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + 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 L3 +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate Director, +Division of Enforcement, New York Regional Office, Securities and Exchange Commission, 200 +Vesey Street, New York, NY 10281. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $1.6 million based upon its cooperation in a Commission investigation and/or related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +obtains information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission, or in a related proceeding, the Division may, at its +sole discretion and with prior notice to the Respondent, petition the Commission to reopen this +matter and seek an order directing that the Respondent pay an additional civil monetary penalty. +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, +any statute of limitations defense. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3845.txt b/raw/aaer/2017/AAER-3845.txt new file mode 100644 index 0000000000000000000000000000000000000000..aa0afb9496f373fc75b4dbbe793cb356f3113ea8 --- /dev/null +++ b/raw/aaer/2017/AAER-3845.txt @@ -0,0 +1,745 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10281 / January 18, 2017 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79815 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3845 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17791 + +In the Matter of +ORTHOFIX INTERNATIONAL N.V. +Respondent. + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of +1934 (“Exchange Act”) against Orthofix International N.V. (“Orthofix” or “Respondent”). +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Paragraphs 1 through 93 below, acknowledges that its conduct violated the +federal securities laws, 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 Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + + +2 + + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds +1 that: +SUMMARY + From at least 2011 to mid-2013 (“the relevant period”), Orthofix materially overstated its +distributor revenue and operating income in various annual and quarterly reports and earnings +releases filed with the Commission. The majority of this misconduct occurred at Orthofix’s +then-largest segment, its Spine segment (“Spine”). In particular, Orthofix improperly recognized +revenue associated with several transactions with Spine’s distributors, including its largest +international distributor during the relevant period. Among other things, it entered into +contingent sales with that distributor and also recognized revenue for product sales when the +product could not be resold due to Orthofix’s delay in providing a required associated product. +Moreover, in the domestic section of Spine, Orthofix improperly accounted for certain +transactions by treating certain price discounts as expenses instead of a reduction to revenue and +recognizing revenue on transactions in which the purchaser had the ability to return or exchange +products. +Orthofix’s misconduct, however, was not limited to Spine as it also improperly +recognized revenue in its Orthopedics Segment through extra-contractual agreements used at its +Brazilian subsidiary. Moreover, throughout the relevant period, Orthofix had inadequate internal +accounting controls over its distributor revenue recognition and had a culture of setting +aggressive internal sales targets and imposing pressure to meet those sales targets. + As a result of its misconduct, Orthofix restated its financial results for the first quarter of +fiscal year 2013, all reporting periods in fiscal years 2012 and 2011, and its annual reporting +period in fiscal year 2010. For example, Orthofix announced that it had overstated its net sales +for fiscal year 2011 by 6% and its operating income by over 430%. By engaging in the +foregoing misconduct, Orthofix violated the antifraud, reporting, books and records, and internal +accounting controls provisions of the federal securities laws, namely Sections 17(a)(2) and +17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Exchange Act, +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +RESPONDENT +Orthofix International N.V. (“Orthofix”) is a company organized under the laws of +Curacao and is headquartered in Lewisville, Texas. It is a diversified medical device company +that develops and sells products used by doctors and other medical specialists to treat and repair +human spine and orthopedic conditions. Orthofix’s common stock is registered with the +Commission pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ. + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or +entity in this or any other proceeding. + +3 + + +Orthofix’s fiscal year ends on December 31. During the relevant period, Orthofix sold securities +to its employees pursuant to Form S-8 registration statements filed with the Commission. A +broad range of employees could purchase Orthofix stock in these offerings via payroll +deductions. During the relevant period, the Form S-8 registration statements incorporated by +reference the company’s public filings with the Commission. +OTHER RELEVANT PERSONS +The Spine CFO served as the Chief Financial Officer of Orthofix’s Spine Segment from +July 2010 until he resigned in approximately February 2013. +The Spine President served as the President of Orthofix’s Spine Segment from +November 2011 through November 2012. The Spine President is no longer employed by +Orthofix. +The Spine Sales VP served as the Vice President of Global Sales and Development for +the international portion of Orthofix’s Spine Segment from March 2011 until May 2013. The +Spine Sales VP is no longer employed by Orthofix. +The Corporate CFO served as Orthofix’s Chief Financial Officer from March 2011 +through November 2012. In November 2012, the Corporate CFO became the President of +Orthofix’s Spine Segment until he left Orthofix in July 2013. In the Order, we use the term New +Spine President/Prior Corporate CFO to describe this person’s conduct from November 2012 +and beyond. +FACTS +A. Orthofix’s Business and Structure + +1. Orthofix’s business was primarily divided into two Global Business Segments during the +relevant period – Spine and Orthopedics. During the relevant period, Spine was +Orthofix’s largest segment and contributed two-thirds of the company’s overall revenues. +2. Spine had several operating divisions during the relevant period. For example, Orthofix +Spinal Implants (“OSI”) was responsible for international sales of spinal implants and +related instruments. +3. During the relevant period, the Spine CFO was responsible for the accounting and +financial functions of Spine, including preparing its operating results (which were +included in Orthofix’s public filings with the Commission). +4. The Spine CFO reported directly to Spine’s President, a salesperson, during the relevant +period. The Spine President was in charge of Spine’s sales and overall management. +The Spine President had several sales persons who worked under him, including an +individual who served as Spine’s Vice President of Global Sales and Development +(“Spine Sales VP”). + +4 + + +5. In essence, the Spine Sales VP was the relationship manager for a number of +relationships that OSI had with certain international distributors. The Spine Sales VP had +a sales team of approximately four employees who reported to him and had day-to-day +responsibility for certain distributor relationships. +6. While the Spine CFO reported directly to the Spine President during the relevant period, +the Spine CFO also had dotted line reporting responsibility to Orthofix’s Corporate CFO +(hereinafter “Corporate CFO”). The Corporate CFO was responsible for the preparation +of Orthofix’s public filings, including its consolidated financial results. +7. Spine sold various products including spinal and cervical implants and related +instruments. The instruments and implants were interconnected as implants could not be +used in patients without functioning instrument sets. +8. Spine sold the above products through two primary methods: (i) sales of its products to +U.S. and international distributors who then sold the products to hospitals and physicians +and (ii) sales of its products directly to hospitals and physicians in the U.S. +B. Orthofix’s Revenue Recognition Policies and Practices and Distributor Business Practices + +a. Revenue Recognition Policies and Practices + +9. ASC 605-10-25-1 provides that revenue may be recognized only when it is both realized +or realizable and earned. Consistent with the authoritative literature, Orthofix’s financial +statements disclosed four criteria as its revenue recognition policy. +10. The four criteria are: (i) persuasive evidence of an arrangement exists; (ii) delivery has +occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed and +determinable; and (iv) collectability is reasonably assured. +11. Other than the four criteria disclosed in its filings, Orthofix did not have any other +revenue recognition policies during the relevant period and failed to adequately document +how it satisfied the four criteria with respect to the sales transactions that were recognized +as revenue. Moreover, Orthofix could not and did not reasonably estimate the revenue +recognition impact of the amount of future returns when extra-contractual agreements +included rights of return. +12. With limited exceptions, Orthofix recognized revenue during the relevant period based on +the “sell-in” method, which provides for revenue recognition upon shipment of products +to the distributor. +b. Distributor Business Practices During the Relevant Period +13. Orthofix entered into written agreements with distributors of its product. These +distributor agreements provided, among other things, standard payment terms for +purchase of products. These standard payment terms ranged typically from 90 to 180 +days. + +5 + + +14. During the relevant period, Spine had an unwritten policy requiring that modifications to +the terms in existing distributor agreements had to be approved by the Spine CFO. The +Spine CFO’s approval authority in this regard extended to all aspects of distributor +agreement terms, including pricing, commissions, discounts, extensions of payment +terms, payment plans, returns, and exchanges. The Spine CFO was the only person +within OSI who had any type of revenue recognition training. +15. Moreover, Orthofix did not have any policies and procedures requiring the analysis +and/or documentation of the impact, from a revenue recognition perspective, of +modifications to the standard contractual terms contained in distributor agreements. +C. Orthofix Aggressively Set Internal Sales Targets and Imposed Pressure to Meet those +Targets + +16. During the relevant period, Orthofix had a culture of aggressively setting internal sales +targets and imposing pressure upon its sales personnel to meet those targets. +17. Spine generally set sales targets in the following manner. Towards the end of a fiscal +year, the Spine sales leaders prepared sales forecasts (by month, quarter, and for the year) +for the upcoming fiscal year and sent those forecasts to the Spine President and Spine +CFO. The Spine President and Spine CFO then reviewed and approved the forecasts +before adding the costs components to prepare a budget which included the revenue +targets. +18. The budget was then sent to the then-Company CEO who approved the budget or rejected +it. If the budget was rejected, it was revised for review and resubmitted to the Company +CEO for approval. +19. On August 28, 2012 – and reflecting the pressure imposed to meet revenue targets – the +Spine Sales VP sent the following email to his sales team with the subject line +“September Gut:” +I need your gut feeling on the revenue we can generate in September. We need $2 +million in addition to what is on the portal . . .based on the feedback I have received I +have gotten so far, we are off about $1.5 million. I know what people say they need, +but as you know this is important. We need to ask everyone to purchase just a bit +more . . .if I have to walk into [the Spine President’s] office and tell him we are short +again, that is going to be a major problem. +20. After receiving the above email, one of the sales persons who reported to the Spine Sales +VP emailed a colleague separately and wrote: +I was just speaking with [the Spine Sales VP] and had finance listened to us last year +we wouldn’t be in this mess. We all predicted our markets could not sustain this +growth but they got greedy. Found this budget brutal because here we are for another +year just estimating the dollars. + +6 + + +D. Orthofix Improperly Recognized Revenue on Several Transactions with Brazilian +Distributor + +a. Orthofix Improperly Recognized $5 Million in Revenue in FY 2011 by Selling +Implants without Instrument Sets + +21. OSI had several international distributors during the relevant period, but its largest +distributor of product was located in Brazil (hereinafter “the Brazilian Distributor”). In +fact, for eight of the nine quarters from Q1 2011 to Q1 2013, the Brazilian Distributor +was the Company’s second largest customer on a revenue per quarter basis. +22. Entering 2011, Orthofix had a receivable of approximately $5 million from the Brazilian +Distributor from prior sales. After discussions with the Spine President and Spine Sales +VP, the Brazilian Distributor forecasted that it would purchase approximately $8.5 +million of Orthofix implants and instruments in FY 2011. +23. Prior to this time, Orthofix had sold implants along with used instrument sets rather than +new ones to the Brazilian Distributor. As discussed above, implants and instruments +were interconnected because the implants could not be used in patients without related +instrument sets. +24. At this time, however, the Brazilian Distributor could no longer purchase previously used +instrument sets because ANVISA (the Brazilian equivalent of the U.S. Food and Drug +Administration) imposed new regulations prohibiting the importation of used instrument +sets. +25. Orthofix did not have the new instrument sets (105 in total) available to be shipped along +with the implants it shipped to the Brazilian Distributor. Rather than waiting until the +new instrument sets were available, Orthofix – in FY 2011 – shipped approximately $5 +million in implants to the Brazilian Distributor despite the fact that these implants could +not be used in patients without the new instrument sets. +26. Orthofix recognized the approximately $5 million revenue upon shipment of the above +implants. Orthofix’s recognition of revenue in this regard was improper as delivery of +the interconnected product – the instruments – had not yet occurred. Orthofix knew that +the implants could not be used in patients without the instruments. As such, payment +timing and terms were contingent upon the instrument sets being made available and +therefore, revenue recognition was inconsistent with Orthofix’s accounting policy +because it did not meet the fixed or determinable criteria or the collectability criteria. +27. This improper recognition of revenue caused Orthofix’s financial statements to be +materially misstated in its Forms 10-Q for the second and third quarters of FY 2011 and +its year-end Form 10-K for FY 2011 and corresponding earnings releases. +28. By the beginning of FY 2012, virtually none of the 105 instrument sets had been shipped +to the Brazilian Distributor. Thus, the Brazilian Distributor refused to pay for the +implants because those implants that Orthofix had previously shipped to the Brazilian + +7 + + +Distributor could not be used without the instrument sets. As a result, the Brazilian +Distributor’s amounts payable to Orthofix increased from approximately $5 million at the +beginning of FY 2011 to approximately $11 million at the beginning of FY 2012. +29. In March 2012, the Spine President and Spine Sales VP had discussions with the +Brazilian Distributor concerning a payment plan to address the increasing amounts +payable. The Brazilian Distributor agreed to pay approximately $4.2 million of the +amounts payable by the end of FY 2012 but only if all the remaining 105 instrument sets +were delivered by the end of April 2012. +30. The Spine President and Spine Sales VP agreed to this payment plan proposal without +approval from the Spine CFO. +31. By April 30, 2012, Orthofix had only shipped 40 of the 105 instrument sets. +Accordingly, in June 2012, the Brazilian Distributor informed the Spine Sales VP and +Spine President that it would only pay $1.6 million of its amounts payable in December +2012 and $2.6 million in February 2013. +32. The Spine President and Spine Sales VP agreed to this payment plan proposal without +approval from the Spine CFO. More broadly – throughout the relevant period – Orthofix +did not establish and maintain procedures to reasonably ensure proper communication to +the Company’s finance and accounting departments of deviations from contractually +established terms, which included written or unwritten agreements made with Company +distributors. +b. Orthofix Improperly Recognized Even More Revenue with the Brazilian +Distributor in Summer 2012 + +33. In late May 2012, the Spine President discussed a product launch plan with the Brazilian +Distributor to purchase approximately $2.5 million of a new Orthofix implant product +called Firebird. This product, however, had not yet been approved by ANVISA and, +therefore, could not be shipped into Brazil until such approval was obtained. +34. The Brazilian Distributor agreed to place the order on the following conditions: (i) one +year to pay for the implants contingent on ANVISA approval; (ii) 210 days to pay on all +subsequent product orders; and (iii) all corresponding instrument sets needed to be +available once ANVISA approved the implants. Neither Orthofix nor the Brazilian +Distributor knew when ANVISA would grant approval. +35. Moreover – despite the fact that the Brazilian Distributor was provided 210 days to pay +on any subsequent purchase orders – the new payment terms were not reflected in any +revised or amended distributor agreement with the Brazilian Distributor. +36. The Spine CFO learned of this transaction a few weeks after the product had been +shipped but before the company filed its third quarter FY 2012 financial results. In +particular – on July 24, 2012 – the Spine Sales VP forwarded the Spine CFO an email + +8 + + +describing the transaction along with a series of emails containing prior discussions +between him and the Brazilian Distributor’s President. +37. The Spine CFO replied to the Spine Sales VP and the Spine President – “[Spine Sales +VP], can you please address how we ended up with a full year to pay for the June order. I +have a hard time managing that with a lot of pressure to reduce our ballooning [Days +Sales Outstanding].” The Spine Sales VP replied, “we accepted this due to the need for +that size of an order.” +38. Despite the contingent nature of the sale and the Spine CFO’s own concerns about how +this transaction would impact the company’s Days Sales Outstanding, the over $2 million +in revenue from this transaction was recognized immediately upon shipping the implants +to the Brazilian Distributor’s U.S. based subsidiary located in Atlanta, Georgia. +39. Orthofix’s recognition of revenue in this regard was improper because the Brazilian +Distributor’s obligation to pay, and the payment terms themselves, were contingent upon +ANVISA approval and, therefore, revenue recognition was inconsistent with Orthofix’s +accounting policy because it did not meet the fixed or determinable criteria or the +collectability criteria. +c. Corporate CFO Became Aware of Issues with Implant Without Instruments +Transactions + +40. The Corporate CFO – soon after beginning in that role in early 2011 – implemented a +general unwritten bad debt policy applicable to both Spine and Orthopedics. The policy +required that any accounts receivable that had been outstanding at least 360 days from the +invoice date of a shipment had to be fully reserved as bad debt. The Corporate CFO, +along with the Corporate Controller and Segment CFOs, were responsible for the +calculation of the bad debt reserve. +41. On August 1, 2012 – two days after Orthofix had filed its Form 10-Q for the second +quarter of FY 2012 and as part of the process for handling Orthofix’s bad debt calculation +– the Corporate Controller emailed the Spine CFO an aging schedule identifying that as +of June 30, 2012 approximately $4 million of amounts owed to OSI was over one year +old.2 +42. The aging schedule contained in this email, however, demonstrated that the allowance for +doubtful accounts as of the second quarter of FY 2012 was only $1.6 million (or 40% of +accounts receivable over 360 days old). The Corporate Controller then wrote “what +doesn’t make sense is that our policy is to reserve all amounts in the [over one year old +bucket].” + +2 Orthofix used the term “360+ day bucket” to denote amounts due over one year old. + +9 + + +43. The Corporate Controller then forwarded the email to the Corporate CFO and wrote the +following: +I spoke with [the Spine CFO] on this. The rationale for not reserving all of the +360+ bucket for [Spine] is that technically the receivable balance from [the +Brazilian Distributor] is not >360 days old since they have extended terms in their +contract. The aging schedule is based on days past the invoice date for all +[accounts receivable]. To further exacerbate the situation, [the Brazilian +Distributor] could not sell the Implants inventory that we sold to them in 2011 +since we were delayed in sending them the instrument sets that they needed to sell +the Implants). This one-year delay was caused by [ANVISA] who required us to +send new instruments (as opposed to our original plan to move used instruments). +44. The Corporate Controller further noted in the email that – based on discussions he had +with the Spine CFO – the Brazilian Distributor planned to make a $4 million payment in +December 2012 that would significantly reduce the 360+ day bucket in the year-end +aging presentation. +45. Unbeknownst to the Corporate Controller and the Spine CFO, however – and as another +example of Orthofix’s inadequate internal accounting controls surrounding distributor +revenue recognition – the Brazilian Distributor had already informed the Spine President +and Spine Sales VP that it would only pay $1.6 million in December 2012 and another +$2.6 million in February 2013 because the 105 instrument sets had not been delivered in +full in April 2012. +46. Through this email, the Corporate CFO was on notice that Orthofix had a significant +outstanding receivable associated with implants for which there had been an at least one +year delay in sending the corresponding instrument sets. +47. The Corporate CFO, however, did not take steps to investigate the circumstances of the +original transaction and to determine whether the revenue associated with the original +transaction had been properly recognized. As noted earlier, Orthofix improperly +recognized $5 million of revenue because the implants could not be used in patients +without the instruments. As such, payment timing and terms were contingent upon the +instrument sets being made available and, therefore, revenue recognition was inconsistent +with Orthofix’s accounting because it did not meet the fixed or determinable criteria or +the collectability criteria. +48. Orthofix had inadequate internal accounting controls to evaluate the impact of these facts +on the revenue that was previously recognized on this transaction. In particular, Orthofix +did not establish and maintain procedures to reasonably ensure an assessment by the +Company’s finance and accounting department of deviations from contractually +established terms. +d. Orthofix Improperly Recognized Even More Revenue with the Brazilian +Distributor in Fall 2012 + + +10 + + +49. In the fall of 2012, Orthofix improperly recognized even more revenue with the Brazilian +Distributor. By the fall of 2012, the Spine President had left the company and was +replaced in that role by the Corporate CFO (hereinafter “New Spine President/Prior +Corporate CFO”).3 +50. Beginning in September 2012, the Spine Sales VP solicited the Brazilian Distributor to +purchase approximately $1.5 million of Orthofix implants that had not yet been approved +by ANVISA. Thus – as with the summer 2012 sales transaction with the Brazilian +Distributor – this product could not be shipped into Brazil until that approval occurred. +51. The Brazilian Distributor indicated that it would agree to the purchase but only under the +following two conditions: (i) the ability to renegotiate the payment terms if ANVISA +approval did not occur by the end of 2012 (just three months away) and (ii) one year to +pay for the product. Neither Orthofix nor the Brazilian Distributor knew when ANVISA +would grant approval. +52. Despite the conditions noted above, Orthofix recognized the revenue from this +transaction immediately upon shipping the implants to the Brazilian Distributor’s +warehouse located in the United States. In particular, Orthofix’s recognition of revenue +in this regard was improper because the Brazilian Distributor’s obligation to pay, and the +payment terms themselves, were contingent upon ANVISA approval and, therefore, +revenue recognition was inconsistent with Orthofix’s accounting policy because it did not +meet the fixed or determinable criteria or the collectability criteria. +53. This improper recognition of revenue – in combination with the improper recognition of +revenue for other transactions in FY 2012 described previously and later – caused +Orthofix’s financial results in its FY 2012 Form 10-K (and corresponding earnings +release) to be materially misstated. +e. The Brazilian Distributor’s President Described Transactions to Spine CFO and +Spine Sales VP +54. As discussed previously, in March 2012, the Spine President and Spine Sales VP +discussed a payment plan proposal such that the Brazilian Distributor would pay +approximately $4.2 million of its amounts owed by the end of 2012. The Brazilian +Distributor responded that it would only agree to this payment if all of the 105 instrument +sets were delivered by the end of April 2012. When these instrument sets were not +delivered by April 2012, the Brazilian Distributor informed the Spine President and Spine +Sales VP in June 2012 that it would only pay $1.6 million in December 2012 and $2.6 +million in February 2013. + +3 The then-CFO of Orthofix’s Orthopedics Segment replaced the New Spine President/Prior Corporate CFO +as the Corporate CFO. + +11 + + +55. On December 1, 2012, the Spine Sales VP emailed the Brazilian Distributor’s President +and wrote “I believe you have been speaking with [the Spine CFO] about the end of the +year payment of $4 million. They are all extremely anxious about this. This has to +happen as agreed.” +56. The Brazilian Distributor’s President replied “No [the Spine CFO] did not communicate +with me, certainly because it is quite clear this was agreed with [the Spine President]. +We will pay $1.6 million in December.” +57. The Spine Sales VP forwarded this email to the Spine CFO, writing “this is a disaster,” +despite the fact that the Spine Sales VP had been informed in June 2012 that the Brazilian +Distributor would only pay $1.6 million in December 2012. The Spine CFO then +forwarded the above email to the New Spine President/Prior Corporate CFO and wrote: +[The Brazilian Distributor’s President] says below they made a payment agreement +with [the Spine President] . . .I have no idea what may have been promised. I do +know that I fought pricing and terms concessions, but those were ultimately given at +some point despite my denials. This was commonplace. I was told that I was the +decision maker on pricing and terms and then secretly overridden. [The Spine Sales +VP] did it all of the time – don’t know how much [the Spine President] was involved. +58. On December 7, 2012, the Brazilian Distributor’s President travelled to the U.S. to meet +with the Spine CFO and Spine Sales VP. At that meeting, the Brazilian Distributor’s +President provided a Power Point presentation to the Spine CFO and Spine Sales VP with +a detailed chronology of events on each of the sales transactions described previously, +including the implant-without-instruments transactions, the June and September 2012 +transactions, and the payment plan related issues. +59. The Spine CFO subsequently forwarded the Power Point presentation to the New Spine +President/Prior Corporate CFO. The Spine CFO did not forward this Power Point +presentation to the company’s then Corporate CFO and did not reassess the revenue that +the company had previously recognized and disclosed in its financial statements. +60. The New Spine President/Prior Corporate CFO failed to confirm that this Power Point +presentation had been brought to the attention of the then Corporate CFO and did not +separately confirm that the transactions outlined in the Power Point presentation had been +separately discussed with the Corporate CFO. Moreover, the New Spine President/Prior +Corporate CFO failed to evaluate the impact that the information contained in the Power +Point had on the revenue that the company had previously recognized and disclosed in its +financial statements when he served as the company’s Corporate CFO. +61. Ultimately, Orthofix filed its FY 2012 Form 10-K in March 2013 and took no steps to +correct the revenue that it had previously improperly recognized on the implants-without +instruments, Firebird, and September 2012 transactions with the Brazilian Distributor. +Moreover, Orthofix did not adequately assess the collectability of the significant +receivables it had with the Brazilian Distributor. + +12 + + +62. As a result of this and other errors described below, Orthofix materially misstated its +financial results in its FY 2012 Form 10-K and corresponding earnings release. +E. Orthofix Improperly Recognized Revenue with Other Spine International Distributors + +a. Introduction + +63. In addition to the Brazilian Distributor, OSI had relationships with other international +distributors including in Italy, Spain, and Mexico. In total, these four international +distributors accounted for over 70% of OSI’s revenue and almost 4% of Orthofix’s +consolidated revenue in FY 2011 and 2012. +64. Orthofix improperly recognized revenue with each of these distributors and did not have +adequate internal accounting controls to provide reasonable assurance that transactions +with these distributors were recorded as necessary to permit the preparation of financial +statements in conformity with GAAP. +b. Italy + +65. On October 22, 2011, the Spine President emailed the Company CEO, Corporate CFO, +Spine CFO, and Spine Sales VP concerning the need for OSI to meet its fourth quarter +fiscal year 2011 forecast of $6 million in revenue. The Spine President wrote “if we fail +at this endeavor then the company will be at risk and next year will be Hell on Earth for +all of us.” +66. In early December 2011 – in an attempt to meet Spine’s internal sales targets for the +fourth quarter of FY 2011 – the Spine Sales VP emailed the Italian Distributor and +solicited it to make a $400,000 order. The Italian Distributor’s President responded that +it could make the order if they had extended payment terms of 180 days and the ability +“in case of cash difficulties” to extend those payment terms. Moreover, the Italian +Distributor’s President noted that “it is a very bad moment for Italy.” +67. The Spine CFO was copied on these email exchanges and, despite the specifically +identified financial difficulties in Italy, Orthofix recorded the revenue upon shipment of +the products. This revenue recognition upon shipment was improper because payment +terms were contingent upon timing of the Italian Distributor’s sell-through and payment +receipt of the products and, therefore, revenue recognition was inconsistent with +Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or +the collectability criteria. +c. Spain +68. In early December 2011, the Spine Sales VP, by email, solicited the Spanish Distributor +to make a $300,000 order. The Spanish Distributor noted the difficult conditions in the +Spanish economy at the time. The Spine Sales VP responded that “based on the expected +challenges in Europe due to the instability of the financial institutions,” he could offer +extended payment terms of 180 days for instruments and 150 days for implants. + +13 + + +69. In late December 2011, the Spine Sales VP forwarded this email exchange to the Spine +CFO for his approval of the extended payment terms. The Spine CFO provided his +approval. Orthofix recognized the revenue from this transaction upon shipment of the +products and this was improper because it did not meet the fixed or determinable criteria. +70. In July 2012, the Spine Sales VP, without getting the approval of the Spine CFO, +solicited the Spanish Distributor to place an $810,000 order in which he offered the +Distributor certain concessions, which he characterized as the “deal of the century.” The +concessions included extended payment terms on the order and the right to return +$250,000 of excess distributor inventory that resulted from the order. Orthofix’s +recognition of revenue from this transaction upon shipment of the products was improper +because payment terms and timing were contingent upon certain extra-contractual +concessions and, therefore, revenue recognition was inconsistent with Orthofix’s +accounting policy because it did not meet the fixed or determinable criteria or the +collectability criteria. +d. Mexico +71. In September 2012, the Spine Sales VP, without getting the approval of the Spine CFO, +solicited the Mexican Distributor to place a $300,000 order in which he offered the +Distributor a number of concessions. The concessions included extended payment terms +on the order, and expansion of sales territory and reduction in sales quotas for the next +year. Orthofix’s recognition of revenue from this transaction upon shipment of the +products was improper because payment terms and timing were contingent upon certain +extra contractual concessions and, therefore, revenue recognition was inconsistent with +Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or +the collectability criteria. +F. Orthofix Improperly Accounted for Spinal Stimulation Product Transactions +72. Orthofix’s revenue recognition issues were not just limited to transactions with certain of +its international distributors for spinal products. Orthofix also improperly accounted for +certain domestic distributor transactions in Spine involving spine stimulation products. +73. Beginning in the first quarter of FY 2012, the Spine President began exploring +opportunities to generate more revenue in the domestic spine market by selling spine +stimulation products to wholesale distributors. Prior to this time, Orthofix sold these +products directly to patients, doctors and hospitals. The Spine President began exploring +selling these products directly to wholesale distributors who would then resell them to +doctors and hospitals. +74. At this time, the wholesale market for these products was dominated by an Orthofix +competitor. To draw market share away from this competitor, the Spine President and +Spine CFO determined that they would need to sell Orthofix spinal stimulation products +at deeply discounted prices. + +14 + + +75. Accordingly, the Spine President and Spine CFO decided they would offer the +wholesalers products at deeply discounted prices-per-unit. Moreover, Orthofix paid a +referral fee to the wholesaler that was termed as a “commission.” +76. For example, if Orthofix agreed to sell 100 units for $1,500 per unit, or $150,000, +Orthofix also agreed to pay the wholesaler a commission of 25%, or $37,500, which +essentially reduced the amount being paid for the product to $112,500 ($150,000 less +$37,500). +77. Orthofix improperly treated these commissions as expenses rather than as reductions to +revenue. Orthofix’s accounting treatment was improper because where the vendor does +not receive an identifiable benefit for the commissions, sales discounts such as these are +presumed to be a reduction in the seller’s price pursuant to ASC 605-50-45-2. Thus, +these commissions should have been treated as further price discounts and as a reduction +in revenue. +78. Due to this improper accounting, Orthofix overstated its revenue by approximately $1.7 +million in FY 2012, with the overwhelming majority of this amount (approximately $1.4 +million) being overstated in the third quarter of FY 2012. +79. Moreover, Orthofix improperly recognized revenue upon shipment on two of the spinal +stimulation transactions in which the purchaser was granted a right to exchange the +products for cervical stimulation products. +80. In particular – because Orthofix could not and did not reasonably estimate the revenue +recognition impact of the amount of future returns – Orthofix was precluded from +recognizing revenue upon shipment in the above transactions pursuant to ASC 605-15- +25-1(f). +81. As a result, Orthofix overstated its revenue by over $650,000 in FY 2012, with all of this +revenue being improperly recognized in the third quarter of FY 2012. +G. Orthofix Engaged in Improper Accounting at its Orthopedics Brazilian Subsidiary +82. As noted earlier, Orthofix had two primary business segments during the relevant period +– Spine and Orthopedics. Within Orthopedics, Orthofix had a Brazilian subsidiary +known as Orthofix do Brazil. During the relevant period, the Orthofix do Brazil +subsidiary had inadequate internal accounting controls surrounding revenue recognition +and, as a result, improperly recognized revenue associated with certain distributor +transactions upon shipment. +83. In particular, Orthofix do Brazil used side agreements that included extended payment +terms and other concessions, and therefore, did not meet the revenue recognition +requirements upon shipment of the product. +84. Moreover, Orthofix do Brazil improperly recognized revenue upon shipment in at least +FY 2011 and FY 2012 as a result of providing distributors with rights to both exchange +and return products. + +15 + + +H. Orthofix Improperly Calculated its Excess and Obsolete Reserve for Certain of Its +Inventory +85. During the relevant period, Orthofix calculated an excess and obsolete (E&O) reserve for +its inventory. In essence, the E&O calculation serves as an estimated reserve against +inventory based on – among other things – assumptions related to the marketability or +saleability of inventory on hand. +86. During the relevant period, Orthofix improperly calculated or accounted for its E&O +reserve in two respects. First – in the third quarter of FY 2011 – Orthofix launched a new +product called FORZA. Orthofix experienced issues with FORZA’s launch and therefore +took an E&O reserve totaling approximately $1.2 million in the second quarter of fiscal +year 2012. +87. In the fourth quarter of fiscal year 2012, a new E&O calculation policy was implemented +at Spine to conform the E&O calculation performed at another Orthofix segment since at +least 2007. +88. The updated E&O policy, among other things, provided that an E&O reserve would not +be taken in the first four years of a product’s launch. Applying that policy, in the fourth +quarter of FY 2012 the Spine CFO reversed the reserve originally booked in the second +quarter of FY 2012 (which resulted in a $1.2 million gross margin increase in the fourth +quarter of FY 2012). +89. On restatement, however, Orthofix concluded that the FORZA E&O reserve should not +have been reversed due to the fact that issues with FORZA’s launch had indeed impacted +demand. +90. Second, in connection with the company’s restatement process and based on a previously +known design deficiency in the company’s controls over the computation and recording +of its E&O reserve, Orthofix reviewed the broader methodology it used to compute and +record its inventory reserve. Based on this review, Orthofix determined that it had +improperly made reductions to previously recorded reserves based on changes in +forecasted demand in contravention of ASC 330.4 +91. As a result of its improper reserve accounting for this broader issue and the FORZA issue +noted above, Orthofix understated its E&O reserve by $3.4 million and $5.6 million in +FY 2011 and 2012, respectively. +I. Orthofix’s Restatement + +4 ASC Topic 330, Inventory (specifically ASC 330-10-35-14) states that a write-down below cost at the +close of a fiscal year creates a new cost basis. + +16 + + +92. In late March 2014, Orthofix restated its financial statements for the first quarter of fiscal +year 2013, all quarterly and annual periods in fiscal years 2012 and 2011, and the annual +period for fiscal year 2010. +93. As a result of certain improper distributor revenue recognition practices, Orthofix +announced that it had overstated – for example – fiscal year 2011 net sales by +approximately 6% and operating income by over 430%. Moreover, in the restatement, +Orthofix acknowledged certain material weaknesses in its internal control over financial +reporting. +VIOLATIONS +94. 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. +95. 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. +96. Section 13(a) of the Exchange Act requires issuers to file such periodic and other reports +as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of +annual, current, and quarterly reports, respectively. In addition to the information +expressly required to be included in such reports, Rule 12b-20 of the Exchange Act +requires issuers to add such further material information, if any, as may be necessary to +make the required statements, in the light of the circumstances under which they are +made not misleading. “The reporting provisions of the Exchange Act are clear and +unequivocal, and they are satisfied only by the filing of complete, accurate, and timely +reports.” SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) (citing SEC v. +IMC Int’1, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974)). A violation of the reporting +provisions is established if a report is shown to contain materially false or misleading +information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). +97. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the +Exchange Act requires issuers to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit the preparation of financial statements in conformity with generally +accepted accounting principles. +98. As a result of the conduct described above, Orthofix 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. + +17 + + +COOPERATION AND REMEDIAL ACTION +In determining to accept Respondent’s Offer, the Commission considered remedial acts +undertaken by Orthofix, including its enhancement of internal controls, the restructuring and +strengthening of the Company’s accounting and finance group (which includes retention of +additional accounting personnel), and Orthofix’s cooperation with the staff’s investigation. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, Respondent cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $8,250,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment +must be made in one of the following three ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request +5 +; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Orthofix as a Respondent in these proceedings, and the file number of these proceedings; a copy + +5 + The minimum threshold for transmission of payment electronically is $1,000,000. For amounts below the +threshold, respondents must make payments pursuant to option (2) or (3) above. + +18 + + +of the cover letter and check or money order must be sent to Antonia Chion, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549- +5720. +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph IV.B above. This Fair Fund may receive +the funds from and/or be combined with fair funds established for civil penalties paid by other +respondents for conduct arising in relation to the violative conduct at issue in this Orthofix +proceeding, in order for the combined fair funds to be distributed to harmed investors affected by +the violative conduct. Amounts ordered to be paid as civil money penalties pursuant to this Order +shall be treated as penalties paid to the government for all purposes, including all tax purposes. +To preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related +Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction +of any award of compensatory damages by the amount of any part of Respondent’s payment of a +civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants +such a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + + Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3846.txt b/raw/aaer/2017/AAER-3846.txt new file mode 100644 index 0000000000000000000000000000000000000000..d877c4ebcce1270daacaa9c1ad3161d80ac8c8a1 --- /dev/null +++ b/raw/aaer/2017/AAER-3846.txt @@ -0,0 +1,565 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10282 / January 18, 2017 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79817 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3846 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17792 + +In the Matter of +JEFFREY HAMMEL, CPA +Respondent. + ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(E) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C2 of the + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 + + + +Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice against Jeffrey Hammel, CPA (“Hammel” 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 him and the subject matter of these proceedings, which are +admitted, and except as provided in Section IV.G. herein, Respondent consents to the entry of +this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to +Section 8A of the Securities Act, Sections 4C and 21C of the Securities Exchange Act of 1934, +and Rule 102(e) of the Commission’s Rules of Practice, Making Findings and Imposing +Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: +SUMMARY + This matter concerns the conduct of Jeffrey Hammel (“Hammel”) in connection with a +financial restatement that occurred at Orthofix International, N.V. (“Orthofix”). Hammel served +as the Chief Financial Officer (“CFO”) of Orthofix’s largest segment, its Spine Segment +(“Spine”). In that role, Hammel was responsible for the accounting and financial functions of +Spine, including preparing its operating results (which were included in Orthofix’s public filings +with the Commission). + From early 2011 to late 2012, Hammel recorded revenue on several transactions that +resulted in the company making material misstatements in its public filings. In particular, +improper revenue was recorded on three transactions with one of Orthofix’s largest international +distributors, including one transaction in which the company sold a product that could not be +resold due to Orthofix’s delay in providing a required associated product and two transactions in +which payment for the product was contingent on approval of the product by a regulatory body. +This recording of revenue upon shipment of the products for these three transactions was + +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 and are not binding on any other person or +entity in this or any other proceeding. + +3 + + + +improper because it did not meet the fixed or determinable or collectability criteria for revenue +recognition. + As part of his job responsibilities, Hammel annually signed management representation +letters on behalf of Spine that were provided to Orthofix’s independent auditors. Prior to the +fiscal year 2012 audit of the company’s financials, Hammel was aware of transactions with +extended credit terms and/or oral agreements. Despite his awareness in this regard, Hammel +signed a letter to the company’s independent auditors in connection with the company’s fiscal +year 2012 audit representing that he was not aware of any transactions with extended credit +terms and/or oral agreements that had not been disclosed to the company’s independent auditors. + By engaging in the foregoing conduct, Hammel was a cause of Orthofix’s violations of +Securities Act Sections 17(a)(2) and 17(a)(3) and the reporting, books and records, and internal +controls provisions of the federal securities laws. Hammel also violated Exchange Act Rules +13b2-2(b) and 13b2-1. +RESPONDENT +Jeffrey Hammel, 50, served as the Chief Financial Officer of Orthofix’s then-largest +segment, its Spine Segment, from July 2010 to approximately February 2013. Hammel resigned +from Orthofix in February 2013 prior to the issuance of the FY 2012 financial statements by +Orthofix. Hammel is a Certified Public Accountant in the state of Ohio and maintained an active +license until the license lapsed in 2008. +FACTS +A. Orthofix’s Business and Hammel’s Responsibilities + +1. Orthofix’s business was primarily divided into two Global Business Segments during the +relevant period – Spine and Orthopedics. Spine was Orthofix’s largest segment and +contributed two-thirds of the company’s overall revenues. +2. Spine had several operating divisions during the relevant period including Orthofix +Spinal Implants (“OSI”), which was responsible for international sales of spinal implants +and related instruments. +3. From approximately July 2010 to February 2013, Hammel served as the Chief Financial +Officer of the Spine Segment. In that role, Hammel was responsible for the accounting +and financial functions of Spine, including preparing its operating results (which were +included in Orthofix’s public filings with the Commission). Moreover, Hammel annually +signed management representation letters and certifications on behalf of Spine that were +provided to Orthofix’s independent auditors. +4. Hammel reported directly to Spine’s President, a salesperson, during the relevant period. +The Spine President was in charge of Spine’s sales and overall management and had + +4 + + + +several sales persons who worked under him, including an individual who served as +Spine’s Vice President of Global Sales and Development (“Spine Sales VP”). +5. While Hammel reported directly to the Spine President during the relevant period, he also +had dotted line reporting responsibility to Orthofix’s Corporate CFO. The Corporate +CFO was responsible for the preparation of Orthofix’s public filings, including its +consolidated financial results. +6. Spine sold various products including spinal and cervical implants and related +instruments. Spine sold the above products through two primary methods: (i) sales of its +products to U.S. and international distributors who then sold the products to hospitals and +physicians, and (ii) sales of its products directly to hospitals and physicians in the U.S. +B. Revenue Recognition Practices +7. With limited exceptions, Orthofix recognized revenue during the relevant period based on +the “sell-in” method, which provides for revenue recognition upon shipment of products +to the distributor. +8. ASC 605-10-25-1 provides that revenue may be recognized only when it is both realized +or realizable and earned. Consistent with the authoritative literature, Orthofix’s financial +statements disclosed four criteria as its revenue recognition policy. +9. The four criteria are: (i) persuasive evidence of an arrangement exists; (ii) delivery has +occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed and +determinable; and (iv) collectability is reasonably assured. +C. Hammel Improperly Recorded Revenue on Transactions with Brazilian Distributor + +a. Implants without Instruments Transactions +10. OSI had several international distributors during the relevant period, but its largest +distributor of product was located in Brazil (hereinafter “the Brazilian Distributor”). In +fact, for eight of the nine quarters from Q1 2011 to Q1 2013, the Brazilian Distributor +was the Company’s second largest customer on a revenue per quarter basis. +11. Entering 2011, Orthofix (and OSI) had a receivable of approximately $5 million from the +Brazilian Distributor from prior sales. The Brazilian Distributor forecasted that it would +purchase approximately $8.5 million of Orthofix implants and instruments in FY 2011. +12. Prior to this time, the Brazilian Distributor agreed to purchase implants along with +instrument sets previously used in surgeries from Orthofix. Implants and instruments +were interconnected because the implants could not be used in patients without related +instrument sets. + +5 + + + +13. At this time, however, the Brazilian Distributor could no longer purchase previously used +instrument sets because ANVISA (the Brazilian equivalent of the U.S. Food and Drug +Administration) imposed new regulations prohibiting the importation of used instrument +sets. +14. Orthofix (and OSI) did not have the new instrument sets (105 in total) available to be +shipped along with the implants it shipped to the Brazilian Distributor. Rather than +waiting until the new instrument sets were available, Orthofix – in FY 2011 – shipped +approximately $5 million in implants to the Brazilian Distributor despite the fact that +these implants could not be used in patients without the new instrument sets. +15. Orthofix recognized the approximately $5 million revenue upon shipment of the above +implants. This recognition of revenue was improper as delivery of the interconnected +product – the instruments – had not yet occurred. As such, payment timing and terms +were contingent upon the instrument sets being made available and therefore, revenue +recognition was inconsistent with Orthofix’s accounting policy because it did not meet +the fixed or determinable criteria or the collectability criteria. +16. This improper recognition of revenue caused Orthofix’s financial statements to be +materially misstated in its Forms 10-Q for the second and third quarters of FY 2011 and +its year-end Form 10-K for FY 2011 and corresponding earnings releases. +17. As of the summer of 2012, virtually none of the 105 instrument sets had been shipped to +the Brazilian Distributor. Thus, the Brazilian Distributor refused to pay for the implants +because those implants that Orthofix had previously shipped to the Brazilian Distributor +could not be used without the instrument sets. +18. Hammel became aware subsequent to the shipment of the implants that the corresponding +105 instrument sets had not been delivered, but did not take sufficient steps to evaluate +the impact of the continued non-delivery of the instrument sets on the previously +recognized revenue. +19. In fact, as of August 2012 all of the corresponding instrument sets had still not been +delivered and – at that time – Hammel knew that (i) the Brazilian Distributor had been +provided extended payment terms to pay for the implants and (ii) the Brazilian +Distributor could not sell the implants because Orthofix was delayed in sending the +corresponding instrument sets. +b. Firebird Transaction + +20. In late May 2012, the Spine President discussed a product launch plan with the Brazilian +Distributor to purchase approximately $2.5 million of a new Orthofix product called +Firebird. This product, however, had not yet been approved by ANVISA and, therefore, +could not be shipped into Brazil until such approval was obtained. + +6 + + + +21. The Brazilian Distributor agreed to place the order on the following conditions: (i) one +year to pay for the implants from the date of anticipated ANVISA approval; (ii) 210 days +to pay on all subsequent product orders; and (iii) all corresponding instrument sets +needed to be available once ANVISA approved the implants. No one knew when +ANVISA would grant approval. +22. At this time, Spine had an unwritten policy that modifications to the terms in existing +distributor agreements be approved by Hammel. The Spine Sales VP and Spine President +agreed to the Firebird order terms without approval from Hammel. +23. Hammel learned of this transaction a few weeks after the product had been shipped to the +warehouse but before the company filed its third quarter FY 2012 financial results. In +particular – on July 24, 2012 – the Spine Sales VP forwarded Hammel an email +describing the transaction along with a series of emails containing prior discussions +between him and the Brazilian Distributor’s President. +24. Hammel replied to the Spine Sales VP – “[Spine Sales VP], can you please address how +we ended up with a full year to pay for the June order. I have a hard time managing that +with a lot of pressure to reduce our ballooning [Days Sales Outstanding].” The Spine +Sales VP replied, “we accepted this due to the need for that size of an order.” +25. Despite the contingent nature of the sale and Hammel’s own concerns about how this +transaction would impact the company’s Days Sales Outstanding, Hammel recognized +over $2 million in revenue from this transaction immediately upon shipping the implants +to the Brazilian Distributor’s warehouse located in the United States. +26. The recognition of revenue here was improper because the Brazilian Distributor’s +obligation to pay, and the payment terms themselves, were contingent upon ANVISA +approval and, therefore, revenue recognition was inconsistent with Orthofix’s accounting +policy because it did not meet the fixed or determinable criteria or the collectability +criteria. +c. Fall 2012 Implants Transaction + +27. Beginning in September 2012, the Spine Sales VP solicited the Brazilian Distributor to +purchase approximately $1.5 million of Orthofix implants that had not yet been approved +by ANVISA. Thus – as with the summer 2012 sales transaction with the Brazilian +Distributor – this product could not be shipped into Brazil until that approval occurred. +28. The Brazilian Distributor indicated that it would agree to the purchase but only under the +following two conditions: (i) the ability to renegotiate the payment terms if ANVISA +approval did not occur by the end of 2012 (just three months away) and (ii) one year to +pay for the product. +29. The Spine Sales VP forwarded an email to Hammel concerning the transaction terms for +his approval. Hammel approved the transaction and recognized the revenue from this + +7 + + + +transaction immediately upon shipping the implants to the Brazilian Distributor’s +warehouse located in the United States. +30. This revenue recognition was improper because the Brazilian Distributor’s obligation to +pay, and the payment terms themselves, were contingent upon ANVISA approval and, +therefore, revenue recognition was inconsistent with Orthofix’s accounting policy +because it did not meet the fixed or determinable criteria or the collectability criteria. +d. Hammel Did Not Reassess Revenue Recognition After Meeting with Brazilian +Distributor +31. In December 2012, Hammel learned from an email sent to him by the Spine Sales VP +that the Brazilian Distributor’s President had in June 2012 informed the then-Spine +President and Spine Sales VP that it would not pay $4 million of its amounts payable by +the end of December 2012. Rather, the Brazilian Distributor’s President informed the +then Spine President and Spine Sales VP that it would only pay $1.6 million of its +amounts payable by December 2012 and the remainder by February 2013. +32. On December 1, 2012, Hammel forwarded the email to the New Spine President (who +had previously served as the company’s Corporate CFO) and wrote: +[The Brazilian Distributor’s President] says below they made a payment agreement +with [the Spine President] . . . I have no idea what may have been promised. I do +know that I fought pricing and terms concessions, but those were ultimately given at +some point despite my denials. This was commonplace. I was told that I was the +decision maker on pricing and terms and then secretly overridden. [The Spine Sales +VP] did it all of the time – don’t know how much [the Spine President] was involved. +33. On December 7, 2012, the Brazilian Distributor’s President travelled to the U.S. to meet +with Hammel and the Spine Sales VP. At that meeting, the Brazilian Distributor’s +President provided a Power Point presentation with a detailed chronology of events on +several sales transactions involving the Brazilian Distributor, including the implant- +without-instruments transactions, the June and September 2012 transactions, and the +payment plan related issues. +34. After this December 7 meeting, Hammel did not reassess the revenue that the company +had previously recognized and disclosed in its financial statements with the Brazilian +Distributor. Moreover, Hammel did not forward or provide the Power Point presentation +to Orthofix’s then Corporate CFO. +35. As a result of this and other errors described previously and below, Orthofix materially +misstated its financial results in its FY 2012 Form 10-K and corresponding earnings +release. + + +8 + + + +D. Hammel Improperly Recognized Revenue with Italian and Spanish Distributors + +36. In addition to the Brazilian Distributor, OSI had relationships with other international +distributors including in Italy and Spain. +37. During his tenure as Spine’s CFO, Hammel became aware of extended payment terms +being granted to OSI’s Italian and Spanish distributors as a result of those distributors +experiencing financial difficulties. Hammel did not, however, evaluate the impact of +these facts on Orthofix’s revenue recognition. +38. For example, in early December 2011, the Spine Sales VP emailed the Italian Distributor +and solicited it to make a $400,000 order. The Italian Distributor’s President responded +that it could make the order if they had extended payment terms of 180 days and the +ability “in case of cash difficulties” to extend those payment terms. +39. Hammel was copied on these email exchanges and – despite the specifically identified +financial difficulties in Italy – recognized the revenue associated with this order upon +shipment. This revenue recognition was improper because payment terms were +contingent upon timing of the Italian Distributor’s sell-through and payment receipt of +the products and, therefore, revenue recognition was inconsistent with Orthofix’s +accounting policy because it did not meet the fixed or determinable or collectability +criteria. +40. Similarly, in early December 2011, the Spine Sales VP solicited the Spanish distributor to +make a $300,000 order. The Spanish Distributor noted the difficult conditions in the +Spanish economy at the time. The Spine Sales VP responded that “based on the expected +challenges in Europe due to the instability of the financial institutions,” he could offer +extended payment terms of 180 days for instruments and 150 days for implants. +41. In late December 2011, the Spine Sales VP forwarded the email exchange to Hammel for +his approval of the extended payment terms. Hammel provided this approval and +recognized the revenue from this transaction upon shipment of the products. This +revenue recognition was improper because it did not meet the fixed or determinable or +collectability criteria. +E. Hammel Incorrectly Accounted for Certain Spinal Stimulation Product Transactions +42. Beginning in the first quarter of FY 2012, the Spine President began exploring +opportunities to generate more revenue in the domestic spine market by selling spine +stimulation products directly to wholesale distributors who would then resell them to +doctors and hospitals. Prior to this time, Orthofix sold these products directly to doctors +and hospitals. +43. At this time, the wholesale market for these products was dominated by an Orthofix +competitor. To draw market share away from this competitor, the Spine President and +Hammel determined to sell Orthofix spinal stimulation products at deeply discounted + +9 + + + +prices-per-unit to the wholesalers, and pay a referral fee to the wholesaler that was +termed a “commission.” +44. Hammel accounted for these commissions as expenses rather than as reductions to +revenue. This accounting treatment was improper because where the vendor does not +receive an identifiable benefit for the commissions, sales discounts such as these are +presumed to be a reduction in the seller’s price pursuant to ASC 605-50-45-2. Thus, +these commissions should have been treated as further price discounts and as a reduction +in revenue. +45. Due to this improper accounting, Orthofix overstated its revenue by approximately $1.4 +million in the third quarter of FY 2012, and a total of approximately $1.7 million in FY +2012. +46. Moreover, Hammel was aware of two spinal stimulation transactions in which the +purchasers were granted rights to exchange the products for cervical stimulation products. +47. Because Orthofix could not and did not reasonably estimate the revenue recognition +impact of the amount of future returns, Orthofix was precluded from recognizing revenue +upon shipment in the above transactions pursuant to ASC 605-15-25-1(f). As a result, +Orthofix overstated its revenue by over $650,000 in the third quarter of FY 2012. +F. Hammel Made an Inaccurate Representation to Orthofix’s Independent Auditors +48. As of the company’s fiscal year 2012 audit – and as described by the conduct above – +Hammel was aware that the company had entered into transactions with extended +payment terms and that the company had made certain oral agreements such as the fact +that the Brazilian Distributor’s payment for certain products was contingent on ANVISA +approval. +49. Nevertheless, Hammel – in connection with an audit of the company’s FY 2012 financial +statements – represented through a February 15, 2013 management representation letter4 +provided directly to the independent auditors that: +a. All significant oral agreements were made available to the auditors; +b. There were no orders with extended credit terms; and +c. All sales terms (express or implied), including all rights of returns were disclosed. + +50. Hammel provided the misleading representation at the direction of a company officer or +director, namely, the company’s then-Corporate CFO. + +4 Hammel signed the management representation letter after he resigned from the company. + +10 + + + +G. Orthofix’s Restatement +51. Orthofix materially misstated several of its annual and quarterly filings and +corresponding earnings releases, failed to make and keep books and records which, in +reasonable detail, accurately and fairly reflected the transactions and dispositions of the +assets of the issuer, and failed to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurance that transactions are recorded as +necessary to permit the preparation of financial statements in conformity with generally +accepted accounting principles. +52. Accordingly – in late March 2014 – Orthofix restated its financial statements for the first +quarter of fiscal year 2013, all quarterly and annual periods in fiscal years 2012 and 2011, +and the annual period for fiscal year 2010 as a result of misconduct. Orthofix also +acknowledged certain material weaknesses in its internal controls over financial +reporting. +VIOLATIONS +53. 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. +54. 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. +55. Exchange Act Section 13(a) and Rules 13a-1, 13a-11, and 13a-13 thereunder require +issuers to file such periodic and other reports as the Commission may prescribe and in +conformity with such rules as the Commission may promulgate. Exchange Act Rules +13a-1, 13a-11, and 13a-13 require the filing of annual, current, and quarterly reports, +respectively. 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. +56. Exchange Act Section 13(b)(2)(A) requires issuers to “make and keep books, records, +and accounts, which, in reasonable detail, accurately and fairly reflect the transactions +and dispositions of the assets of the issuer.” Exchange Act Section 13(b)(2)(B) requires +issuers to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of financial statements in conformity with generally accepted accounting +principles. +57. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or +causing to be falsified, any book, record, or account subject to Exchange Act Section +13(b)(2)(A). + +11 + + + +58. Exchange Act Rule 13b2-2(b) prohibits any officer or director of an issuer or any other +person acting under the direction thereof from directly or indirectly taking any action to +mislead an accountant engaged in the performance of an audit if that person knew or +should have known that such action, if successful, could result in rendering the issuer’s +financial statements materially misleading. +59. As a result of the conduct described above, Hammel was a cause of Orthofix’s 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, 13a-11, and 13a-13 thereunder. +Hammel also willfully5 violated Exchange Act Rules 13b2-1 and 13b2-2(b). +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e)(1(iii) of the Commission’s Rules of Practice, it is hereby +ORDERED, effectively immediately, that: +A. Hammel shall cease and desist from committing or causing any violations and any future +violations of Securities Act Section 17(a)(2) and 17(a)(3) and Exchange Act Sections +13(a), 13(b)(2)(A), 13(b)(2)(B), and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and +13b2-2(b) thereunder. +B. Hammel is denied the privilege of appearing or practicing before the Commission as an +accountant. +C. After two years from the date of this order, Respondent may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that +Respondent’s work in his/her practice before the Commission will be +reviewed either by the independent audit committee of the public company + +5 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)). + + +12 + + + +for which he/she works or in some other acceptable manner, as long as +he/she practices before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the +Commission that: + (a) Respondent, or the public accounting firm with which he/she is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + (b) Respondent, or the registered public accounting firm with which +he/she is associated, has been inspected by the Board and that +inspection did not identify any criticisms of or potential defects in +the respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his/her responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. +D. The Commission will consider an application by Respondent to resume appearing or +practicing before the Commission provided that his/her state CPA license is current and +he/she has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional +conduct, or qualifications to appear or practice before the Commission. +E. Within 30 days of the entry of this Order, Hammel shall pay a civil money penalty in the +amount of $20,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be +made in one of the following three ways: + +13 + + + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request +6 +; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Jeffrey Hammel as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Antonia Chion, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549- +5720. +F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair Fund +is created for the penalties referenced in paragraph IV.E above. This Fair Fund may be +added to or combined with the fair fund established in In the Matter of Orthofix +International, N.V., (AP File No. 3-17791; Release No. 10281, January 18, 2017) and/or +may be added to or combined with fair funds established for the civil penalties paid by other +Respondents for conduct arising in relation to the violative conduct at issue in this +proceeding or the Orthofix proceeding, in order for the combined fair funds to be distributed +to harmed investors affected by the same violative conduct. 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 + +6 + The minimum threshold for transmission of payment electronically is $1,000,000. For amounts below the +threshold, respondents must make payments pursuant to option (2) or (3) above. + +14 + + + +to change the amount of the civil penalty imposed in this proceeding. For purposes of +this paragraph, a “Related Investor Action” means a private damages action brought +against Respondent by or on behalf of one or more investors based on substantially the +same facts as alleged in the Order instituted by the Commission in this proceeding. +G. It is further ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true +and admitted by Respondent, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondent under this Order or any other +judgment, order, consent order, decree or settlement agreement entered in connection +with this proceeding, is a debt for the violation by Respondent of the federal securities +laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) +of the Bankruptcy Code, 11 U.S.C. §523(a)(19). +By the Commission. + + Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3847.txt b/raw/aaer/2017/AAER-3847.txt new file mode 100644 index 0000000000000000000000000000000000000000..687252950c144f912e686c8fdebd299cb7d9ef80 --- /dev/null +++ b/raw/aaer/2017/AAER-3847.txt @@ -0,0 +1,360 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79819 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3847 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17793 + +In the Matter of +BRIAN MCCOLLUM +Respondent. + 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 REMEDIES + +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 Brian McCollum (“McCollum” 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 him and the subject matter of these proceedings, which are +admitted, and except as provided in Section IV.F herein, 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 Cease-and-Desist Orders and Remedies +(“Order”), as set forth below. + + + +III. +2 + + + +On the basis of this Order and Respondent’s Offer, the Commission finds that: +SUMMARY + This matter concerns the role of Brian McCollum (“McCollum”) in a financial +restatement that occurred at Orthofix International, N.V. (“Orthofix”) as a result of misconduct +from at least 2011 through mid-2013 (“the relevant period”). From March 2011 to November +2012, McCollum served as the company’s Chief Financial Officer (“CFO”) and, beginning in +November 2012, left the CFO role to become the President of Orthofix’s Spine Segment. +The majority of this misconduct that caused the restatement occurred at Orthofix’s then- +largest segment, its Spine segment (“Spine”). In particular, Orthofix improperly recognized +revenue associated with several transactions with Spine’s distributors, including its largest +international distributor during the relevant period. As a result of its misconduct, Orthofix +restated its financial results for the first quarter of fiscal year 2013, all reporting periods in fiscal +years 2012 and 2011, and its annual reporting period in fiscal year 2010. + During the relevant period, McCollum received notice indicating that Orthofix had +improperly recognized revenue on a significant transaction with its largest international +distributor and certain internal controls issues at the company. In response, however, McCollum +failed to investigate the improperly recognized revenue and made an improper Sarbanes-Oxley +Section 302 certification. Moreover, McCollum received bonuses during the 12-month periods +following the filings containing financial results that Orthofix has restated as a result of +misconduct and has not reimbursed Orthofix for those bonuses. +RESPONDENT +Brian McCollum, 40, served as Orthofix’s Chief Financial Officer from March 2011 +through November 2012 and then served as the President of Orthofix’s Spine Segment from +November 2012 until July 2013. McCollum is no longer employed at Orthofix. +FACTS +A. Orthofix’s Business and McCollum’s Responsibilities + +1. Orthofix’s business was primarily divided into two Global Business Segments during the +relevant period – Spine and Orthopedics. Spine was Orthofix’s largest segment and +contributed two-thirds of the company’s overall revenues. +2. Spine had several operating divisions during the relevant period including Orthofix +Spinal Implants (“OSI”), which was responsible for international sales of spinal implants +and related instruments. +3. During his tenure as Orthofix’s CFO, McCollum was responsible for the preparation of +Orthofix’s public filings, including its consolidated financial results. +3 + + + +4. During his tenure as the Spine Segment President, McCollum was in charge of Spine’s +sales and overall management. In his role as Spine Segment President, several persons +reported to him including the Chief Financial Officer of the Spine Segment (“Spine +CFO”). +5. Spine sold various products including spinal and cervical implants and related +instruments. The instruments and implants were interconnected as implants could not be +used in patients without functioning instrument sets. +6. Spine sold the above products through two primary methods: (i) sales of its products to +U.S. and international distributors who then sold the products to hospitals and physicians +and (ii) sales of its products directly to hospitals and physicians in the U.S. +B. Revenue Recognition Practices +7. With limited exceptions, Orthofix recognized revenue during the relevant period based on +the “sell-in” method, which provides for revenue recognition upon shipment of products +to the distributor. +8. ASC 605-10-25-1 provides that revenue may be recognized only when it is both realized +or realizable and earned. Consistent with the authoritative literature, Orthofix’s financial +statements disclosed four criteria as its revenue recognition policy. +9. The four criteria are: (i) persuasive evidence of an arrangement exists; (ii) delivery has +occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed and +determinable; and (iv) collectability is reasonably assured. +C. Orthofix Improperly Records Revenue by Selling Implants without Instrument Sets +10. OSI had several international distributors during the relevant period, but its largest +distributor of product was located in Brazil (hereinafter “the Brazilian Distributor”). In +fact, for eight of the nine quarters from Q1 2011 to Q1 2013, the Brazilian Distributor +was the company’s second largest customer on a revenue per quarter basis. +11. Entering 2011, Orthofix had a receivable of approximately $5 million from the Brazilian +Distributor from prior sales. The Brazilian Distributor forecasted that it would purchase +approximately $8.5 million of Orthofix implants and instruments in FY 2011. +12. Prior to this time, Orthofix had sold implants along with used instrument sets rather than +new ones to the Brazilian Distributor. As discussed above, implants and instruments +were interconnected because the implants could not be used in patients without related +instrument sets. +13. At this time, however, the Brazilian Distributor could no longer purchase previously used +instrument sets because ANVISA (the Brazilian equivalent of the U.S. Food and Drug +4 + + + +Administration) imposed new regulations prohibiting the importation of used instrument +sets. +14. Orthofix did not have the new instrument sets (105 in total) available to be shipped along +with the implants it shipped to the Brazilian Distributor. Rather than waiting until the +new instrument sets were available, Orthofix – in FY 2011 – shipped approximately $5 +million in implants to the Brazilian Distributor despite the fact that these implants could +not be used in patients without the new instrument sets. +15. Orthofix recognized the approximately $5 million revenue upon shipment of the above +implants. Orthofix’s recognition of revenue in this regard was improper as delivery of +the interconnected product – the instruments – had not yet occurred. Orthofix knew that +the implants could not be used in patients without the instruments. As such, payment +timing and terms were contingent upon the instrument sets being made available and +therefore, revenue recognition was inconsistent with Orthofix’s accounting policy +because it did not meet the fixed or determinable criteria or the collectability criteria. +16. This improper recognition of revenue caused Orthofix’s financial statements to be +materially misstated in its Forms 10-Q for the second and third quarters of FY 2011 and +its year-end Form 10-K for FY 2011 and corresponding earnings releases. +D. McCollum is Put on Notice of Issues with Implant Without Instruments Transactions + +17. McCollum – soon after becoming Orthofix’s CFO in early 2011 – implemented a general +unwritten bad debt policy applicable to both Spine and Orthopedics. The policy required +that any accounts receivable that had been outstanding at least 360 days from the invoice +date of a shipment had to be fully reserved as bad debt. McCollum, along with the +Corporate Controller and Segment CFOs, were responsible for the calculation of the bad +debt reserve. +18. On August 1, 2012 – two days after Orthofix had filed its Form 10-Q for the second +quarter of FY 2012 and as part of the process for handling Orthofix’s bad debt calculation +– the Corporate Controller emailed the Spine CFO an aging schedule identifying that as +of June 30, 2012 approximately $4 million of amounts owed to OSI was over one year +old. +19. The aging schedule contained in this email, however, demonstrated that the allowance for +doubtful accounts as of the second quarter of FY 2012 was only $1.6 million (or 40% of +accounts receivable over 360 days old). The Corporate Controller then wrote “what +doesn’t make sense is that our policy is to reserve all amounts in the [over one year old +bucket].” +20. The Corporate Controller then forwarded the email to McCollum and wrote the +following: +5 + + + +I spoke with [the Spine CFO] on this. The rationale for not reserving all of the +360+ bucket for [Spine] is that technically the receivable balance from [the +Brazilian Distributor] is not >360 days old since they have extended terms in their +contract. The aging schedule is based on days past the invoice date for all +[accounts receivable]. To further exacerbate the situation, [the Brazilian +Distributor] could not sell the Implants inventory that we sold to them in 2011 +since we were delayed in sending them the instrument sets (that they needed to +sell the Implants). This one-year delay was caused by [ANVISA] who required +us to send new instruments (as opposed to our original plan to move used +instruments). +21. The Corporate Controller further noted in the email that – based on discussions he had +with the Spine CFO – the Brazilian Distributor planned to make a $4 million payment in +December 2012 that would significantly reduce the 360+ day bucket in the year-end +aging presentation. +22. Through this email, McCollum was on notice that Orthofix had a significant outstanding +receivable associated with implants for which there had been an at least one year delay in +sending the corresponding instrument sets. +23. McCollum, however, did not take steps to investigate the circumstances of the original +transaction and to determine whether the revenue associated with the original transaction +had been properly recognized. As noted earlier, Orthofix improperly recognized $5 +million of revenue because the implants could not be used in patients without the +instruments. As such, payment timing and terms were contingent upon the instrument +sets being made available and, therefore, revenue recognition was inconsistent with +Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or +the collectability criteria. +24. Moreover, McCollum subsequently made an improper Sarbanes-Oxley Section 302 +certification in Orthofix’s Form 10-Q for the third quarter of 2012. +E. McCollum is Put on Notice of Issues Concerning Brazilian Distributor +25. In December 2012, the Spine CFO learned that the Brazilian Distributor’s President had – +in June 2012 – informed the then Spine President and Vice President of Global Sales and +Development for the international portion of the Spine Segment (“Spine Sales VP”) that +it would not pay $4 million of its amounts payable by the end of December 2012. Rather, +the Brazilian Distributor’s President informed the then Spine President and Spine Sales +VP that it would only pay $1.6 million of its amounts payable by December 2012 and the +remainder by February 2013. +26. At this time, McCollum was no longer Orthofix’s CFO and now served as the President +of Orthofix’s Spine Segment. +6 + + + +27. On December 1, 2012, the Spine CFO informed McCollum of the above information he +learned, writing: +[The Brazilian Distributor’s President] says below they made a payment agreement +with [the then Spine President] . . . I have no idea what may have been promised. I +do know that I fought pricing and terms concessions, but those were ultimately given +at some point despite my denials. This was commonplace. I was told that I was the +decision maker on pricing and terms and then secretly overridden. [The Spine Sales +VP] did it all of the time – don’t know how much [the Spine Sales President] was +involved. +28. On December 7, 2012, the Brazilian Distributor’s President travelled to the U.S. to meet +with the Spine CFO and Spine Sales VP. At that meeting, the Brazilian Distributor’s +President provided a Power Point presentation to the Spine CFO and Spine Sales VP with +a detailed chronology of events on several transactions involving the Brazilian +Distributor, including the implants-without-instruments transactions. +29. The Spine CFO subsequently forwarded the Power Point presentation to McCollum. +McCollum, however, failed to confirm that this Power Point presentation had been +brought to the attention of the then Orthofix CFO nor did he separately confirm that the +transactions outlined in the Power Point presentation had been discussed with the then +Orthofix CFO. +30. Moreover, McCollum failed to evaluate the impact that the information contained in the +Power Point had on the revenue that the company had previously recognized and +disclosed in its financial statements when he served as Orthofix’s CFO. +31. Ultimately, Orthofix filed its FY 2012 Form 10-K in March 2013 and took no steps to +correct the revenue that it had previously improperly recognized on the implants-without +instruments and other transactions with the Brazilian Distributor. +F. Orthofix’s Restatement +32. Orthofix materially misstated several of its annual and quarterly filings and +corresponding earnings releases, failed to make and keep books and records which, in +reasonable detail, accurately and fairly reflected the transactions and dispositions of the +assets of the issuer, and failed to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurance that transactions are recorded as +necessary to permit the preparation of financial statements in conformity with generally +accepted accounting principles. +33. Accordingly – in late March 2014 – Orthofix restated its financial statements for the first +quarter of fiscal year 2013, all quarterly and annual periods in fiscal years 2012 and 2011, +and the annual period for fiscal year 2010 as a result of misconduct. Orthofix also +acknowledged certain material weaknesses in its internal control over financial reporting. +7 + + + +G. McCollum’s Compensation +34. During the 12-month periods that followed the filing of the periodic reports requiring +restatement, McCollum received bonuses and has not reimbursed those amounts to +Orthofix. +VIOLATIONS +35. Exchange Act Section 13(a) and Rules 13a-1, 13a-11, and 13a-13 thereunder require +issuers to file such periodic and other reports as the Commission may prescribe and in +conformity with such rules as the Commission may promulgate. Exchange Act Rules +13a-1, 13a-11, and 13a-13 require the filing of annual, current, and quarterly reports, +respectively. 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. +36. Exchange Act Section 13(b)(2)(A) requires issuers to “make and keep books, records, +and accounts, which, in reasonable detail, accurately and fairly reflect the transactions +and dispositions of the assets of the issuer.” Exchange Act Section 13(b)(2)(B) requires +issuers to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of financial statements in conformity with generally accepted accounting +principles. +37. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or +causing to be falsified, any book, record, or account subject to Exchange Act Section +13(b)(2)(A). +38. Exchange Act Rule 13a-14, among other things, requires each principal executive, and +principal financial officer to certify in each quarterly and annual report filed under +Section 13(a) of the Exchange Act that such officer and the issuer’s other certifying +officer have designed internal control over financial reporting, or caused such internal +controls over financial reporting to be designed under their supervision, to provide +reasonable assurance regarding the reliability of financial reporting and the preparation of +financial statements for external purposes in accordance with GAAP. +39. 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. +8 + + + +40. As a result of the conduct described above, McCollum violated Exchange Act Rules 13a- +14 and 13b2-1, Sarbanes-Oxley Act Section 304(a) and was a cause of Orthofix’s +violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b- +20, 13a-1, 13a-11, and 13a-13 thereunder. +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 +effective immediately that McCollum cease and desist from committing or causing any +violations and any future violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), +and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, and 13b2-1 thereunder and Section 304(a) of +the Sarbanes-Oxley Act. +A. Within 30 days of the entry of this order, McCollum shall pay a civil money +penalty of $35,000. +B. Moreover, McCollum shall, within 30 days of the entry of this order, reimburse +Orthofix for a total of $40,885 in Orthofix bonuses, other incentive-based or equity-based +Orthofix compensation pursuant to Section 304(a) of Sarbanes-Oxley Act. +C. If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. § 3717. +D. Payment must be made in one of the following three ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +9 + + + +letter and check or money order must be sent to Antonia Chion, Division of Enforcement, +Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-5720. +E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph IV.A above. This Fair Fund may be added +to or combined with the fair fund established in In the Matter of Orthofix International, N.V., (AP +File No. 3-17791; Release No. 10281, January 18, 2017) and/or may be added to or combined with +fair funds established for the civil penalties paid by other Respondents for conduct arising in relation +to the violative conduct at issue in this proceeding or the Orthofix proceeding, in order for the +combined fair funds to be distributed to harmed investors affected by the same violative conduct. +Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil +money penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of +any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court +in any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, +within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's +counsel in this action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of +this paragraph, a “Related Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. +F. It is further ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). +By the Commission. + + Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3849.txt b/raw/aaer/2017/AAER-3849.txt new file mode 100644 index 0000000000000000000000000000000000000000..547ead9eae34d024d3b688eca41801db9be0063f --- /dev/null +++ b/raw/aaer/2017/AAER-3849.txt @@ -0,0 +1,311 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10283 / January 18, 2017 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79823 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3849 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17795 +In the Matter of +MDC PARTNERS 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 MDC Partners Inc. (“MDCA” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + 2 +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. This matter arises from two sets of federal securities laws violations involving +MDC Partners Inc., a publicly-traded marketing firm. First, for several years, MDCA failed to +disclose significant amounts of compensation paid to its then Chairman and Chief Executive +Officer, Miles S. Nadal, in the form of a wide range of perquisites and personal benefits. After +MDCA conducted an in-depth internal investigation in response to inquiries from the Commission +staff, Nadal resigned and agreed to return $10.582 million in cash bonus awards and to pay back +$11.285 million worth of perquisites, personal expense reimbursements and other items of value +that he improperly received from 2009 through 2014. +2. Second, MDCA violated the disclosure requirements concerning non-GAAP +financial measures contained in Regulation G and Item 10(e) of Regulation S-K.2 Despite agreeing +to comply with non-GAAP financial measure disclosure rules in December 2012 correspondence +with the Commission’s Division of Corporation Finance, MDCA continued to violate those rules +for six quarters by failing to afford equal or greater prominence to GAAP measures in earnings +release presentations containing non-GAAP financial measures. Furthermore, for seven quarters +between mid-2012 and early-2014, MDCA did not reconcile “organic revenue growth,” which as +calculated by MDCA was a non-GAAP financial measure, to GAAP revenue. +Respondent and Relevant Individual + 3. Respondent MDC Partners Inc. is a Canadian corporation headquartered in New +York, New York, engaged in the advertising, marketing and communications businesses. MDC +Partners Inc.’s common stock is registered under Section 12(b) of the Exchange Act and trades on +the NASDAQ National Market under the ticker symbol “MDCA.” +4. Miles S. Nadal was the Chairman of the Board, Chief Executive Officer and +President of MDCA from 1986 until July 2015. + +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 “GAAP” refers to U.S. generally accepted accounting principles. + 3 +Facts +MDCA’s Failure to Disclose Compensation Paid to Nadal +5. From 2009 through 2014, MDCA paid $11.285 million worth of perquisites and +personal benefits to Miles S. Nadal, its then Chairman and CEO, without disclosing such items as +compensation in its definitive proxy statements. Items that MDCA paid for on Nadal’s behalf, but +did not disclose, include, but are not limited to, private aircraft usage, cosmetic surgery, yacht-and- +sports-car-related expenses, jewelry, cash for tips and gratuities, medical expenses for Nadal, +family members and others, charitable donations in Nadal’s name, pet care, vacation and personal +travel expenses, and club memberships. +6. In definitive proxy statements for 2009 through 2014, MDCA disclosed +approximately $3.87 million worth of perquisites and personal benefits provided to Nadal. MDCA +disclosed an annual $500,000 perquisite allowance; interest benefits received on interest free loans +in 2009, 2010, 2011 and 2012; disability, medical, life insurance benefits in 2009 and 2010; and +legal fees and the use of company aircraft and apartment in 2014. +7. However, MDCA’s definitive proxy statements for 2009 through 2014 failed to +disclose an annual average of approximately $1.88 million worth of additional perquisites and +personal benefits provided to Nadal, thereby understating the perquisites and personal benefits +portion of Nadal’s compensation by an average of almost 300% each year. +8. MDCA incorporated its definitive proxy statements into its annual reports by +reference. +9. From March 2013 through April 2014, MDCA sold $735 million in debt securities. +MDCA’s offering documents concerning these debt issuances incorporated by reference the +deficient executive compensation disclosures in MDCA’s April 2012 and April 2013 definitive +proxy statements. +10. From 2009 through 2014, MDCA incorrectly recorded payments for the benefit of, +and reimbursements to, Nadal as business expenses, and not compensation. As a result, its books, +records, and accounts did not, in reasonable detail, accurately and fairly reflect its disposition of +assets. +11. In addition, MDCA failed to devise and maintain internal accounting controls +relating to payments for the benefit of, and reimbursements to, Nadal that were sufficient to +provide reasonable assurances that transactions were recorded as necessary to maintain the +accountability of assets. These failures included, for instance, MDCA’s practice of reimbursing +Nadal several thousands of dollars a month for cash payments of “tips and gratuities,” based solely +on a line item in Nadal’s monthly expense submissions. By way of further example, MDCA paid +more than $1.5 million for the benefit of Nadal outside of its monthly expense reimbursement +process. +12. After MDCA’s internal investigation, which was launched upon receipt of a +subpoena from the Commission staff and continued after additional staff inquiries, Nadal resigned + 4 +and agreed to return $10.582 million in cash bonus awards and to pay back $11.285 million worth +of perquisites, personal expense reimbursements and other items of value that he improperly +received from 2009 through 2014. +MDCA’s Failure to Comply with Non-GAAP Financial Measure Disclosure Requirements +13. Instruction 2 of Item 2.02 of Form 8-K requires an issuer to comply with Item +10(e)(1)(i) of Regulation S-K when it makes a public earnings announcement or other disclosure of +material non-public information regarding its results of operations or financial condition for a +completed fiscal year or quarter. Item 10(e)(1)(i)(A) of Regulation S-K provides that an issuer, +when disclosing a non-GAAP financial measure subject to the item, must include a presentation, +with equal or greater prominence, of the most directly comparable financial measure or measures +calculated and presented in accordance with GAAP. Item 10(e)(1)(i)(B) of Regulation S-K +requires an issuer, when disclosing a non-GAAP financial measure subject to the item, to include a +reconciliation (by schedule or other clearly understandable method) of the differences between the +non-GAAP financial measure disclosed or released with the most comparable financial measure or +measures calculated and presented in accordance with GAAP. +14. Prior to July 2014, MDCA’s earnings releases failed to comply with the +prominence requirement set forth in Item 10(e)(1)(i)(A) of Regulation S-K. In a letter to MDCA +dated November 27, 2012, staff in the Commission’s Division of Corporation Finance expressed +concerns about MDCA’s compliance with the prominence requirement in its November 5, 2012 +earnings release, and directed MDCA’s attention to Item 10(e) of Regulation S-K. MDCA +responded in a letter dated December 10, 2012, indicating that it would comply with Item 10(e) of +Regulation S-K in future earnings releases. +15. Notwithstanding its representation to the Commission staff, MDCA, in its +subsequent earnings release dated February 21, 2013, and in quarterly earnings releases thereafter +through April 24, 2014, failed to comply with the prominence requirement. For instance, MDCA +repeatedly emphasized non-GAAP financial measures such as EBITDA, EBITDA margin, and free +cash flow without giving equal or greater prominence to the comparable GAAP measures. +16. In addition to its failure to comply with the prominence requirement, from July 30, +2012 through March 10, 2014, MDCA also failed to comply with non-GAAP financial measure +disclosure requirements when it made disclosures concerning “organic revenue growth,” a non- +GAAP financial measure that MDCA utilized in communications with market participants. +17. According to its public statements, MDCA’s “organic revenue growth” represented +growth in revenue, excluding the effects of two reconciling items: acquisitions and foreign +exchange impacts. However, with respect to its second quarter 2012 through year end 2013 +results, MDCA incorporated a third reconciling item into its calculation of “organic revenue +growth.” MDCA did not disclose in earnings releases or filings on Forms 10-Q and 10-K the +existence of this third reconciling item. +18. MDCA’s undisclosed reconciling item had an impact on the amount of “organic +revenue growth” MDCA publicized in connection with its results for the second quarter of 2012 + 5 +through the end of 2013. Had MDCA calculated “organic revenue growth” consistent with its +filings with the Commission, i.e. by comparing period over period growth in MDCA’s recorded +GAAP revenue, and excluding the effects of acquisitions and foreign exchange impacts, MDCA’s +“organic revenue growth” would have been lower. +19. MDCA’s undisclosed reconciling item arose out of the Company’s change, during +the second quarter of 2012, to its presentation of revenue derived from a shift to net revenue from +gross revenue accounting for two partner-firm subsidiaries. In its “organic revenue growth” +calculations for the second quarter 2012 through the first quarter of 2013, MDCA made +adjustments to revenue for the corresponding prior periods (the second quarter of 2011 through the +first quarter of 2012) in order to derive revenue figures that MDCA would have obtained had it +presented revenue the same way it began presenting it for two partner-firm subsidiaries in the +second quarter of 2012. MDCA’s adjustments also affected its “organic revenue growth” +calculations for the six months ended June 30, 2013, the nine months ended September 30, 2013, +and the year ended December 31, 2013. +20. During the time period in which MDCA included the undisclosed reconciling item +in its “organic revenue growth” calculations, MDCA’s earnings releases and filings on Forms 10-Q +and 10-K did not include tabular reconciliations to GAAP revenue. +Violations +21. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers (including CEOs) who receive at least +$10,000 worth of such items in a given year. Item 402 of Regulation S-K also requires disclosure +of all perquisites and personal benefits by type, and specific identification of any perquisite or +personal benefit that exceeds the greater of $25,000 or 10% of the total perquisites. Rule 14a-9 +prohibits the use of proxy statements containing materially false or misleading statements or +materially misleading omissions. As a result of the conduct described above, MDCA violated +Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder. +22. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder +require every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with +the Commission, among other things, annual, quarterly and current reports as the Commission may +require. As a result of its failure to comply with the non-GAAP financial measure disclosure +requirements under Item 10(e) of Regulation S-K and the incorporation of deficient proxy +statements by reference in its annual reports, MDCA violated Section 13(a) of the Exchange Act +and Rules 13a-1, 13a-11 and 13a-13 thereunder. + 6 +23. As a result of the conduct described above, MDCA 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. +24. As a result of the conduct described above, MDCA violated Section 13(b)(2)(A) of +the Exchange Act, which requires reporting companies to make and keep books, records and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of their assets. +25. As a result of the conduct described above, MDCA violated Section 13(b)(2)(B) of +the Exchange Act, which requires reporting companies to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that, among other things, +transactions are recorded as necessary to maintain accountability for assets. +26. As a result of the conduct described above, MDCA violated Section 17(a)(2) of the +Securities Act, which prohibits any person from obtaining money or property in the offer or sale of +securities by means of an 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. +27. As a result of the conduct described above, MDCA violated Rule 100(a)(2) of +Regulation G, which requires an issuer of a class of securities registered pursuant to Section 12 of +the Exchange Act, when publicly disclosing material information that includes a non-GAAP +financial measure, to accompany that non-GAAP financial measure with a reconciliation (by +schedule or other clearly understandable method) of the differences between the non-GAAP +financial measure disclosed or released with the most comparable financial measure or measures +calculated and presented in accordance with GAAP. +Undertakings +28. Respondent undertakes to cooperate fully with the Commission in any and all +investigations, litigations or other proceedings relating to or arising from the matters described in +the Order. In connection with such cooperation, Respondent undertakes: +a. To produce, without service or notice of subpoena, any and all documents +and other information reasonably requested by the Commission’s staff, with a custodian +declaration as to their authenticity, if requested; +b. To use its best efforts to cause Respondent’s current and former employees, +officers and directors to be interviewed by the Commission’s staff at such times and places as the +staff reasonably may direct; +c. To use its best efforts to cause Respondent’s current and former employees, +officers and directors to appear and testify truthfully and completely without service of a notice or + 7 +subpoena in such investigations, depositions, hearings or trials as may be reasonably requested by +the Commission’s staff; and +d. In connection with any interviews of Respondent’s current and former +employees, officers and directors to be conducted pursuant to this undertaking, requests for such +interviews may be provided by the Commission’s staff by regular or electronic mail to Paul C. +Curnin, Esq., Simpson Thacher & Bartlett LLP, 425 Lexington Ave., New York, NY 10017, +pcurnin@stblaw.com, or such other counsel that may be substituted by Respondent. +29. In determining whether to accept the Offer, the Commission has considered these +undertakings. +MDCA’s Remedial Efforts +30. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +Specifically, MDCA undertook remedial efforts, including (i) the formation of an independent +Special Committee of MDCA’s Board of Directors, who engaged outside counsel and an +independent forensic accounting firm to conduct an in-depth investigation; (ii) replacing its Chief +Executive Officer and Chief Accounting Officer; (iii) collecting more than $21.7 million in +repayments from the former Chief Executive Officer; (iv) adding three new independent +directors to the Board of Directors, as well as a new Senior Vice President of Internal Controls +and Compliance; and (v) implementing new internal control and compliance policies and +procedures, and executive training programs, concerning expense reimbursement, accounts +payable processing, and travel and entertainment. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent MDC Partners Inc. shall cease and desist from committing or causing any violations +and any future violations of Section 17(a)(2) of the Securities Act; Sections 13(a), 13(b)(2)(A), +13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 14a-3 and +14a-9 thereunder; and Rule 100(a)(2) of Regulation G. + B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1.5 million to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury , subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + 8 +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 MDC +Partners 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 Brendan P. McGlynn, Assistant +Regional Director, Philadelphia Regional Office, Division of Enforcement, Securities and +Exchange Commission, 1617 JFK Blvd., Suite 520, Philadelphia, PA 19103. + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $1.5 million based upon its cooperation in a Commission investigation and related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the Division +may, at its sole discretion and with prior notice to the Respondent, petition the Commission to +reopen this matter and seek an order directing that the Respondent pay an additional civil penalty. + 9 +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, +any statute of limitations defense. +By the Commission. + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3850.txt b/raw/aaer/2017/AAER-3850.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a587717b9c27081f5dae2aad02e074f5e8e706d --- /dev/null +++ b/raw/aaer/2017/AAER-3850.txt @@ -0,0 +1,321 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79825 / January 18, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3850/ January 18, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17797 + + +In the Matter of + +GENERAL MOTORS +COMPANY, + +Respondent. + + + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against General Motors Company (“GM” 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 (the “Order”), as set forth below. + + + + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +Respondent + +1. GM, a Delaware corporation based in Detroit, Michigan, designs, builds and sells +cars, trucks, crossovers and automobile parts worldwide. GM common stock is registered under +Section 12(b) of the Exchange Act and has been publicly traded since November 2010 on the New +York and Toronto stock exchanges. GM is the successor entity solely for accounting and financial +reporting purposes to General Motors Corporation (“Old GM”), which filed a voluntary petition +for relief under the United States Bankruptcy Code in June 2009. In July 2009, NGMCO, Inc., an +acquisition vehicle principally formed by the United States Department of the Treasury +(“Treasury”), acquired substantially all of the assets and assumed certain liabilities of Old GM in +connection with the bankruptcy proceedings and eventually changed its name to General Motors +Company. Old GM changed its name to Motors Liquidation Company at the time of the sale and +became a privately held company whose sole purpose was liquidating the remaining assets and +liabilities of Old GM. On December 9, 2013, Treasury announced that it had sold all of its +remaining holdings of GM stock. Old GM was a Delaware Corporation formed in 1916 and based +in Detroit, Michigan that was engaged in the development, production and marketing of cars, +trucks and automobile parts. Prior to July 2009, Old GM’s common stock was registered under +Section 12(b) of the Exchange Act and was publicly traded on the New York stock exchange and +other exchanges. + +Background + + 2. Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that, among +other things, transactions are recorded as necessary to permit preparation of financial statements in +conformity with generally accepted accounting principles (“GAAP”). + + 3. The Accounting Standards Codification (“ASC”) is the principal source of GAAP. +ASC 450 provides guidance for the recognition and disclosure of a loss contingency. The ASC +defines a loss contingency as an existing condition, situation, or set of circumstances involving +uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future +events occur or fail to occur. The term loss, as used in ASC 450, includes many charges against +income that are commonly referred to as expenses and others that are commonly referred to as +losses. + +4. ASC 450 requires issuers to assess the likelihood that the future event or events will +confirm the loss or impairment of an asset or the incurrence of a liability is remote, reasonably +possible or probable. “Probable” means the future event or events is likely to occur. A loss is +considered “reasonably possible” when the chance of the future event or events occurring is more + +3 + +than remote but less than likely. A loss is considered “remote” when the chance of the future event +or events occurring is slight. + +5. When a loss is deemed probable and the amount of the loss can be reasonably +estimated, ASC 450 requires the issuer to accrue the estimated loss. If a loss is probable but a +reasonable estimate of the amount of the loss cannot be made, the issuer is required to disclose the +nature of the contingency and provide an estimate of the loss or range of loss or a statement that +such an estimate cannot be made. Disclosure is preferable to accrual when a reasonable estimate +of loss cannot be made. ASC 450 also requires consideration of whether a loss contingency is +reasonably possible and estimable, and whether disclosure is necessary. Neither accrual nor +disclosure is required under ASC 450 if the loss contingency is remote. + +GM’s Recall Process and Related Internal Accounting Controls + + 6. In 2012 and continuing until the third quarter of 2014, GM used two different +approaches for accruing estimated losses associated with vehicle recalls. For small recall +campaigns – up to $5 million – GM used an actuarial-based estimation technique by which the +company took a per-vehicle accrual at the time each vehicle was sold to account for the amount the +company could expect to spend on small recalls over each vehicle’s lifetime. For large recall +campaigns, defined as recalls exceeding $5 million, GM recorded a specific accrual for each recall +at the time the recall became probable and estimable. + +7. Prior to the third quarter of 2014, GM had a formal recall process called the Field +Performance Evaluation, or “FPE,” process. The FPE process included an investigation and, when +merited, a recall decision-making process that relied on three committees (together “the FPE +committees”): The Field Performance Evaluation Team (“FPET”), which had no recall decision +making authority but was tasked with gathering information relevant to executing a potential recall +should one occur; the Field Performance Review Committee (“FPERC”), which made a +preliminary determination about whether an issue qualified as a safety defect and made a +recommendation regarding recall decisions to the ultimate recall decision-making body, the +Executive Field Action Decision Committee (“EFADC”), which made a final recall decision. + +8. In typical cases, an issue would advance through the FPE process as follows. +Engineers in the Product Investigations (“PI”) group were responsible for investigating suspected +safety and compliance issues with GM vehicles. Once the PI group determined that an issue +warranted moving forward in the recall decision-making process, it would present its evaluation of +the problem to decision makers at an Investigation Status Review (“ISR”) meeting. If the ISR +decision makers agreed that the issue should proceed in the process, the issue would be escalated +into the FPE committees. Typically, the issue would be sent to the FPET first. Typically, at +roughly the same time as review by the FPET, the issue would be reviewed by the FPERC, which +would make a recommendation to the EFADC, which had the sole authority to issue a recall. + + +4 + +9. Prior to the second quarter of 2014, when a problem was moved from the ISR into +the FPE committees, it was placed on the Emerging Issues List. At that point, GM generally +considered the potential recall to be “probable and estimable” under ASC 450. The Warranty +Group, those responsible for the accounting treatment of possible losses related to potential field +actions, received the Emerging Issues List and would record the accrual based on information +available at that point. + +10. The Warranty Group had no role in determining if or when issues were placed on +the Emerging Issues List and they were not consistently provided with the relevant information +from other parts of GM’s organization necessary to assess the likelihood of a liability arising out of +a potential recall other than through the Emerging Issues List. As a result, from 2012 through the +first quarter of 2014, the Warranty Group was not able to consistently consider whether a loss was +“reasonably possible” under ASC 450 and for which disclosure was necessary prior to the point at +which GM considered the potential field action for an accrual. Accordingly, the Warranty Group +did not typically assess items beyond those placed on the Emerging Issues list through the FPE +process. If the engineers in the PI group were aware of a problem but determined the evidence did +not establish that there may be a defect requiring consideration for a potential recall, the issue +would generally not be entered into the FPE process and therefore would not be placed on the +Emerging Issues List until additional information became available or additional analysis was +done. + +The Ignition Switch Investigation + + 11. On February 7, 2014, GM notified the National Highway Traffic Safety +Administration (“NHTSA”) that it was recalling 619,122 vehicles, including model year 2005 – +2007 Chevrolet Cobalts, to repair a defective ignition switch (the “Defective Switch”). The defect +at issue was a low-torque ignition switch installed in certain vehicles which, under certain +circumstances, may move out of the “Run” position. If this occurred, the driver would lose the +assistance of power steering and power brakes. Moreover, if a collision occurred while the +switch was in the “Accessory” or “Off” position, the vehicle’s airbags may fail to deploy. This +recall, the first of three related to the Defective Switch, followed years of internal reviews. + +12. By 2012, GM engineers were reviewing airbag non-deployment claims in certain +vehicles that had occurred over several years. In or about early April 2012, a GM electrical +engineer reported to his supervisor his view that a probable root cause of the airbag non- +deployment problem was the Defective Switch moving out of the Run position to the Accessory +or Off position. The same day, the supervisor reported this to the PI Senior Manager and a GM +attorney. At this point, in approximately Spring 2012, certain GM personnel understood the +Defective Switch presented a safety issue. However, the issue was not added to the Emerging +Issues List at that time and thus the Warranty Group was not informed of it. + +13. Yet, from approximately Spring 2012 until the fourth quarter of 2013, no one +advised Warranty Group of the problems with the Defective Switch. Therefore, Warranty Group + +5 + +could not evaluate the likelihood of losses resulting from a potential recall of cars with the +Defective Switch under ASC 450. + + 14. On April 29, 2013, during a deposition in a case arising from a crash of a GM +vehicle with the Defective Switch, the plaintiff’s attorney showed evidence that a component of +the Defective Switch in a model year 2008 Cobalt differed from the same component in an +earlier model year Cobalt. + + 15. In July 2013, an expert retained by GM confirmed that Cobalts from model years +2008 through 2010 had a different ignition switch component than those in model years 2005 +and 2006. The Warranty Group remained uninformed of this information and thus unable to +assess the possible losses related to the potential recall of vehicles with the Defective Switch at +this time. + + 16. In late October 2013, GM received documentary confirmation from the supplier +of the ignition switch that there had been a part change in the Defective Switch. At this point, +the engineers were satisfied that they understood the problem and they initiated the formal FPE +process, which, as explained above, did not include the Warranty Group until a later stage. + + 17. In November 2013, the Warranty Group received information about the potential +recall. In December 2013, the Defective Switch was placed on the Emerging Issues List and the +Warranty Group accrued approximately $41 million for estimated costs of recalling three models +with the Defective Switch, which on an after tax basis, represented less than 0.7% of GM’s $3.8 +billion net income for the year 2013. + +GM’s Internal Accounting Controls Failed to Timely Identify and Evaluate Loss +Contingencies Related to the Defective Switch + + 18. Under GM’s system of internal accounting controls in place in 2012 through the +second quarter of 2014, GM’s processes were focused on recall accruals and thus generally only +provided Warranty Group with information about vehicle issues at the point at which a recall was +considered probable and the costs of such a recall were estimable, and did not provide information +about potential vehicle issues to the Warranty Group prior to this point. The Warranty Group was +therefore unable to make a timely evaluation of whether certain potential recall campaigns were +reasonably possible and should be considered for disclosure, as required by ASC 450. In the case +of the Defective Switch in the Cobalt, certain GM personnel understood that the Defective Switch +presented a potential safety issue by approximately the Spring of 2012. Yet, GM’s Warranty +Group did not learn of the issue until the FPE Director informed them of the likely recall in +November 2013, and, as a result, prior to this time the Warranty Group were unable to evaluate the +likelihood of a loss related to the potential recall of the Defective Switch to determine if disclosure +of the nature of the potential recall or an estimate of the possible loss or range of loss was +required. + +6 + + +19. GM made fundamental organizational changes in 2014 in its processes for +investigating and deciding on potential recall campaigns. As part of those organizational changes, +information is required to be provided to the Warranty Group earlier in the process and separate +from an Emerging Issues List, such that a timely reasonably possible disclosure determination can +be made. +Violation + + 20. As a result of the conduct described above, for large recall campaigns for the period +2012 through the second quarter of 2014 GM violated Section 13(b)(2)(B) of the Exchange Act by +not devising and maintaining a system of internal accounting controls sufficient to provide +reasonable assurances that transactions were recorded as necessary to permit preparation of +financial statements in conformity with generally accepted accounting principles. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent GM’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, GM cease and desist from committing or +causing any violations and any future violations of Section 13(b)(2)(B) of the Exchange Act. + +B. GM shall, within 10 days of the entry of this Order, 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. + +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 +General Motors Company 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 Sanjay Wadhwa, +Senior Associate Regional Director, Division of Enforcement, Securities and Exchange +Commission, Brookfield Place, 200 Vesey Street, Room 400, New York, NY 10281. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3851.txt b/raw/aaer/2017/AAER-3851.txt new file mode 100644 index 0000000000000000000000000000000000000000..3ed6ab61aba21f8831a4627a8be7254a0eca83b7 --- /dev/null +++ b/raw/aaer/2017/AAER-3851.txt @@ -0,0 +1,492 @@ + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79828 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3851 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17800 + +In the Matter of +Orthofix International N.V. +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 Orthofix International N.V. +(“Orthofix” or “Respondent”). +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Paragraphs 1 through 20 below, acknowledges that its conduct violated the +federal securities laws, 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 Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + + +2 + + + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds +1 that: +SUMMARY + This matter concerns violations of the books and records and internal controls provisions +of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by Orthofix International N.V., a +medical device company organized under the laws of Curacao and headquartered in Lewisville, +Texas, and its Brazilian subsidiary, Orthofix do Brasil LTDA. From at least 2011 to 2013 +(hereinafter “the relevant period”), senior personnel at Orthofix Brazil employed at least four +schemes, with third-party commercial representatives and distributors, to make improper +payments to doctors employed at government-owned hospitals to induce them to use Orthofix’s +products, thereby increasing sales. The improper payments to doctors employed at government +hospitals were improperly recorded as legitimate expenses and generated illicit profits to +Orthofix of approximately $2,928,000. + Orthofix also failed to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances to detect and prevent such payments by Orthofix +Brazil, despite the fact that Orthofix had been charged by the Commission in 2012 with violating +the books and records and internal controls provisions of the FCPA in connection with bribes +paid to Mexican officials by its Mexican subsidiary. + By engaging in the foregoing conduct, Orthofix violated the books and records and +internal controls provisions of the federal securities laws set forth in Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. +RESPONDENT +Orthofix International N.V. (“Orthofix,” “Respondent,” or “Company”) is a limited +liability company formed under the laws of Curacao and headquartered in Lewisville, Texas. It +is a diversified medical device company that develops and sells surgical and non-surgical +medical products to medical professionals in various market sectors, including orthopedics. It +distributes its products both domestically in the United States and internationally in multiple +countries. Orthofix’s common stock is registered with the Commission pursuant to Section 12(b) +of the Exchange Act and currently trades on the Nasdaq Global Select Market under the symbol +“OFIX.” + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or +entity in this or any other proceeding. + +3 + + + + +RELEVANT ENTITY + Orthofix do Brasil LTDA (“Orthofix Brazil”) is a wholly-owned subsidiary of +Orthofix headquartered in Sao Paulo, Brazil. Orthofix Brazil markets and sells extremity +fixation products through direct and indirect sales to public and private sector customers. From +2011 to 2013, approximately 12.5 % of Orthofix Brazil’s sales were made to public sector +customers, such as government-owned hospitals and associated doctors, and the remaining +87.5% to private customers, including non-government-owned hospitals and associated doctors. +Orthofix consolidated Orthofix Brazil’s financial statements into its financials. +FACTS +A. Prior Commission Enforcement Action Against Orthofix +1. In 2012, the Commission filed a settled civil injunctive action in United States +District Court for the Eastern District of Texas alleging that Orthofix had violated the books and +records and internal controls provisions of the FCPA through its Mexican subsidiary, Promeca +S.A. de C.V. (“Promeca”). From at least 2003 to 2010, Promeca made improper payments +totaling approximately $317,000 to employees of a government agency in Mexico. These +improper payments, recorded as training and promotional expenses, generated illicit net profits to +Orthofix of approximately $4.9 million. +2. Orthofix settled the matter by consenting to the entry of a final judgment that (i) +enjoined the company from violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, +(ii) ordered Orthofix to pay disgorgement and prejudgment interest of approximately $5.2 +million, and (iii) ordered Orthofix to undertake certain remedial measures concerning its FCPA +compliance program, including self-reporting to the staff for a two-year term regarding its +remediation efforts. In a parallel criminal investigation, Orthofix entered into a deferred- +prosecution agreement in which it admitted, accepted, and acknowledged responsibility for +specific conduct related to Promeca’s operations in Mexico, and paid a $ 2,220,000 criminal fine. +B. Background +3. During the relevant period, Orthofix Brazil accounted for approximately 5-7% of +Orthofix’s consolidated net sales. During the relevant period, Orthofix Brazil sold its products +through either (i) direct sales to a customer through third-party commercial representative +entities who provide assistance and receive a commission, or (ii) indirect sales through a third- +party distributor that purchased the products from Orthofix Brazil, held the inventory, and resold +them to an end customer. +4. During the relevant period, Orthofix Brazil engaged in direct sales with the +assistance of third-party commercial representatives who helped to market and sell its products +in Brazil. These commercial representatives also employed sales agents to make sales. +Commercial representative sales comprised approximately two-thirds of the sales of the + +4 + + + +subsidiary. In addition, Orthofix Brazil engaged sixteen distributors to conduct indirect sales. +Orthofix Brazil sold its products to the distributors who in turn resold the products to health care +providers, including private and government-owned hospitals, in various regions in Brazil. +Indirect sales through distributors comprised about one-third of the sales of the subsidiary. +5. Orthofix provided budgets, financial targets, and guidance to Orthofix Brazil and +approved certain actions and expenditures. Orthofix also received regular updates from Orthofix +Brazil on many details regarding sales opportunities, numbers, and business developments. +Orthofix set internal sales targets and management imposed pressure on subsidiaries to meet +those targets. Orthofix’s reporting structure and relationship with its subsidiaries was +decentralized during the relevant time period, complicating parent oversight, compliance +monitoring, and communication with U.S. executives. Orthofix lacked adequate training, +policies, processes, and corporate culture that would have allowed employees at its subsidiaries +to raise compliance concerns to the parent level. +C. Orthofix Brazil Made Improper Payments to Doctors Through Commercial +Representatives +6. During the relevant period, Orthofix Brazil entered into agreements with third- +party commercial representatives to directly sell its products to hospitals and doctors in Brazil, +and it paid commissions to those commercial representatives as part of such agreements. +Orthofix Brazil’s commercial representatives in turn made improper payments to certain doctors +at government owned hospitals in exchange for sales contracts. +7. The scheme involving commercial representatives worked in one of two ways. In +the first scenario, commercial representatives made arrangements to pay doctors a specific +amount, usually constituting 20-25% of the sales price, in exchange for using Orthofix products. +After doctors performed a procedure using Orthofix’s products, Orthofix Brazil typically billed +the hospital for the products used. Orthofix Brazil then paid a commission of approximately 33- +43% of the sales price to the commercial representative responsible for the sale, who then used a +portion of that commission to make certain agreed upon payments to doctors. +8. In the second scenario, a company related to the commercial representative sent +Orthofix Brazil false invoices for services such as marketing that were never provided. The +former general manager of Orthofix Brazil approved these payments and the former finance +director of Orthofix Brazil instructed Orthofix Brazil employees to classify the payments as +“administrative expenses.” The services were never rendered and the payments were not +administrative expenses but rather provided funds that were intended to be used to make +improper payments to certain doctors. The payments were intentionally improperly recorded as +legitimate expenses to hide the true nature of the payments. +9. Certain Orthofix Brazil employees knew that commercial representatives were +paying doctors and were involved in the schemes. The former general manager was responsible +for negotiating the arrangements with the commercial representatives, and he instructed the +former finance director and other lower level Orthofix Brazil employees to make the commission + +5 + + + +payments to commercial representatives. Payments to commercial representatives were referred +to by these employees as “doctors’ commissions.” Orthofix Brazil employees and commercial +representatives openly discussed payment percentages, total amounts, and payment instructions +for making direct deposits or in-person payments to doctors. +D. Orthofix Brazil Made Improper Payments to Doctors Through Distributors + +10. Similar to the schemes involving commercial representatives, Orthofix Brazil +used third-party distributors in two ways to make improper payments to doctors. In the first +scenario, Orthofix Brazil provided a high discount ranging in certain instances of up to 70% to +the distributors, who then used part of the profit generated by that discount to make improper +payments to certain doctors. The high discounts were purportedly meant to allow distributors to +make a sufficient profit while also covering their overhead costs. In reality, part of the discount +was often used to make the improper payments to certain doctors at public hospitals. Employees +of the distributors openly discussed the improper payment scheme in emails to certain Orthofix +Brazil employees. For example, in 2011, one distributor emailed an Orthofix Brazil employee +that “[t]he agreement with the physicians is to make the payment after using the material,” +indicating a promise to pay doctors after they used Orthofix products. The four distributors that +made improper payments to doctors on behalf of Orthofix Brazil openly discussed the improper +payments in person with certain Orthofix Brazil employees and demanded higher discounts from +the company to facilitate the payments. +11. In the second scenario involving distributors, Orthofix Brazil made payments for +services that were never rendered. These payments were inaccurately described in the +company’s books and records as “consulting for sales” payments made to a company related to +one of the distributors, when, in fact, the payments to the distributor were made to facilitate +improper payments to doctors. +12. The general manager, finance director, and certain other Orthofix Brazil +employees no longer associated with Orthofix Brazil knew that distributors were using excessive +discounts and making payments on false invoices to pay doctors. Nevertheless, Orthofix Brazil +improperly recorded the payments as legitimate business expenses to hide the true nature of the +payments. +E. Orthofix Failed to Maintain Accurate Books and Records + +13. Orthofix Brazil improperly recorded certain payments to commercial +representatives and discounts to third-party distributors, portions of which were used to make +improper payments to doctors, as commissions, discounts, consulting fees, administrative +expenses, and other legitimate business expenses in its books and records that were subsequently +consolidated into Orthofix’s books and records, rendering them inaccurate. +F. Orthofix Lacked Adequate Internal Accounting Controls + + +6 + + + +14. Orthofix failed in a timely manner to devise and maintain an adequate system of +internal accounting controls in Brazil, even after the company had been charged previously for +internal controls failings in the Commission’s earlier case against it for improper payments in +Mexico. The controls in place during the relevant period were minimal and clearly deficient. +15. The internal accounting controls were deficient with respect to the setting, +approval, and payment of commissions and discounts. Orthofix had no policies or processes in +place to standardize or centrally approve and monitor the commissions and discounts that +Orthofix Brazil was providing to third parties, which allowed Orthofix Brazil to push through +high commissions and discounts that ultimately were used to facilitate improper payments. The +decentralized nature of Orthofix’s business in Brazil allowed Orthofix Brazil to easily evade the +policies and controls that Orthofix did have in place when the conduct occurred. An indirect +reporting structure created gaps in supervision that provided the opportunity to orchestrate and +execute the bribery schemes without detection. +16. Furthermore, a lack of centralized global accounting and payment controls +allowed Orthofix Brazil to record the improper payments as legitimate business expenses. Given +the prior corruption and internal controls issues at its Mexican subsidiary, Orthofix was aware of +deficiencies in its controls and the FCPA risks at its subsidiaries’ operations. Despite these red +flags, Orthofix failed to establish better controls and supervision over its subsidiaries in high risk +countries. +COOPERATION AND REMEDIAL ACTION +17. Orthofix disclosed the Brazil allegations as part of its ongoing self-reporting +obligations undertaken as part of its earlier settlement with the Commission for its conduct +related to Mexico discussed above. Orthofix cooperated with the investigation by, among other +things: (i) conducting a thorough and timely internal investigation; (ii) voluntarily producing +documents and other information in a timely manner, identifying significant documents and +translating documents from Portuguese; (iii) compiling financial data and analysis; (iv) providing +detailed witness interview downloads, Power-Point presentations summarizing its findings, and +timelines; and (v) assisting us in our efforts to coordinate witness interviews with current and +former Orthofix and Orthofix Brazil employees. +18. Although the Company took remedial steps following the resolution of the +Promeca allegations in 2012, Orthofix did not start fully implementing sufficient remedial steps +until after the discovery of the Brazil conduct in late 2013. Though delayed, these efforts have +been significant. Orthofix and Orthofix Brazil now have terminated problematic representatives +and distributors; developed and implemented new global accounting policies to provide further +structure and guidance to foreign subsidiaries; established an internal audit function and +expanded Orthofix’s compliance department; conducted extensive audits of third-party vendors +used by subsidiaries; and revised existing trainings and implemented additional compliance +training for employees. + +7 + + + +LEGAL STANDARDS AND VIOLATIONS +19. As a result of the conduct described above, Orthofix violated Section 13(b)(2)(A) +of the Exchange Act, which requires issuers to make and keep books, records, and accounts +which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of the +assets of the issuer. +20. In addition, as a result of the conduct described above, Orthofix violated Section +13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions are +recorded as necessary (I) to permit preparation of financial statements in conformity with +generally accepted accounting principles or any other criteria applicable to such statements, and +(II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for +assets is compared with the existing assets at reasonable intervals and appropriate action is taken +with respect to any differences. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. +B. Respondent shall, within thirty days of the entry of this Order, pay disgorgement +of $2,928,000, prejudgment interest of $263,375, and a civil money penalty in the amount of +$2,928,000 to the Securities and Exchange Commission. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one of +the following three ways: +1. Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +2. Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +3. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +8 + + + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Orthofix 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 Kara N. Brockmeyer, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549- +5720. +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +D. Respondent shall comply with the following undertakings: +1. Retain an independent consultant (the “Independent Consultant”) not +unacceptable to the Staff within sixty (60) calendar days after the issuance of +this Order. Within thirty (30) calendar days after the issuance of this Order, +Respondent shall recommend to the Staff three qualified candidates to serve +as the Independent Consultant. The Staff shall provide feedback to +Respondent within fifteen (15) calendar days of receiving Respondent’s +recommendations. +2. The Independent Consultant candidates shall have, at a minimum, the +following qualifications: demonstrated expertise with respect to the FCPA, +including experience counseling on FCPA issues; experience designing and/or +reviewing corporate compliance policies, procedures, and internal controls, +including FCPA-specific policies, procedures, and internal controls; ability to +access and deploy resources as necessary to discharge the Independent +Consultant’s duties as described herein; and independence from Respondent + +9 + + + +to ensure effective and impartial performance of the Independent Consultant’s +duties. +3. The Independent Consultant should not have provided legal, auditing, or other +services to, or have had any affiliations with, the Respondent during the two +years prior to the issuance of this Order. +4. Respondent shall retain the Independent Consultant for a period of one (1) +year from the date of the engagement. Respondent shall exclusively bear all +costs, including compensation and expenses, associated with the retention of +the Independent Consultant. +5. To ensure the independence of the Independent Consultant, Respondent shall +not have the authority to terminate the Independent Consultant without the +prior written approval of the Staff. +6. The Independent Consultant’s responsibility is to review and evaluate +Respondent’s internal controls, record-keeping and financial reporting policies +and procedures as they relate to its compliance with the books and records, +internal accounting controls, and anti-bribery provisions of the FCPA (“the +Policies and Procedures”) and to make recommendations designed to +reasonably improve the Policies and Procedures. This review and evaluation +shall include an assessment of the Policies and Procedures as actually +implemented and how FCPA compliance fits within Respondent’s ethics and +compliance function. The Independent Consultant shall consider whether the +ethics and compliance function has sufficient resources, authority, and +independence, and provides sufficient training and guidance. +7. Respondent and the Independent Consultant shall agree that the Independent +Consultant is an independent third-party and not an employee or agent of the +Respondent. In addition, Respondent and the Independent Consultant agree +that no attorney-client relationship shall be formed between them. +8. Respondent shall require the Independent Consultant to enter in an agreement +with Respondent providing that, for the period of engagement and for a period +of two years from completion of the engagement, the Independent Consultant +shall not enter into any employment, consultant, attorney-client, auditing or +other professional relationship with Respondent, or any of its present or +former affiliates, directors, officers, employees, or agents acting in their +capacity as such. Any firm with which the Independent Consultant is +affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall +not, without prior written consent of the Staff enter into any employment, +consultant, attorney-client, auditing or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, + +10 + + + +employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two (2) years after the engagement. +9. Respondent shall require the Independent Consultant to prepare a written +work plan and submit it to Respondent and the Staff for comment within thirty +(30) calendar days of commencing the engagement. The Respondent’s +comments shall be provided to the Independent Consultant no more than +fifteen (15) calendar days after receipt of the written work plan. In order to +conduct an effective initial review and to understand fully any deficiencies in +the Policies and Procedures, including how FCPA compliance fits within +Respondent’s ethics and compliance function, the Independent Consultant’s +initial work plan shall include such steps as are reasonably necessary to +develop an understanding of the facts and circumstances surrounding any +violations that may have occurred as reflected in this matter and to assess the +effectiveness of Respondent’s existing Policies and Procedures, and of +Respondent’s ethics and compliance program. Any dispute between +Respondent and the Independent Consultant with respect to the work plan +shall be decided by the Staff. +10. Respondent shall cooperate fully with the Independent Consultant, and the +Independent Consultant shall have the authority to take such reasonable steps +as, in his or her view, may be necessary to be fully informed about +Respondent’s Policies and Procedures in accordance with the principles set +forth herein and applicable law, including data protection, blocking statutes, +and labor laws and regulations applicable to Respondent. To that end +Respondent shall provide the Independent Consultant with access to all +information, documents, records, facilities and/or employees, as requested by +the Independent Consultant, that fall within the scope of the Independent +Consultant’s responsibility, except as provided in this paragraph; and provide +guidance on applicable laws (such as relevant data protection, blocking +statutes, and labor laws). +11. In the event the Respondent seeks to withhold from the Independent +Consultant access to information, documents, records, facilities and/or +employees of Respondent that may be subject to a claim of attorney-client +privilege or to the attorney work product doctrine, or where Respondent +reasonably believes production would otherwise be inconsistent with +applicable law or beyond the scope of these undertakings, Respondent shall +work cooperatively with the Independent Consultant. If the matter cannot be +resolved, at the request of the Independent Consultant, Respondent shall +promptly provide written notice to the Independent Consultant and the Staff. +Such notice shall include a general description of the nature of the +information, documents, records, facilities and/or employees that are being +withheld, as well as the basis for the claim. To the extent Respondent has +provided information to the Staff in the course of the investigation leading to + +11 + + + +this action pursuant to a non-waiver of privilege agreement, Respondent and +the Independent Consultant may agree to production of such information to +the Independent Consultant pursuant to a similar non-waiver agreement. +12. Respondent shall require the Independent Consultant to issue a written report +(“Report”), within six (6) months after being retained to review Respondent’s +Policies and Procedures: (a) summarizing its review and evaluation, and (b) if +necessary, making recommendations based on its review and evaluation that +are reasonably designed to improve Respondent’s Policies and Procedures. +Respondent shall require that the Independent Consultant provide the Report +to the Board of Directors of Respondent and simultaneously transmit a copy to +the Staff at the following address: Ansu N. Banerjee, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, 444 +South Flower Street, Suite 900, Los Angeles, California 90071. +13. Respondent shall adopt all recommendations in the Report within sixty (60) +days of the issuance of the Report; provided, however, that, as to any +recommendations that Respondent considers to be unduly burdensome, +impractical, or costly, Respondent need not adopt the recommendations at that +time, but may submit in writing to the Staff, within thirty (30) days of +receiving the Report, an alternative policy or procedure designed to achieve +the same objective or purpose. Respondent and the Independent Consultant +shall attempt in good faith to reach an agreement relating to each +recommendation Respondent considers unduly burdensome, impractical, or +costly. In the event that Respondent and the Independent Consultant are +unable to agree on an alternative proposal within thirty (30) days, Respondent +will abide by the determinations of the Staff. +14. Upon completion of the implementation, the Independent Consultant shall +have thirty (30) calendar days to complete a follow-up review to confirm that +Respondent has implemented the recommendations or agreed-upon +alternatives and continued the application of the Policies and Procedures, and +to deliver a supplemental report to the Board of Directors of Respondent and +the Staff setting forth its conclusions and whether any further improvements +should be implemented. +15. Respondent agrees that the Staff may extend any of the dates set forth above +at its direction. +16. Respondent shall certify, in writing, compliance with the undertaking(s) set +forth above. The certification shall identify the undertaking(s), provide +written evidence of compliance in the form of a narrative, and be supported by +exhibits sufficient to demonstrate compliance. The Staff may make +reasonable requests for further evidence of compliance, and Respondent +agrees to provide such evidence. Respondent shall submit the certification + +12 + + + +and supporting material to Ansu N. Banerjee, Assistant Regional Director, +Division of Enforcement, with a copy to the Office of Chief Counsel of the +Enforcement Division, no later than sixty (60) days from the date of the +completion of the undertakings. +17. Respondent agrees that these undertakings shall be binding upon any +successor in interest to Respondent or any acquirer of substantially all of +Respondent’s assets and liabilities or business. +By the Commission. + + Brent J. Fields +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3853.txt b/raw/aaer/2017/AAER-3853.txt new file mode 100644 index 0000000000000000000000000000000000000000..ebda335bf253f0fd5e0d203094b4445792290dc3 --- /dev/null +++ b/raw/aaer/2017/AAER-3853.txt @@ -0,0 +1,246 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79855 / January 23, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3853 / January 23, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17805 + +In the Matter of + +SHELLY R. MCGUIRE, 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 Shelly R. McGuire, CPA +(“Respondent” or “McGuire”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have engaged in unethical or +improper professional conduct. + 2 +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her 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: + +Summary + + 1. This matter involves a false statement made by certified public accountant Shelly +R. McGuire to the Financial Industry Regulatory Authority (“FINRA”) concerning her +knowledge of insider trading in the securities of Sun Healthcare Group, Inc. (“Sun Healthcare”) +in 2012. In April 2012, McGuire learned of merger negotiations involving Sun Healthcare as +part of her professional responsibilities providing tax accounting services to the company. +McGuire disclosed the merger negotiations to Donald P. Jones, an accountant with whom she +had a close personal relationship and a relationship of trust and confidence, to seek professional +guidance on an accounting issue affecting the merger. Jones thereafter misappropriated the +information by purchasing Sun Healthcare stock and tipping a friend. Sun Healthcare publicly +announced its acquisition by Genesis Healthcare, Inc. on June 20, 2012. + + 2. In September 2012, as part of an inquiry into trading in advance of the merger +announcement, FINRA sent a request to McGuire’s firm for individuals with prior knowledge of +the Sun Healthcare acquisition to identify and provide information about parties who traded prior +to the public announcement. FINRA included Jones and his tippee as such traders in this request. +McGuire was asked to identify any known individuals on the list, and in her review of it, learned +that Jones had used the confidential merger information to purchase Sun Healthcare stock and tip +another trader. McGuire thereafter falsely responded to FINRA that she had no information about +any of the identified traders. + +Respondent + + 3. Shelly R. McGuire, age 42, is a resident of Alhambra, California, is a certified +public accountant licensed in California and New Mexico, and in 2012 was a member of The + +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 +American Institute of Certified Public Accountants (“AICPA”). In 2012, McGuire was +employed by a public accounting firm as an accountant and provided tax accounting services to +Sun Healthcare. +Other Relevant Entity and Individual + + 4. Sun Healthcare Group, Inc. formerly headquartered in Irvine, California, operated +nursing, long-term care and assisted living facilities in the United States. The company’s stock +was registered under Section 12(b) of the Exchange Act and was traded on the NASDAQ Stock +Market under the ticker symbol “SUNH” until December 1, 2012, when it was acquired by +Genesis Healthcare, Inc. + + 5. Donald P. Jones was, at all relevant times, a certified public accountant licensed in +California and Michigan. + +Facts + + 6. Since at least 2011, Sun Healthcare had retained McGuire’s prior accounting firm +to provide certain accounting services. As part of that professional engagement, McGuire provided +tax-related accounting services to Sun Healthcare. + + 7. On or about April 5, 2012, McGuire learned that Sun Healthcare was engaged in +merger discussions when a Sun Healthcare official asked McGuire to provide guidance on a tax +issue that could impact the terms of a merger agreement. + + 8. McGuire had a relationship of trust and confidence with Donald P. Jones, based on +a history, pattern, and practice of sharing confidences with each other. Shortly after learning of the +merger negotiations, McGuire told Jones about them and sought his professional advice on the Sun +Healthcare tax issue. McGuire continued to consult with Jones on the tax issue during the period +leading up to Sun Healthcare’s public announcement on June 20, 2012 of its acquisition by +Genesis Healthcare, Inc. + + 9. At all times, McGuire expected Jones to maintain the confidentiality of the +confidential information she had disclosed to him and not to trade based on the information. +However, in breach of the duty of trust or confidence he owed to McGuire, Jones misappropriated +the merger information from McGuire and used it to purchase Sun Healthcare stock in advance of +the merger announcement and to tip another person, who also purchased stock. McGuire did not +know of the trades at the time they occurred. + + 10. Subsequently, on September 19, 2012, McGuire received an inquiry from FINRA +requesting that any person with prior knowledge of the Sun Healthcare acquisition identify any +individuals included on a list of traders, provide details of all contacts with those individuals and +provide information regarding knowledge of Sun Healthcare securities transactions by those +traders. The FINRA letter identified Jones and his tippee as traders. + + 4 + 11. On that date, Jones admitted to McGuire to purchasing Sun Healthcare stock +based upon the information McGuire had disclosed in confidence and to tipping another person, +whom Jones identified to McGuire. However, despite this knowledge, McGuire falsely +responded to the FINRA inquiry, stating that she had no information about any of the identified +traders. + +Findings + + 12. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice state that the Commission may deny to any person the privilege of appearing or +practicing before it if such person is found to have engaged in improper professional conduct. + + 13. In 2012, Section ET 54 of the AICPA Code of Professional Conduct stated, +among other things, that “[t]o maintain and broaden public confidence, members should perform +all professional responsibilities with the highest sense of integrity.” + + 14. McGuire’s misrepresentation to FINRA regarding her knowledge of trading of +Sun Healthcare securities by Jones and his tippee constitutes improper professional conduct as +defined by Rule 102(e)(1)(iv)(A)(1) of the Commission’s Rules of Practice because it was +intentional or knowing conduct that resulted in a violation of professional standards. Applicable +professional standards include Generally Accepted Accounting Principles, Generally Accepted +Auditing Standards, the AICPA Code of Professional Conduct and Commission Regulations. +Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57163, 57167 +(Oct. 26, 1998). + + 15. Based on the foregoing, the Commission finds that McGuire engaged in unethical +or improper professional conduct within the meaning of Section 4C of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +McGuire’s Cooperation + + 16. In determining to accept the Offer, the Commission considered the cooperation +afforded by Respondent to the Commission staff. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent McGuire’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent McGuire is denied the privilege of appearing or practicing before the +Commission as an accountant. + + 5 + B. After one year from the date of this Order, Respondent may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission. 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 +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 + 6 +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3854.pdf b/raw/aaer/2017/AAER-3854.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6c45df2ba9a73b9d9965d9270a83ee12f71bd8c2 Binary files /dev/null and b/raw/aaer/2017/AAER-3854.pdf differ diff --git a/raw/aaer/2017/AAER-3854.txt b/raw/aaer/2017/AAER-3854.txt new file mode 100644 index 0000000000000000000000000000000000000000..fe7947edacbee3ebff2a4eb5596a7109edaac25e --- /dev/null +++ b/raw/aaer/2017/AAER-3854.txt @@ -0,0 +1,286 @@ + UNITED STATES OF AMERICA + Bef or e the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79856 / January 23, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3854 / January 23, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17806 + +In the Matter of + +DONALD P. JONES, CPA + +Respondent. + + + + +CORRECTED 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 Donald P. +Jones, CPA (“Respondent” or “Jones”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. 2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . .(1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or + + 2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + + 1. This matter involves insider trading and tipping by Donald P. Jones, a certified +public accountant, in advance of the June 20, 2012 public announcement that Sun Healthcare +Group, Inc. (“Sun Healthcare”) had entered into a definitive agreement to be acquired by Genesis +Healthcare, Inc. (“Genesis”) for approximately $275 million, or $8.50 per share. In early April +2012, Jones was told material nonpublic information about the proposed acquisition by Shelly R. +McGuire, a certified public accountant who was providing professional accounting services to +Sun Healthcare during the time of the merger negotiations. McGuire told Jones the information +in confidence while seeking his advice about a tax issue impacting the merger. + + 2. Jones and McGuire had a history, pattern, and practice of sharing confidences with +each other and McGuire expected that Jones would maintain the confidentiality of the information. +Jones understood that the information was conveyed to him in confidence and that he should not +trade on it or otherwise tip the information to others. However, in breach of a duty of trust or +confidence owed to McGuire, Jones misappropriated the information by purchasing shares of Sun +Healthcare in advance of the public announcement of the merger, and by tipping the information to +a friend, who also traded. Jones realized illegal profits of $27,675 and his tippee realized illegal +profits of $11,407. By engaging in this conduct Jones violated Section 10(b) of the Exchange Act +and Rule 10b-5 thereunder. + + + +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 +Respondent + + 3. Donald P. Jones , age 49, is a resident of Alhambra, California, and is a certified +public accountant licensed in California and was a certified public account licensed in Michigan +until December 31, 2015. + +Other Releva nt Entities and Individual + + 4. Genesis Healthcare, Inc. is a privately-held corporation headquartered in Kennett +Square, Pennsylvania, that operates nursing, long-term care and assisted living facilities across the +United States. + + 5. Sun Healthcare Group, Inc. formerly headquartered in Irvine, California, o perated +nursing, long-term care and assisted living facilities in the United States. The company’s stock +was registered under Section 12(b) of the Exchange Act and was traded on the NASDAQ Stock +Market under the ticker symbol “SUNH” until December 1, 2012, when it was acquired by +Genesis. + + 6. Shelly R. McGuire was, at all relevant times, an accountant employed by an +accounting firm that was retained by Sun Healthcare to advise on the transaction with Genesis. + +Facts + + 7. In September 2011, Genesis and Sun Healthcare entered into a confidentiality +agreement and began preliminary discussions concerning a potential business combination. + + 8. In February 2012, Genesis offered to acquire Sun Healthcare for $8.00 per share. +Genesis increased its offer to $9.50 per share days before the companies entered into an +exclusivity agreement on March 25, 2012. + + 9. After additional due diligence and negotiations occurred during the ensuing weeks, +Genesis notified Sun Healthcare on May 18, 2012 that it was decreasing its offer to $8.50 per +share. + + 10. On June 20, 2012, Sun Healthcare’s board of directors voted to accept the revised +Genesis offer. After the close of the market that same day, Genesis and Sun Healthcare issued a +joint press release announcing the merger agreement. + + 11. During the period leading up to and during the merger negotiations, McGuire’s +prior accounting firm (the “Accounting Firm”) was retained by Sun Healthcare to provide auditing, +tax and other related accounting services. Specifically, McGuire provided tax related professional +accounting services to Sun Healthcare. + + 12. In or around April 5, 2012, Sun Healthcare told McGuire about the ongoing merger +discussions and asked McGuire to provide advice on a tax issue that could impact the terms of a + 4 +merger agreement. McGuire worked on the tax issue throughout April and May 2012 and +remained informed about the ongoing merger negotiations. On June 2, 2012, Sun Healthcare +informed McGuire that the announcement of the acquisition was imminent. + + 13. McGuire and Jones knew each other for several years, mutually owned and +operated a separate business together, and had a close personal relationship. At all relevant times, +McGuire and Jones had a history, pattern, and practice of sharing confidences with each other, +including confidential personal and work related information. Shortly after being tasked with +analyzing the tax issue for Sun Healthcare in or around April 5, 2012, McGuire told Jones about +the ongoing merger negotiations while soliciting his advice on the tax issue. McGuire continued to +consult with Jones on the tax issue during the period leading up to the June 20, 2012 merger +announcement. McGuire expected that Jones would maintain the confidentiality of the merger +discussions. + + 14. Jones knew that the information that McGuire disclosed to him concerning the +merger negotiations was confidential and that he should not trade on the information, or +otherwise tip the information to others. + + 15. However, based on the material nonpublic information that he received from +McGuire, between April 20, 2012 and April 24, 2012, Jones purchased 8,200 shares of Sun +Healthcare at an average price of $6.75 per share, and on June 4, 2012, Jones purchased an +additional 4,200 shares of Sun Healthcare at an average price of $4.66 per share. + + 16. Jones also received a benefit when he tipped the merger information to a friend +who then purchased 6,000 shares of Sun Healthcare common stock between April 24, 2012 and +June 14, 2012. + + 17. By purchasing Sun Healthcare securities and tipping material nonpublic +information about the merger negotiations to a friend, Jones misappropriated the information and +breached a duty of trust or confidence he owed to McGuire. Others who traded in Sun +Healthcare securities at the same time as Jones and his tippee were harmed by the advantageous +market positions Jones and his tippee gained through Jones’ use of material nonpublic +information. + + 18. Jones knew or was reckless in not knowing that his purchases of Sun Healthcare +common stock and tipping of material nonpublic information concerning the merger negotiations +were in breach of the duty of trust or confidence that he owed to McGuire. + + 19. After the close of business on June 20, 2012, Sun Healthcare and Genesis jointly +announced a definitive agreement in which Sun Healthcare agreed to be acquired by Genesis. +The following day, Sun Healthcare’s stock price closed at $8.40 per share, a 36.82 percent +increase from the previous day’s closing price of $6.14 per share. + + 20. On June 21, 2012, Jones sold all 12,400 of his Sun Healthcare shares, realizing +illegal profits of $27,675. Jones’ tippee realized illegal profits of $11,407. + 5 + +Findings + + 21. Based on the foregoing, the Commission finds that Jones willfully violated +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct +in connection with the purchase or sale of securities. + + 22. Based on the forgoing, the Commission finds that Jones engaged in conduct +within the meaning of Section 4(C)(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rule s of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Jones’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent Jones shall cease and desist from committing or causing any violations +and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + B. Respondent Jones is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. Respondent Jones shall, within 10 days of entry of this Order, pay disgorgement of +$39,082, prejudgment interest thereon of $4,530, and a civil money penalty of $39,082, for a total of +$82,694 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: + + + 6 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Donald P. Jones as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to G. Jeffrey Boujoukos, Associate +Regional Director, P hiladelphia Regional Office, Securities and Exchange Commission, 1617 JFK +Boulevard, Suite 520, Philadelphia, Pennsylvania 19103. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, 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 + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3855.txt b/raw/aaer/2017/AAER-3855.txt new file mode 100644 index 0000000000000000000000000000000000000000..de808f784d9f51ac0552777ae8ba8a1fcffc7533 --- /dev/null +++ b/raw/aaer/2017/AAER-3855.txt @@ -0,0 +1,919 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10286 / January 23, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79857 / January 23, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3855 / January 23, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17807 + + +In the Matter of + +OVERSEAS SHIPHOLDING +GROUP, INC. + +and + +MYLES ROBERT ITKIN, + +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 +public 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 Overseas Shipholding Group, Inc. (“OSG” or “the Company”) +and Myles Robert Itkin (“Itkin”) (collectively “Respondents”). + + II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents + +2 + +consent to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section +8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, +making findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY + +1. This matter concerns the failure of OSG to record material federal income tax +liabilities in its financial statements from 2000 through the second quarter of 2012. The tax +liabilities, reportable under Internal Revenue Code Section 956, which provides that when a +“controlled foreign corporation” guarantees the debt of its U.S. parent company, the amounts +borrowed by the parent are, in effect, “deemed dividends” and taxable to the parent. During the +relevant period, OSG’s credit agreements contained a provision making its controlled foreign +subsidiary, Overseas International Group, Inc. (“OIN”), and another subsidiary “jointly and +severally” liable for OSG’s debt, thereby triggering Section 956 current tax liability for those +amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available +under the credit agreements. From 2000 to the second quarter of 2012, OSG failed to record and +report these federal income tax liabilities in various annual and quarterly reports and earnings +releases filed with the Commission. Certain of these nondisclosures constituted violations of +Section 17(a)(2) and (3) of the Securities Act. + +2. During the relevant period, OSG failed to recognize its tax liability despite +significant indicia that the structure of its credit agreements, in effect, made OIN a guarantor and +could trigger tax consequences, including tax memos from outside counsel and communications +with the banks during the negotiation phase of the credit agreements. Despite these indicators, +OSG failed to disclose the issue to its outside auditors and ascertain whether the credit +agreements impacted its financial reporting. Moreover, OSG had inadequate internal accounting +controls over its accounting for income taxes and had deficient controls over the impact of the +credit agreements on its financial reporting process. + +3. As a result of its misconduct, OSG restated its financial results for all annual +reporting periods in fiscal years 2000 through 2011, as well as the results for the quarterly +reporting periods in the first half of 2012. For example in 2000, by failing to record the deferred +tax liability related to the prospective drawdowns under the first credit agreement to contain the +“jointly and severally” language, OSG understated the deferred federal tax income tax liabilities +in its financial statements by $122.5 million, or approximately 10% of its total liabilities. The +failure to record the related income tax expense resulted in OSG recognizing a profit that year +when it would have otherwise recognized a loss. By 2011 the cumulative failure to record the +current and deferred income tax liabilities arising from the Section 956 issue resulted in an +understatement of OSG’s income tax liabilities by approximately $512 million, or 17% of its +total liabilities. Had OSG recorded the related income tax provision in that period, its net loss + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +would have increased by approximately 265%, from $193 million to $705 million. In November +2012, following the discovery of the issue, OSG filed for bankruptcy protection. + +4. Myles Robert Itkin (“Itkin”), the chief financial officer (“CFO”) for OSG and its +foreign subsidiary during the relevant period, who participated in the negotiation of and was the +signator to OSG’s credit facilities, oversaw OSG’s financial reporting function, and became +aware of significant red flags indicating tax consequences from the credit agreements, caused +OSG’s Securities Act Section 17(a)(2) and (3) violations from 2011 through the second quarter +of 2012 and caused the company’s reporting, books and records and internal accounting controls +failures going back to 2009. Itkin also negligently misled OSG’s auditor by representing that +OSG had not received any written tax advice concerning income tax issues and signed false +certifications under Sarbanes-Oxley for filings in 2011 and 2012. + +RESPONDENTS + +5. Overseas Shipholding Group, Inc. (“OSG” or the “Company”), is a Delaware +corporation incorporated in 1969, and its wholly owned subsidiaries own and operate a fleet of +oceangoing vessels engaged primarily in the transportation of crude oil and petroleum products +in the international and domestic markets. OSG managed its international and domestic +operations through its wholly owned subsidiaries, OIN, a Marshall Islands corporation, and OSG +Bulk Ships, Inc. (“OBS”), a New York corporation, respectively. OBS’s vessel-owning and +vessel-leasing corporations conduct OSG’s US shipping operations, and OIN’s vessel-owning +and vessel-leasing corporations conducted OSG’s international shipping operations. OSG, OBS, +and OIN were the key corporations of the OSG corporate group. During the relevant time, OSG +had a class of securities registered under Section 12(b) and a reporting obligation under Section +13(a) of the Exchange Act. In November of 2012, OSG and 180 subsidiaries filed for +bankruptcy protection under Chapter 11 of the US Bankruptcy Code in the US Bankruptcy Court +for the District of Delaware (all of which proceedings were jointly administered under Case No. +12-20000 (MFW)), and its shares were delisted. In July of 2014 the bankruptcy court confirmed +a plan of reorganization that provided for a rights offering sponsored by certain of OSG’s equity +holders, pursuant to which they purchased shares in the reorganized Company. In October 2014, +OSG’s Class B common stock became listed on the NYSE MKT. OSG’s Class A common stock +became listed on the NYSE MKT in November 2015, and its listing was moved to the New York +Stock Exchange in June 2016. OSG’s Class A common stock is registered with the Commission +pursuant to Exchange Act Section 12(b). There are no outstanding shares of OSG’s Class B +common stock. + +6. Myles R. Itkin (“Itkin”), age 68, was OSG’s Chief Financial Officer from June +1995, to April 12, 2013, when he was terminated from the Company. Itkin is not a CPA. Itkin +had primary responsibility overseeing OSG’s taxes, accounting, and financial statement +preparation and reporting and participated in the negotiation of and was the signator to the credit +agreements at issue. He was also the senior vice president and CFO of the Company’s +subsidiaries, OIN and OBS, and sat on the board of OIN. As an OIN director and officer, Itkin +made and implemented decisions concerning OIN’s assets, liabilities, transactions, including +debt incurrence, and transfers, including distributions of assets to OSG or OBS. Since October +2006, Itkin has served as a director of Danaos Corporation, a Marshall Islands company, whose + +4 + +securities trade on the New York Stock Exchange under the symbol “DAC,” and serves on its +audit committee. Itkin is not otherwise currently employed. + +FACTS + +Background on Relevant Tax Provisions + +7. From 1987 to 2004, OSG was required to pay U.S. income taxes on current +offshore shipping income of its foreign subsidiaries, including OIN, whether it was distributed or +not. However, after the passage of the American Jobs Creation Act of 2004 (the “Jobs Creation +Act”), OSG was no longer required to pay taxes on undistributed foreign shipping income earned +by its offshore subsidiaries or controlled foreign corporations (“CFC”) so long as the income +remained offshore. OSG, thus, could only make tax-free distributions of foreign shipping +income up to the amount previously subject to income taxation that had not been distributed. +Over time the amount of deferred taxes for undistributed foreign shipping income became quite +substantial because OIN was the primary source of income for the Company. + +8. Under Sections 956(c) and (d) of Subpart F of the Internal Revenue Code +(“Section 956”) when a foreign subsidiary guarantees the loans of a U.S. parent company, the +untaxed “accumulated ‘earnings and profits’ of that subsidiary are deemed to have been distributed +to the U.S. parent company” in amounts equal to average quarterly loan balances. Specifically, +the deemed dividends in this scenario under the Code arise from “investments in United States +property” and includes types of property a CFC could purchase with its untaxed retained +earnings to provide an economic benefit — the functional equivalent of a dividend — to its US +parent corporation without having transferred title in such assets to its US parent corporation. +Such property can include real assets in the United States, tangible or intangible, or financial +assets, such as its US parent corporation’s equity, called “stock,” or debt, called an “obligation.” +To capture circuitous attempts of economic benefit from the CFC to its US parent corporation, +Section 956(d) expands the meaning of “obligation” to include a CFC’s guarantee of its US +parent corporation’s debt obligations to a third-party lender. Accordingly, Subpart F treats such +earnings as if the CFC had distributed them as a distribution or dividend to its US parent +corporation or as “deemed dividends.” The parent company is therefore subject to United States +federal income taxation on the amount of the deemed dividend (subject to certain offsets available +to the company). + +OSG’s Pre-2000 Credit Facilities and Understating of Section 956 Tax Implications + +9. As early as 1990, OSG, which in some years did not generate significant cash- +inflows or profits, relied on large credit facilities with lending banks to sustain its operations. +The facilities typically had credit limits in the hundreds of millions of dollars and terms of five or +seven years. When a credit facility period ended, the balance under the credit facility became +due as a “balloon” payment. Given the lengthy terms of the facilities and the extended +negotiation period preceding a credit facility, OSG often had more than one revolving credit +facility available at any given time. + + +5 + +10. By the late 1990s, OSG’s lenders, aware of OSG’s financial results, sought +greater credit enhancement on the revolving credit facilities. OSG’s downstream guarantees of +loans made to its subsidiaries, OBS and OIN, were not optimal given that OSG’s income was +limited to dividends from its subsidiaries and earnings on its securities investments. Also, OSG +was a significant borrower under the facilities. The banks sought to obtain, as security, direct +access to the significant current and retained earnings of OIN. To obtain this direct access, the +banks sought to make OIN a guarantor of payment on loans made to OSG and OBS under the +facilities, using “joint and several” language that joined the entire facility balance into a single +debt on which OIN would be obligated to pay. With regard to the credit facilities, as early as +1997, the income tax implications from OIN guaranteeing OSG’s debt was discussed among +certain OSG management and resulted in a decision that OSG could not accept the language +‘jointly and severally’ in a credit facility because of the possible adverse tax consequences. + +11. In 1997, OSG negotiated a credit facility specifically to avoid including a “joint +and several” provision because it would make OIN, OSG’s foreign subsidiary, a guarantor of +OSG’s loans under these credit facilities and trigger tax consequences under Section 956. OSG’s +credit facilities from 1990 through 1997 did not provide for such a guarantee, but only a +“downstream guarantee,” meaning that OSG’s subsidiaries would not be required to pay OSG’s +debt in the instance of OSG’s debt default. + +12. Consistent with this understanding, in connection with negotiating a $600 million +credit facility in 1997, OSG specifically rejected an attempt by the lending banks to include a +provision that OSG, OBS, and OIN be “jointly and severally liable” for all advances on the credit +facility regardless of which of the corporations received the funds from the drawdowns. OSG +also rejected the lending banks’ request that all three corporations, OSG, OBS, and OIN, co-sign +all promissory notes for loans made under the 1997 credit facility. + +13. In response, as reflected in draft credit facilities, OSG crossed out the provision +that OSG, OIN, and OBS would be “jointly and severally” liable for any drawdown on the credit +facility, and changed it to “each borrower severally but not jointly” being liable, meaning that +OSG would be solely liable for its drawdowns on the 1997 credit agreement. As understood by +the then OSG treasurer, who negotiated approximately $10 billion in financing for OSG from +1988 to 2001, OSG modified the “joint and several” language proposed by the banks because it +could make OIN potentially responsible for the obligations of OSG under the credit facilities, +which would trigger possible federal tax liability under Section 956. + +14. In connection with the proposed 1997 credit facility, OSG’s longtime outside +counsel (“Outside Counsel”) also identified the potential tax consequences of the “joint and +several” language in the 1997 credit facility. In an August 13, 1997 fax from Outside Counsel to +the lending bank, copying OSG’s then general counsel and controller, Outside Counsel +specifically stated: “If OSG International [OIN] were to pay or guarantee obligations of OSG or +OSG Bulk [OBS], it could be argued that OSG is liable for income tax on previously +undistributed, untaxed earnings of OSG International [OIN] and its subsidiaries.” + +15. In response to OSG’s objections, the lending bank ultimately acquiesced to +OSG’s demands and the parties executed the 1997 $600 million credit facility without the “joint + +6 + +and several” language. Pursuant to what OSG advocated, the 1997 credit facility made OSG the +sole guarantor of amounts borrowed by OBS and OIN, and promissory notes executed under the +1997 credit facilities were signed solely by OSG as the borrowing corporation. As a result, the +terms of the 1997 credit agreement did not trigger federal income tax consequences for OSG +under Section 956. + +Deteriorating Financial Conditions of OSG and Post-2000 Credit facility + +OSG’s 2000 Credit facility + +16. By 1999, OSG’s financial condition had deteriorated, and OSG needed to raise +capital. In April 1999, one of OSG’s U.S. bank creditors downgraded OSG’s debt from BB3 to +BB1, noting that the Company had “reported lower revenues and earnings during FY1998 and +operating results show no signs of improving given the current poor fundamentals in the bulk +ocean shipping industry.” + +17. In 1999, OSG and Itkin, who joined the company as CFO in 1995, started +negotiating a new $300 to $400 million credit facility with two European banks. Given OSG’s +deteriorating financial condition, OSG’s United States bank arrangers were no longer willing to +negotiate a new credit facility without enhanced credit protection through a “joint and several” +liability provision requiring OIN and OBS to guarantee repayment of OSG’s borrowings. + +18. During this time, the European banks inserted the “joint and several” provision, +which OSG, through Itkin, agreed to in a term sheet dated December 12, 1999. As reflected in +drafts of the 2000 credit facility, both OSG’s internal and external counsel tried to reject the +provision. In one draft, OSG’s then general counsel, crossed out the “joint and several” +provision, writing “no” to the “joint and several” clause being “together” and noted in a +comment to its then treasurer that OSG should reject the “joint and several” language because it +involved “different accounting/tax treatment.” In another draft, OSG’s then general counsel +proposed the language “severally and not jointly” just as the Company had done in connection +with the 1997 credit agreement. The then general counsel made these notations out of concern +that the “joint and several” language could create potential tax problems for OSG. + +19. OSG’s Outside Counsel also noted their concern in drafts of the proposed +agreement that the “joint and several” provision would create an “upstream guarantee.” In one +draft, an attorney for Outside Counsel noted to the banks’ counsel, that “[a]s we discussed at the +commitment letter stage we can't give legal, valid and binding opinion with respect to an +‘upstream' guarantee.’” The attorney for Outside Counsel, in fact, circled the “joint and several” +language several times in the draft where it appeared and wrote “legal issue.” + +20. Although OSG had not entered into any prior credit facility with the “joint and +several” provision, it accepted this structure in its 2000 credit facility. + +21. Itkin signed the credit agreement with the “joint and several” language for the +2000 credit facility on behalf of OSG, OIN, and OBS. In a departure from prior practice, Itkin +also co-signed a series of promissory notes on behalf of all three entities. + + +7 + +22. For all ensuing revolving credit facilities of OSG, the credit agreements included +the “joint and several” provision, and OSG, OBS, and OIN co-signed promissory notes for the +agreements. The joint and several provision triggered tax consequences under Section 956, +which OSG failed to report and record in its books and records. + +OSG’s 2006 Credit facility + +23. In 2005, OSG management began negotiating with banks in an effort to combine +its previous credit facilities into one giant $1.5 billion credit facility. As reflected in the drafts +exchanged between OSG management and the banks, tax implications arising from a guarantee +provision in the credit agreement were discussed among the parties. In this regard, an early draft +term sheet, which was shared with Itkin, reflect footnote comments from bank counsel in +connection with the “guarantors” provision stating, “[d]iscuss tax implications of guarantees +from non-US subsidiaries.” + +24. As part of these negotiations, the lending banks attempted to expand the scope of +the guarantee provision beyond OIN and OBS and include all of OSG’s subsidiaries. The draft +term sheet, for example, stated that all of OSG’s “direct and indirect” subsidiaries would be +“guarantors” of OSG’s debt. OSG management, however, rejected this notion. Instead, as +reflected in a December 22, 2005 email from OSG’s then general counsel to Itkin and a new law +firm that OSG had hired (“Outside Counsel #2”), OSG wanted to “limit subsidiary guarantors” to +OIN and OBS only (the same structure of the 2000 credit agreement), as opposed to all of its +subsidiaries. + +25. As a result of the negotiations, on February 9, 2006, OSG and the lending banks +entered into a $1.5 billion credit facility, which left intact the provision from the 2000 credit +facility that made OIN and OBS “jointly and severally liable” for OSG’s borrowings. Itkin, +again, signed on behalf of all three entities. The joint and several provision triggered tax +consequences under Section 956, which OSG failed to recognize or report and record in its books +and records. + +Additional Economic Benefits from OIN to OSG Triggering Tax Consequences + +26. By the end of 2008, OSG learned that it had exhausted its $548 million in +“previously taxed income” (“PTI”), which up until this point operated as a tax shield from the +income tax liability triggered by the credit agreements. + +27. By this time, Itkin understood that the PTI allowed OSG to receive an economic +benefit from OSG’s foreign subsidiary and recognize taxable income—either in the form of a +deemed dividend or direct dividend— only to the extent it exceeded such PTI, and that utilizing +PTI in this way could reduce or eliminate PTI available in the future. + +28. In early 2008, OSG wanted to repatriate approximately $500 million in cash from +OIN to OSG so that OSG could pay down certain debt. OSG, through Itkin, asked Outside +Counsel (the company’s longstanding counsel that advised on the 1997 and 2000 credit +agreements) to prepare a memorandum concerning the tax impact of the proposed repatriation + +8 + +and whether it made a difference whether it took the form of a distribution or loan by OIN to +OSG. + +29. In response, Outside Counsel prepared a March 14, 2008 memorandum, directed +to Itkin and the OSG Controller, advising that either a direct distribution, which would be a +direct dividend, or a loan, which would be a deemed dividend, of $500 million from OIN to OSG +would not give rise to taxable income to OSG to the extent that the amount was covered by +OSG’s PTI. The memo further noted that a repatriation of this magnitude would wipe out OSG’s +PTI and reduce it to a zero balance, and the Company would no longer be able to shield tax +liabilities resulting from future repatriations through PTI offsets. + +30. Rather than repatriating through a distribution or loan, OSG, under Itkin’s +authorization, directed a net cash transfer of $607 million from OIN to OSG through numerous +inter-company transfers. In February 2009, OSG’s outside tax advisor discovered the $607 +million cash transfer in its yearly tax memo and informed the company that the cash transfer not +only wiped out OSG’s PTI, but also resulted in an additional $53 million (the amount in excess +of the PTI offset) that OSG was to include as part of its taxable gross income for 2008, which the +Company then paid. + +31. Once OSG ‘s PTI was eliminated, OSG no longer had the ability to offset OIN’s +earnings and profits includable in OSG’s taxes pursuant to Section 956(c).2 At this point, based +on outside counsel’s memo of March 14 2008, Itkin and other members of OSG management +knew that a cash transfer in the form of an actual dividend or a loan in the form of a deemed +dividend under Section 956(c) constituted economic benefits to OSG and would create taxable +income to OSG.3 + +32. In 2010, OSG and Itkin were presented with additional indicia that economic +benefits, such as constructive dividends, from OIN to OSG trigger tax liabilities. By October +2010, in connection with a Department of Justice proceeding in which OSG was subject to a $37 +million criminal penalty and plead guilty to 33 criminal counts for certain of its ships discharging +oil into the ocean, the IRS discovered that OIN had paid the OSG penalty. As reflected in IRS +Forms 5701 and 886-A, the IRS claimed that OIN’s payments of OSG’s debt constituted a +constructive dividend, triggering tax liability. + +OSG’s Receipt of the 2011 Tax Memorandum + + +2 It was only after 2008, when the PTI balance had been exhausted with no “automatic” replenishment that the loan +amounts from credit agreements that were previously not included as gross income became taxable income to OSG +with no offset. + +3 In March 2010, OSG conducted both a $300 million debt offering and a $159 million common stock offering +pursuant to the Company’s previous shelf registration of the securities on Form S-3. Both registration statements +incorporated by reference OSG’s 2009 Form 10-K, which contained material misrepresentations and omissions. +Also, during the period March 31, 2009 through the first two quarters of 2012, OSG sold securities to employees +through Form S-8 stock offerings, and the Forms S-8 incorporated by reference the false statements OSG made in its +relevant periodic filings with the Commission. + +9 + +33. By April 2011, OSG was close to finalizing a new $900 million credit facility, +called the Forward Start Credit facility (“FSF”), to refinance a balloon payment on the 2006 $1.8 +billion credit facility that would be due on February 8, 2013. Under the FSF, OSG would be able +to begin drawdowns on and after this due date. + +34. While reviewing a draft for the FSF, a tax attorney for longstanding Outside +Counsel identified to Itkin and other members of OSG management that the “joint and several” +liability provision in the draft could create potential Section 956(c) and (d) income tax liabilities +for OSG and asked whether the provision had been included in prior credit facilities. Outside +Counsel further noted that the provision could be interpreted as an “upstream guarantee” by OIN +of OSG’s indebtedness, which could trigger a 956 liability. + +35. After confirming to Outside Counsel that the “joint and several” provision had +been included in the 2006 credit facility, Itkin, among other OSG management, requested that +Outside Counsel analyze the Section 956 tax implications arising from the “joint and several” +provision in the 2000 through 2006 credit agreements. + +36. As Outside Counsel further examined the issue, the firm realized that, under a tax +law analysis, the IRS could interpret the “joint and several” liability provision, if enforceable, in +the credit facilities as triggering tax liabilities under Section 956(c) and (d). Outside Counsel +then noted that the “joint and several” provision in the credit agreements were arguably +ambiguous and analyzed the issue from the standpoint of determining the original intent of the +parties concerning that provision. In this regard, Outside Counsel advised OSG and Itkin that if +the Company did not intend for OIN to be a guarantor of OSG’s loans and thus trigger tax +consequences, then OSG could argue under commercial law doctrines that the provision should +be set aside and rendered unenforceable by the IRS in a court proceeding. + +37. In determining the intent of the parties, Outside Counsel repeatedly asked OSG +for contemporaneous documents that would shed light on the original intent of the parties, +including draft term sheets and communications surrounding the 2000 and 2006 credit facilities, +but were told by certain OSG management that no documents existed. + +38. Despite receiving at least two documents that discussed subsidiary guarantees in +connection with the 2006 credit facilities (the December 2005 memo and the draft term sheet +referencing “tax implications of guarantees from non-US subsidiaries”) during the time that +Outside Counsel #2 advised OSG, OSG management and Itkin did not disclose the documents to +Outside Counsel. Itkin also did not disclose that he had signed promissory notes on behalf of all +three entities in connection with the 2000 and 2006 credit facilities. + +39. Outside Counsel also requested permission to reach out to individuals who were +involved in the earlier negotiations or term sheet review process for the earlier credit facilities, +but Itkin and other members of OSG management did not authorize Outside Counsel to contact +these individuals. + +40. In May 2011, Outside Counsel memorialized its tax analysis in a memorandum to +OSG senior management, including Itkin, providing an IRS tax analysis and a commercial law + +10 + +analysis—to the question of whether the “joint and several” provisions in the 2006 credit facility +created taxable income to OSG. With respect to the tax analysis, the memorandum concluded +that there was a “significant risk” that the IRS would construe the “joint and several” provision, +if enforceable, as a guarantee under the Internal Revenue Code, triggering significant unpaid tax +liabilities under Section 956. Under the commercial law analysis, the memorandum stated that if +OSG did not intend OIN to be a guarantor under the credit facilities, OSG “should” prevail in a +litigated proceeding by the IRS against OSG for unpaid tax liabilities under Section 956, and that +a court should not enforce “joint and several” liability against OIN. Outside Counsel’s factual +foundation of its commercial law analysis was premised, among other factors, on the +representations of Itkin and OSG management that OSG did not intend to make OIN a guarantor +of OSG’s loans and thus trigger tax consequences and the apparent absence of relevant +documents on the issue of intent. + +41. Notwithstanding the fact that the May 2011 memo noted that if the “joint and +several” provision made OIN a co-borrower or co-obligor with OSG and OBS, then it “would +create a significant risk that a substantial portion of OIN’s deferred earnings would be taxable to +OSG, and were taxable to OSG” as a consequence the application of Section 956(c) and (d) to +the credit agreements, OSG and Itkin failed to disclose the memo to the Company’s outside +auditor, its internal auditor, or its board of directors. + +42. On February 29, 2012, and again in August 2012, Itkin signed management +representation letters for the Company’s outside auditor confirming that the Company had +provided the auditor with all written tax advice, even though Itkin and the Company had +obtained a May 2011 tax memorandum from Outside Counsel, which he had not provided to the +auditor. + +43. OSG continued to not recognize any tax liabilities under Section 956 from its +drawdowns on loans that its foreign subsidiary, OIN, had guaranteed. + +Events Leading Up to OSG’s Board of Directors Discovering the Company’s Tax Liabilities + +44. By February 2012, while OSG was trying to convince the lending banks to +expand the credit limit of the FSF, OSG’s management identified the tax consequences of +making OIN “jointly and severally” liable for OSG’s loans and discussed the issue with the +lending banks. + +45. An internal memo by a loan officer of one of OSG’s key lenders to other bank +officials, dated February 12, 2012, memorialized subjects that were discussed during a recent +meeting between the banks, Itkin, and OSG’s then CEO. The memo noted that OSG’s “preferred +recapitalization continues to be to obtain $350mm-$400mm of additional capital for both +survival and growth.” The memo further noted that the “current FSF is structured with OSG +Inc., OSG International Inc., and OSG Bulk Ships, Inc. as “joint and several” borrowers. The +deemed dividend classification would mean such a distribution or benefit would be subject to +U.S. corporate income tax of 35% without repatriation.” The memo specifically highlighted +Section 956 and highlighted that “a tax issue arises if the FSF is granted security due to section +956 of the Internal Revenue Code.” + +11 + + +46. By May 2012, Itkin had a lead role in negotiating with lending banks in order to +secure additional financing for OSG. The Company’s presentation materials to banks, for +example, referenced that “Myles Itkin, OSG's CFO, will discuss the Company's thoughts on both +amending certain terms of the FSF plus launching a new secured debt credit facility at Overseas +International, Inc. that will assist the Company with enhancing its liquidity position and +maintaining its leading position in the tanker industry.” + +47. By this time, OSG and Itkin were presented with further evidence that OIN’s +guarantee of OSG’s loans under credit facilities triggered tax consequences for OSG. Attached +to an email dated May 25, 2012, from OSG’s vice president of corporate development and +finance to Itkin, among others at OSG, and to various bankers, was an “OSG Presentation to +Lenders” concerning a meeting to be held with the FSF lenders to discuss the presentation. In +the presentation, OSG highlighted precisely the Section 956(c) and (d) tax consequences +identified in the May 2011 memo from Outside counsel and near-certain tax obligations for the +Company. Specifically, OSG’s presentation pointed out: + +“Due to OIN’s status as a controlled foreign corporation and OSG’s status as a “United +States shareholder” of OIN, under the U.S. tax code, certain actions by OIN (including +guaranteeing or providing security for OSG’s outstanding debt) will trigger immediate +taxable income for OSG with respect to some of all of the $2.2 billion in earnings that +have not yet been subject to U.S. federal income taxation. This is true even without an +actual distribution of cash by OIN to OSG…. + +“If OIN were to lend $100 million to OSG, $100 million of OIN’s currently untaxed +earnings ($2.2 billion) would be accelerated and would produce taxable income for the +U.S. + +“If OIN guarantees OSG’s obligations on the $900 million Forward Start +Agreement, it would create $900 million of taxable income and approximately +$300 million of cash taxes for OSG.” + +“The assets of a controlled foreign corporation serve at any time, even though +indirectly, as security for the performance of an obligation of its U.S. shareholder. +The controlled foreign corporation will be considered a pledgor or guarantor of +that obligation. Income tax inclusion would equal the amount of the obligation +and not the value of CFC’s pledged assets.” (Underscore in original.) + +48. Despite acknowledging to its prospective bankers the tax consequences from +OIN’s guarantees of OSG’s drawdowns through the “joint and several” provision in any future +FSF and the tax consequences under Section 956 under prior credit facilities, OSG and Itkin did +not disclose the “joint and several” issue to the Company’s outside auditor, nor did OSG +recognize any tax liability arising from prior credit facilities in OSG’s publicly filed financial +statements. + + +12 + +49. By September 2012, OSG was still unable to secure the financing it needed +through the FSF and was faced with a massive debt obligation of $1.49 billion from the 2006 +credit facility that was due by February 8, 2013. + +50. Left with no other choice and faced with the possibility of defaulting on its debt +obligations, OSG management, including Itkin, finally disclosed the Section 956 issue to OSG's +board of directors during a meeting held on September 20, 2012. During the meeting, which was +attended by OSG management, including Itkin, OSG's financial advisor, and attorneys from +Outside Counsel, OSG's financial advisor made a presentation to the board on a potential +bankruptcy filing by the Company. That presentation disclosed that OSG's potential Section +956 past-due tax liabilities (which the Company had not yet recognized), could result in a +bankruptcy filing if recognized. As one board member understood it, such a situation would +impair the banks' ability to recover on OSG's debt under the credit facilities because the IRS +would stand in front of the banks as a secured creditor in bankruptcy and, thus, the banks may be +more willing to negotiate the FSF on more favorable terms and provide funding. + +51. OSG’s board member expressed surprise that management, including Itkin, had +not disclosed the Section 956 tax liability issue to the board before. Itkin told the board member +at the meeting that OSG was advised by Outside Counsel that the issue need not be disclosed to +the board, Audit Committee or OSG’s auditors—advice that Outside Counsel confirmed at the +meeting—and, as such, the inner circle of people who knew about this issue had been kept small. +The board member also specifically asked to speak with OSG management who were involved in +the negotiations of the earlier credit facilities, including the 2000 agreement that first included +the joint and several provision, but was told that “[t]hose parties are no longer in this room, +meaning former executives of the company.” Itkin, however, did not disclose that he was +involved in the negotiations for the 2000 credit facility or that he had signed the promissory +notes on behalf of OSG, OIN and OBS. + +52. The board member was also troubled by the fact that OSG management had failed +to disclose the 956 issue to the Company’s outside auditor, but OSG management, along with +Outside Counsel, continued to hold the view that such disclosure was not needed. The board +member urged OSG management to disclose immediately the Section 956 issue to OSG’s +outside auditor and bring in an independent outside law firm to investigate the full scope of the +issue. OSG did not immediately disclose the Section 956 issue, but the board scheduled a +follow-up meeting for October 4 to more fully discuss the issue with its Outside Counsel before +making any disclosure. + +53. Following the board meeting, the board member pleaded with his fellow board +members to engage OSG’s outside auditors and an independent law firm immediately. On +September 25, 2012, the board member sent a letter to OSG’s chairman of the board and audit +committee insisting that the tax issue be presented to OSG’s outside audit firm and another +independent law firm be retained to provide “input on any financial statement implications.” +Two days later, on September 27, 2012, the board member submitted a resignation letter. The +board member believed that his resignation would, in effect, force OSG to immediately disclose +the Section 956 issue to OSG’s outside auditor because the Company was required to publicly + +13 + +disclose the board member’s resignation. As anticipated, on October 3, 2012, OSG filed a Form +8-K announcing the board member’s resignation and attaching his letter. + +54. The resignation led to a cascade of events, including immediate disclosure to +OSG’s outside auditor, OSG’s retention of an independent law firm, and the subsequent +reporting that OSG had approximately $463 million in unpaid taxes arising from the Company’s +Section 956 liabilities. As a result, OSG restated its financial statements from 2000 through the +second quarter of 2012 and ultimately filed for Chapter 11 bankruptcy in November 2012. The +Section 956 issue resulted in OSG materially understating its cumulative deferred tax liability +and/or current tax liability by the following material amounts and percentages of total liabilities +per year: + +$123M in 2000 (10%) $519M in 2006 (20%) +$159M in 2001 (12%) $558M in 2007 (20%) +$146M in 2002 (10%) $513M in 2008 (20%) +$169M in 2003 (14%) $476M in 2009 (17%) +$173M in 2004 (12%) $464M in 2010 (16%) +$187M in 2005 (11%) $512M in 2011 (17%) + +55. In a Form 8-K filed on December 19, 2013, the Company reported that the IRS +had amended and reduced its claim for past taxes from about $463 million to approximately +$264 million. OSG subsequently paid this latter amount to the IRS. + +OSG’S Improper Analyses Under ASC 740 + +OSG’s Failure to Recognize Deferred Tax Liabilities Under Accounting Principles Board +Statement 23 (“APB 23”) + +56. The Financial Accounting Standards Board’s (“FASB”) Accounting Standards +Codification (“ASC”) 740-30-25-3, formerly Accounting Principles Board Statement No. 23 +(“APB 23”), paragraph 10, sets forth an accounting presumption that all undistributed earnings +of a subsidiary will eventually be transferred to the parent entity.4 This presumption results in a +temporary difference between when the parent entity recognizes the subsidiary’s earnings for +accounting purposes (when it’s earned) and for tax purposes (when it’s distributed). For +example, OSG recognized its foreign source income when earned for financial reporting, but +after the Jobs Creation Act it deferred recognizing its foreign source income for tax reporting +because the IRS rules allowed for deferred taxation until the income was repatriated. To account +for this temporary difference, the parent is required to record a deferred tax liability and +corresponding expense. Pursuant to ASC 740-30-25-17, the presumption in ASC 740-30-25-3 +can be overcome, however, and no temporary difference recorded, if sufficient evidence shows +that the subsidiary has invested or will invest the undistributed earnings indefinitely. In general, + +4 References are to the ASC for interim and annual periods ending after September 15, 2009. For prior periods, the +authoritative literature in this area, including Financial Accounting Standards Board Statement No. 109 (“SFAS 109 +”), was substantially similar. SFAS 109, as supplemented by FIN 48 in 2007, established the accrual basis of +accounting for income tax liabilities and expenses and explains temporary differences that gave rise to the financial +statement misstatements discussed below. + +14 + +the parent must show it has both the intent and the ability to indefinitely reinvest these earnings +in order to overcome the presumption. + +57. From 2000 to the second quarter of 2012, OSG inappropriately relied upon this +exception pursuant to ASC 740-30-25-17, and thus avoided recognizing deferred tax liabilities +on untaxed earnings and profits of its CFC, OIN, up to the maximum borrowing capacity of the +agreements. Because the “joint and several” language created the possibility of deemed +repatriations under Section 956, OSG did not have the ability to indefinitely reinvest all of OIN’s +earnings and profits. + +58. In each of its Forms 10-K for 2000 to 2011, OSG reported the amount of its +foreign shipping companies’ untaxed and undistributed earnings, as well as a statement that no +provision for U.S. income taxes was required in relation to these earnings because the earnings +would be reinvested indefinitely. For example, OSG’s 2009 Form 10-K, filed on March 1, 2010, +specifically, Note L (Taxes) to the financial statements contained the assertion that was used in +2010 and 2011: + +The Company intends to permanently reinvest these earnings [OIN’s untaxed past +earnings], as well as the undistributed income of its foreign companies accumulated +through December 31, 1986, in foreign operations. Accordingly, no provision for U.S. +income taxes on the shipping income of its foreign subsidiaries was required in the three +years ended December 31, 2009 and no provision for U.S. income taxes on the +undistributed income of the foreign shipping companies accumulated through December +31, 1986 was required at December 31, 2009. + +59. These disclosures were false because OSG was in fact required to provide for +deferred U.S. income taxes in each of these years due to the “joint and several” language in the +credit facilities. During this period, the amount of deferred income taxes OSG failed to report +grew from $165 million in 2000 to $525 million by the second quarter of 2012. + +60. OSG restated its assertion under ASC 740-30-25-17 in its 2013 financials +statements “to the extent these earnings could be deemed repatriated as a result of OIN’s joint +and several liability.” + +OSG’s Failure to Disclose, Analyze, and Document Requirements of ASC 740-10-25-5 + +61. From 2000 through early 2011, OSG created no documentation about the tax +consequences of “joint and several” language despite the significant discussion that took place +surrounding the issue in connection with both the 1997 and 2000 credit facilities. During this +period, OSG also did not obtain any written tax or attorney opinion about the tax implications of +the “joint and several” language. In fact, there was no acknowledgement of a tax position by +OSG, even though the decision to exclude from OSG’s gross income the amounts borrowed by +OSG under the credit facilities, in effect, created a “tax position.” + +62. OSG routinely documented the Company’s “uncertain tax positions” and +understood the requirements of the accounting principle that required analysis under ASC 740- + +15 + +10-25-5.5 For example, on January 8, 2007, OSG’s outside tax adviser sent the Company a +memo asking OSG “to confirm that none of the CFC’s [sic] made an investment or deemed +investment in U.S. property resulting in a deemed dividend under Section 956.” It continued: +“Section 956(d) provides that for purposes of Section 956(a), a CFC shall be considered as +holding an obligation of a U.S. person if such CFC is a pledgor or guarantor of such obligation.” + +63. In May 2011, despite OSG receiving Outside Counsel’s tax memo, the Company +failed to recognize the “joint and several” provision in the 2006 credit facility as creating an +uncertain tax position. However, OSG failed to perform any analysis concerning the Company’s +uncertain tax position or record any related reserve. + +* * * * * * + +64. OSG, with Itkin as the CFO, maintained deficient or non-existent internal +accounting controls, including processes to identify the tax consequences, if any, of +intercompany transactions between OSG and its foreign subsidiary, OIN. OSG and Itkin +understood that the terms of the credit agreements for hundreds of millions of dollars were +complex and its key terms had business, legal, and often tax significance, but agreed to the joint- +and-several provision. Further, OSG did not have an adequate process in place to identify and +evaluate its income tax liabilities pursuant to the Internal Revenue Code stemming from OSG’s +relationship with OIN and the related effects those liabilities would have when accounting for +income taxes in its financial statements. Specifically, OSG had no controls to identify the +interplay between the credit agreement structures, Sections 956(c) and (d), and FIN 48. OSG’s +head of taxation and financial reporting who reported to Itkin who had some understanding of +the IRS Code, did not understand Section 956 and was not involved in the underlying +negotiations of the credit agreements. Despite the limitations of its internal knowledge in +negotiating and accounting for these revolving credit agreements--critical to OSG’s liquidity— +OSG and Itkin failed to implement proper internal accounting controls designed to ensure that +OSG properly reported its tax liabilities. + +Violations + +65. Section 17(a)(2) prohibits any person from directly or indirectly obtaining money +or property in the offer or sale of securities by means of any untrue statement of a material fact +or any omission to state a material fact necessary in order to make the statements made, in light +of the circumstances under which they were made, not misleading, and Section 17(a)(3) prohibits +any person from directly or indirectly engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser in the offer or sale of + +5 ASC 740-10-25-5 requires businesses to analyze uncertain income tax positions to determine whether +the positions are more likely than not to be sustained upon examination. Companies are only permitted to +recognize the associated benefits from an income tax position to the extent it believes it is more likely +than not entitled to the benefits. As a result of this analysis, the amount of benefit recognized for financial +reporting purposes may differ from the benefit taken for tax purposes. This difference should be +recognized as a liability in the company’s balance sheet and disclosed in the footnotes. For +implementation guidance, refer to ASC 740-10-55-3. + + +16 + +securities. + +66. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of annual, +current, and quarterly reports, respectively. In addition to the information expressly required to +be included in such reports, Rule 12b-20 of the Exchange Act requires issuers to add such further +material information, if any, as may be necessary to make the required statements, in the light of +the circumstances under which they are made not misleading. “The reporting provisions of the +Exchange Act are clear and unequivocal, and they are satisfied only by the filing of complete, +accurate, and timely reports.” SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) +(citing SEC v. IMC Int’1, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974)). A violation of the +reporting provisions is established if a report is shown to contain materially false or misleading +information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). + +67. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep +books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the Exchange +Act requires issuers to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are recorded as necessary to permit the +preparation of financial statements in conformity with generally accepted accounting principles. + +68. As a result of the conduct described above, OSG 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. + +69. To establish that a respondent caused a violation of the securities laws, the +Commission must show that: (1) a primary violation occurred; (2) an act or omission by the +respondent was a cause of the violation; and (3) the respondent knew or should have known that +his or her conduct would contribute to the violation. Robert M. Fuller, 56 S.E.C. 976, 984 +(2003), pet. denied, No. 03-1334 (D.C. Cir. 2004). + +70. Exchange Act Rule 13b2-1 prohibits any person from directly or indirectly +falsifying, or causing to be falsified, any book, record, or account subject to Exchange Act +Section 13(b)(2)(A). No showing of scienter is required to establish a violation of Rules 13b2-1 +and 13b2-2 (described below). World-Wide Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. +1983). + +71. Exchange Act Rule 13b2-2(a) prohibits an officer or director of an issuer from +making materially false statements or omissions to an accountant in connection with an audit or +review of the issuer’s financial statements. In addition, Rule 13b2-2(b) prohibits an officer or +director of an issuer from taking actions to mislead an accountant engaged in the performance of +an audit if that person knew or should have known that such action could render the issuer’s +financial statements materially misleading. + +72. Exchange Act Rule 13a-14, among other things, requires a principal financial + +17 + +officer to certify in each quarterly and annual report filed or submitted under Exchange Act +Section 13(a) that he or she has reviewed the report and to certify that he or she had designed +such internal control over financial reporting, or caused such internal control over financial +reporting to be designed under [their] supervision, 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. + +73. Itkin, in his role as CFO of OSG, had responsibility for the financial and +accounting operations of the company, served on the board of directors for OIN and OBS, +negotiated the credit agreements, signed promissory notes on behalf of all three entities and +directed the draw down of advances on behalf of OSG under the revolving credit facilities. In +carrying out these actions, Itkin had indicated that the credit agreements triggered tax +consequences but did not take steps to make sure OSG was recognizing and report tax liabilities +arising from the credit agreements. Itkin also was negligent in allowing internal accounting +controls deficiencies at the company during the relevant period including processes to identify +the tax consequences of intercompany transactions between OSG and its foreign subsidiary, +OIN. Further, Itkin signed management representation letters for the Company’s outside auditor +confirming that the Company had provided the auditor with all written tax advice, even though +Itkin knew that the Company had obtained a May 2011 tax memorandum from Outside Counsel, +which he had not provided to the outside auditor. + +74. Accordingly, Itkin was a cause of the company’s negligence-based fraud +violations under Securities Act Sections 17(a)(2) and (3) from 2011 through the second quarter +of 2012. By engaging in the foregoing conduct, from 2009 through the second quarter of 2012, +Itkin also directly violated Exchange Act Rule 13b2-1 by causing to be falsified various books +and records of the company and acted as a cause of the company’s reporting, internal accounting +controls, books and records, and related rule violations under Exchange Act 13(a), 13(b)(2)(A), +and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13. During the same period, Itkin +violated Exchange Act Rule 13b2-2(a)-(b) by his failure to disclose the May 2011 tax +memorandum or its analysis to OSG’s outside auditor and Exchange Act Rule 13a-14 when he +signed false certifications as the CFO of OSG that were included in OSG’s Forms 10-Q and +Forms 10-K filed with the Commission. + +Findings + +75. Based on the foregoing, the Commission finds that Respondent OSG violated +Securities Act Sections 17(a)(2) and 17(a) (3), Exchange Act Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13. + +76. Based on the foregoing, the Commission finds that Respondent Itkin violated +Exchange Act Rules 13b2-1, 13b2-2, and 13a-14, and caused OSG’s violations of Securities Act +Sections 17(a)(2) and 17(a)(3), Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and +Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13. + + IV. + + +18 + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents OSG and Itkins’ Offers. + + In determining to accept OSG’s Offer, the Commission considered OSG’s cooperation +afforded to the Commission staff, including OSG’s implementation of remedial measures and +improvements to internal accounting controls over its tax reporting function and changes to the +senior management and directors of OSG since 2012. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, Respondents OSG and Itkin cease and desist from committing or causing any violations and +any future violations of Securities Act Section 17(a)(2) and 17(a)(3), and Exchange Act Sections +13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and +Itkin cease and desist from committing or causing any violations or any future violations of +Exchange Act Rules 13a-14, 13b2-1, and 13b2-2. + +B. Respondent OSG shall, subject to the approval of the bankruptcy court in the +above-described bankruptcy proceedings, within ten (10) days of such approval and entry of a +final order by the bankruptcy court, pay a civil money penalty of $5,000,000 to the Securities +and Exchange Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall +accrue pursuant to 31 U.S.C. § 3717. + +C. Respondent Itkin shall, within ten (10) days of the entry of this Order, pay a civil +money penalty of $75,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +D. Respondents’ payments must be made in one of the following three 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/ofin.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 + +19 + +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +OSG and Itkin as a Respondents in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Gerald W. Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F +Street, NE, Washington, DC 20549-5720. + +E. Amounts 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, 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 Respondents’ payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondents agree that it shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondents by or on behalf of one or more investors +based on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3856.txt b/raw/aaer/2017/AAER-3856.txt new file mode 100644 index 0000000000000000000000000000000000000000..99c26d79c03fd5b111326165cf805eb11d854ab9 --- /dev/null +++ b/raw/aaer/2017/AAER-3856.txt @@ -0,0 +1,1037 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79880 / January 26, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3856 / January 26, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17816 + + +In the Matter of + +Anderson Bradshaw PLLC, +Russell Anderson, CPA, +Sandra Chen, CPA, and +William Denney, CPA, + +Respondents. + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +administrative and cease-and-desist proceedings be, and hereby are, instituted against Anderson +Bradshaw PLLC; Russell Anderson, CPA; Sandra Chen, CPA; and William Denney, CPA (the +“Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”), and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is +found…(1) not to possess the requisite qualifications to represent others; (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to +have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it in any way to any person who is found…to have engaged in +unethical or improper professional conduct. + + 2 +II. + +In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”), which the Co mmission 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 t he Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to +Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds that: + + A. Respondents + +1. Anderson Bradshaw PLLC (“AB”) is a public accounting firm.3 AB was +the independent auditor for Longwei Petroleum Investment Holding Limited (“Longwei” or the +“Company”) from August 2, 2012 to May 30, 2013. AB audited Longwei’s financial statements +for its fiscal year ended June 30, 2012, and later conducted additional inquiries and audit +procedures, including an investigation of allegations of fraud at Longwei that could have directly +affected AB’s audit report on Longwei’s financial statements for 2012. + +2. Russell Anderson, age 53, of West Valley City, Utah, is a certified public +accountant licensed in Utah and currently a partner at AB. Before that, Anderson was a partner at +Child Van Wagoner & Bradshaw PLLC (“CVB”). Anderson was listed as a Consulting Partner for +AB’s 2012 audit of Longwei, but did not play an active role in the audit. On July 8, 2014, the +Commission filed administrative proceedings against Anderson, CVB, and others in connection +with the audits of Yuhe International, Inc. In the Matter of Child, Van Wagoner & Bradshaw, + + +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 On August 2, 2012, AB filed a Form 4 with the PCAOB to succeed to the registration status of Child +Van Wagoner & Bradshaw PLLC. CVB was a public accounting firm registered with the PCAOB that +was Longwei’s independent auditor from January 1, 2006 to August 2, 2012. On July 8, 2014, the +Commission filed administrative proceedings against CVB and others in connection with the audits of +Yuhe International, Inc. In the Matter of Child, Van Wagoner & Bradshaw, PLLC, et al. (Rel. No. 34- +72557). On February 11, 2015, CVB agreed to the entry of an order, among other things, denying it the +privilege of appearing or practicing before the Commission. (Rel. No. 34-74262). + + 3 +PLLC, et al. (Rel. No. 34-72557). On February 11, 2015, Anderson agreed to the entry of an order +that, among other things, denied him the privilege of appearing or practicing before the +Commission as an accountant, with the right to apply for reinstatement after a period of three +years. (Rel. No. 34-74262). + +3. Sandra Chen, age 48, of West Jordan, Utah, is a certified public accountant +licensed in Utah and, during the relevant time period, was a partner at AB. Chen served as the +engagement partner for AB’s audit of Longwei’s financial statements for 2012. She also +participated during January 2013 in AB’s additional inquiries and audit procedures regarding +allegations of fraud at Longwei. Before that, Chen was an employee of CVB and served as the +Audit Manager on CVB’s audit of Longwei’s financial statements for 2011. + +4. William Denney, age 59, of East Murray, Utah, is a certified public +accountant licensed in Utah and currently a partner at AB. Denney served as the engagement +quality review partner for AB’s audit of Longwei’s financial statements for 2012. Before that, +Denney was a partner at CVB. + + B. Relevant Issuer + +5. Longwei Petroleum Investment Holding Limited is a Colorado corporation +headquartered in Shanxi Province, China. All of its operations are in China. At all relevant times, +its common stock was registered with the Commission pursuant to Exchange Act Section 12(b), +and was traded on the NYSE MKT stock exchange. On March 22, 2013, the NYSE MKT delisted +Longwei’s stock after the Company failed to respond adequately to requests for documents and +information. Longwei’s common stock currently trades on the “Grey Market” of the OTC under +the symbol “LPIH.” + +C. Background + + 6. Longwei purports to be an energy company engaged in the wholesale +distribution of finished petroleum products in the People’s Republic of China. For its fiscal years +ended June 30, 2011, and June 30, 2012, Longwei claimed to derive 95.1% and 96% of its +revenues from direct product sales of finished petroleum products. For its direct product sales, +Longwei purchased, took physical possession of, and then sold diesel, gasoline, fuel oil, and +solvents. For each of those fiscal years, over 95% of the products it purportedly sold consisted of +diesel and gasoline, while fuel oil and solvents comprised less than 5% of products sold. + +7. As part of its business, Longwei ostensibly stored finished petroleum +products at fuel depot storage facilities in three Chinese cities (Taiyuan, Gujiao, and Huajie), and +recorded those amounts on its financial statements as inventory. In reports filed with the +Commission, Longwei claimed that its storage facilities had the following storage capacities: eight +tanks with a combined storage capacity of 50,000 metric tons at Taiyuan; eight tanks with a +combined storage capacity of 70,000 metric tons at Gujiao; and twelve tanks with a combined +storage capacity of 100,000 metric tons at Huajie.4 Longwei used a computerized system to + +4 Longwei acquired the Huajie facility in September 2012. So, it was not reviewed by AB during its audit +of Longwei’s financial statements for the fiscal year ended June 30, 2012. However, as described below, + + 4 +monitor the inventory at each of its storage facilities. This system consisted of a float gauge that +measured the height of the fluid in each tank and a computerized reading of the volume in each +tank. + +8. Longwei, however, reported its storage capacities in units of weight (metric +tons), and not volume (cubic meters), in its reports filed with the Commission. This created the +potential for inconsistencies and improper reporting because diesel and gasoline have different +densities, which means they have different weights per cubic meter. As a result, the products +stored by Longwei required different formulas for conversion from cubic meters (the unit by which +they were measured by Longwei’s inventory system) to metric tons (the units in which Longwei +reported its inventory). Respondents never questioned this reporting practice, nor considered its +implications. In fact, AB’s workpapers for the 2012 audit show that AB confused volume and +weight in its own calculations. + +D. AB and Chen Failed to Conduct, and Denney failed to Review, the 2012 +Longwei Audit in Accordance with PCAOB Audit Standards5 + + 9. Longwei engaged CVB to audit Longwei’s financial statements for the +fiscal year ended June 30, 2011. On September 12, 2011, CVB issued an audit report containing +an unqualified opinion on Longwei’s 2011 financial statements, which Longwei included in a +Form 10-K that it filed with the Commission on September 13, 2011. + + 10. In July 2012, the PCAOB staff conducted an inspection of CVB. As part of +that inspection, on August 2, 2012, the PCAOB staff informed CVB that CVB had failed to +perform sufficient procedures to test the existence or quantity of Longwei’s inventory during the +2011 audit because CVB had not tested the accuracy of the Company’s computerized inventory +system or the contents of its fuel storage tanks. Chen was the Audit Manager on the 2011 audit, +and was immediately made aware of the PCAOB staff’s findings. In a response to the PCAOB, +Russell Anderson, writing on behalf of CVB, claimed that CVB had conducted a dip test of the +tanks in previous years to determine what fuel the tanks held. However, CVB’s work papers +contained no evidence that those tests had been performed. + + 11. On August 2, 2012, after AB filed a PCAOB Form 4 with the PCAOB to +succeed to the registration status of CVB, Longwei engaged AB to audit Longwei’s financial +statements for its fiscal year ended June 30, 2012. AB hired a Hong Kong-based accounting firm +(the “Foreign Audit Staff”) to perform the fieldwork for the AB audit. On August 3, AB held a +planning meeting with the Foreign Audit Staff, during which Chen identified inventory as a high +risk area, and instructed the Foreign Audit Staff to (1) use a dipstick to verify the accuracy of the +readings provided by Longwei’s computerized inventory system; (2) use “water finding paste” to +ensure that the storage tanks were not contaminated with water; and (3) perform an inventory +rollover test, which is a reconciliation between prior and current inventory levels using records +reflecting fuel sales and acquisitions. + +Huajie was reviewed by AB as part of the additional audit procedures AB performed in December 2012 +and January 2013. +5 All references are to PCAOB auditing standards in effect during AB’s audit of Longwei’s 2012 financial +statements. + + 5 + + 12. On August 4, 2012, the Foreign Audit Staff viewed and recorded the +readings of volume for each of the eight tanks at the Taiyuan facility provided by Longwei’s +computerized inventory system. Those readings provided a combined inventory for that facility +of 41,462 cubic meters. The Foreign Audit Staff attempted to verify the accuracy of those +readings by observing a Longwei employee use a dipstick to measure the height of the fluid in +two of the tanks at that facility (Tanks 7 and 8). The Foreign Audit Staff compared those +measurements to the measurements of height provided by the float gauges in those tanks. After +determining that the measurements of height the Longwei employee obtained with the dipstick +matched the measurements of height provided by the float gauges in those tanks, the Foreign +Audit Staff concluded that the computerized readings of volume for all of the tanks at the +Taiyuan Facility were accurate and reliable. However, even though Chen had identified +inventory as a high risk area, and although the PCAOB inspections staff found that in 2011 CVB +did not sufficiently test the accuracy of Longwei’s computerized inventory system, the Foreign +Audit Staff did not measure or obtain the tanks’ circumference through other procedures, which +was necessary to determine whether the system accurately converted the measurements of height +into volume. As a result, the Foreign Audit Staff did not gather adequate information to support +AB’s conclusion that the computerized readings of volume for the tanks at the Taiyuan Facility +were accurate and reliable. + +13. Also on August 4, 2012, the Foreign Audit Staff tested samples of fluids +taken only from Tanks 7 and 8 at the Taiyuan facility. They did not take samples from any other +tanks. Further, they did not sufficiently test for water content. For example, the Foreign Audit +Staff did not use water finding paste; instead, they simply observed that the samples had a +“heavy smell” and “evaporated quickly under the sunlight.” Based on those observations, the +Foreign Audit Staff concluded that Tanks 7 and 8 were not filled with water. However, those +observations were insufficient to determine what type of fuel was in Tank 7 or 8. As noted, +because Longwei reported its fuel storage inventory by weight rather than volume, and because +each type of fuel had a different density, it was critical for AB to verify what specific liquid was +in each tank. Accordingly, on August 6, 2012, the lead auditor for the Foreign Audit Staff +suggested to Chen that AB retain an “independent inspection company” to confirm the tanks’ +contents. Chen neither responded to this request nor instructed the Foreign Audit Staff to +perform additional procedures in order for AB to obtain sufficient appropriate audit evidence +regarding inventory. + +14. Also on August 4, 2012, the Foreign Audit Staff viewed and recorded the +computerized readings of volume for each of the eight tanks at the Gujiao facility. However, the +Foreign Audit Staff was not allowed access to the tanks themselves. Rather, when the Foreign +Audit Staff arrived at the facility on August 4, 2012, Longwei employees informed the Foreign +Audit Staff that they could not perform any tests because the tanks at that facility were “under +maintenance.” As a result, the Foreign Audit Staff did not test the accuracy of the computerized +readings – such as by measuring the height of the fluid, the circumference of the tanks, and the +type of fluid the tanks contained. Although Chen claims that, on or around August 18, 2012, she +did test the height and content of two (of the eight) Gujiao tanks, the work papers do not reflect +any such testing. Moreover, Chen conceded in testimony that AB never had the actual +dimensions for the tanks at Gujiao. + + 6 + +15. During its audit of Longwei in 2012, AB performed inventory price testing. +However, these procedures did not address the concerns about the testing of Longwei’s inventory +raised by the PCAOB staff after CVB’s 2011 audit of Longwei. In an email exchange on January +14, 2013, the lead auditor from the Foreign Audit Staff informed Chen that they had relied entirely +on documents Longwei had provided, telling her, “there are no supporting documents showing the +suppliers have delivered the stocks to their customers except for the internal warehouse out stock +records for every sales transactions[sic].” + +16. On September 12, 2012, AB issued an audit report containing an +unqualified opinion on Longwei’s financial statements for 2012. AB stated that it conducted its +audit “in accordance with the standards of [PCAOB]. Those standards require that we plan and +perform the audit to obtain reasonable assurance about whether the financial statements are free +of material misstatement.” In its audited financial statements, Longwei reported inventory of +50,405 metric tons, valued at approximately $53 million, which represented approximately 15% +of Longwei’s total assets and 25% of its current assets. + + E. AB Conducts Additional Inquiries and Audit Procedures + + 17. On December 28, 2012, Anderson received an unsolicited email from an +individual claiming to be a Longwei shareholder. The email stated that after reviewing Longwei’s +audited financials, as well as photos and other reference materials, “it seems unrealistic to believe +that the storage capacity of [Longwei’s] facilities is as described.” The email continued that, taking +into account the type of fuel in the tanks, “it appears the [Taiyuan] facility has less than 19,651 MT +[metric tons] – not the 50,000 MT of capacity described.” Anderson shared the email with Chen, +who searched AB’s files for documents listing the dimensions of the tanks at Longwei’s fuel storage +facilities. As a result of that search, Chen found an Excel spreadsheet that Longwei had provided to +CVB in 2007, which listed the dimensions of the tanks at the Taiyuan facility. The dimensions +listed on the spreadsheet indicated that the Taiyuan tanks had only 78% to 89% (depending on the +contents) of the storage capacity that Longwei claimed in its public filings. Chen was unable to find +any documents or support for the disclosed dimensions of the storage tanks at the Gujiao facility or +recently purchased Huajie facility. + + 18. Chen then asked an employee of the Foreign Audit Staff to re-calculate the +inventory at the Taiyuan facility based on the dimensions found in the Excel spreadsheet. The +employee calculated that the inventory was approximately 40% less than the inventory recorded +when the Foreign Audit Staff performed their fieldwork for the 2012 audit, and which Longwei +reported in its Form 10-K filed with the Commission on September 13, 2012. After receiving these +calculations, Chen sent Longwei’s CFO an email asking him - for the first time - to explain how +Longwei’s computerized inventory system worked. + + 19. On January 3, 2013, a private research firm issued a public report +questioning the legitimacy of Longwei’s business and claiming that Longwei must have +substantially exaggerated its sales and overstated its revenues. The research firm reported that +video surveillance of all three Longwei facilities showed very little tanker truck fueling activity, + + 7 +and photographic evidence that railroad tracks providing access to Longwei’s facilities appeared to +be unused because they were covered with vegetation. + + 20. As a result of the research report, as well as the questions posed by the +unsolicited email concerning the stated capacity of Longwei’s fuel storage facilities, AB undertook +additional inquiries and procedures expressly intended to determine whether AB needed to +withdraw its audit report on Longwei’s 2012 financial statements. + + 21. On or around January 5, 2013, Chen alerted Longwei’s management that +she and Anderson planned an immediate visit to Longwei’s facilities in China with Longwei’s +CFO. Anderson, Chen, and Longwei’s CFO arrived at Longwei’s Chinese headquarters on +January 10, 2013. All three were denied access to Longwei’s accounting records, purportedly +because Longwei’s CEO was out of town and its controller was unavailable due to a family +emergency. + + 22. On January 10, 2013, Anderson and Chen made on-site visits to Longwei’s +facilities in Taiyuan and Gujiao, where they observed and recorded tanker trucks fueling. +However, Anderson could not reconcile that day’s “scale tickets” – Longwei’s records of trucks +that fueled at Taiyuan – to his observations. In his memo, Anderson deemed the records +“unreliable.” Further, while at the Taiyuan facility, a purported company representative showed +Anderson and Chen a video that he claimed Longwei captured and kept for “fire safety +requirements.” The video, which appeared to be date-stamped December 9, 2012, purported to +show greater tanker truck activity at the Taiyuan facility than the video taken by the research firm +for the same day. However, the origin and legitimacy of the video was unclear. Longwei claimed +it could not access the video itself, which required an outside specialist familiar with the camera +system. The company representative told Anderson and Chen that he was not, in fact, a Longwei +employee, but claimed to have worked in the past for Longwei’s security contractor. + + 23. While at the Taiyuan facility, Anderson observed a physical measurement +of the circumference of two fuel storage tanks and found that these dimensions were consistent +with the dimensions that appeared in the 2007 Excel spreadsheet Chen discovered in December +2012. Anderson then used these dimensions to calculate the volume of the fluids in all of the +storage tanks at the Taiyuan Facility. Anderson compared his calculations to the readings +provided by Longwei’s computerized inventory system that AB had relied on in its audit, and +found that the inventory system’s calculations were as much as 2.8 times higher than Anderson’s +calculations. + +24. Anderson questioned the COO of the Taiyuan facility about this +discrepancy and was told that readings provided by Longwei’s computerized inventory system +were inaccurate during periods of activity and that the best time to accurately measure was early +morning, before activity started. The COO then told Anderson and Chen that they could not access +Longwei’s fuel storage depots, including the Taiyuan facility, for the next two days because of +purported province-wide inspections prompted by a recent leak at another fuel storage facility. + +25. Anderson and Chen visited the Huajie facility on January 14, 2013. +According to Anderson, while travelling to the facility, a company representative informed + + 8 +Anderson and Chen that “not all of the company’s revenue was derived from tankers loading at +the three facilities.” Upon arrival, Anderson and Chen discovered the facility gate was locked +and had to be opened manually. Once inside, they saw no evidence to indicate the facility was in +operation. This lack of apparent activity called into question the accuracy of a Longwei press +release issued on December 19, 2012, in which Longwei reported sales of 16,290 metric tons for +the Huajie facility in the two-month period ended November 30, 2012. + +26. On January 15, 2013, Longwei employees once again denied Anderson +and Chen access to any of Longwei’s fuel storage depots, claiming that Longwei’s CEO and +controller needed to be present, but were still unavailable. Anderson and Chen then returned to +the U.S. on January 16, 2013, without conducting any additional inquiries or audit procedures. + +27. On January 18, 2013, Anderson and Chen provided an update to the Chair +of Longwei's audit committee on the additional inquiries and audit procedures undertaken in +response to the unsolicited email and the January 3, 2013 research report. During that +conversation, Anderson and Chen did not disclose that Longwei’s computerized inventory +appeared to overstate the actual inventory. They also failed to disclose that they had been +denied access to Longwei’s accounting records and to fuel storage depots on several days. Nor +did they disclose that they saw evidence that Longwei’s largest fuel storage depot had not been +in operation. + + 28. AB’s response to the information that Anderson and Chen obtained in +China was deficient. While in China, Anderson and Chen became aware of several significant +red flags that should have led them to conclude that the information contained in Longwei’s +2012 financial statements might be unreliable. In particular, they discovered that Longwei’s +computerized inventory substantially overstated its holdings, that the company refused to provide +access to facilities and accounting records, and that a key facility appeared dormant. Despite +learning this information, AB has not withdrawn its audit opinion on Longwei’s 2012 financial +statements, and neither Anderson nor Chen ever informed Longwei’s audit committee or its +board of directors of their concerns or the red flags they noticed while in China. AB did not +resign as Longwei’s auditor until May 30, 2013. + +E. Respondents’ Audit Failures + + 29. Respondents’ conduct, described above, violated several PCAOB auditing +and other professional standards. + +i. Failure to Adequately Plan Longwei’s 2012 Audit + +30. PCAOB Auditing Standard No. 9, Audit Planning, states that auditors +should properly plan an audit. AS 9 ¶ 4. To do so, auditors should evaluate the matters in AS 9 +¶ 7 to determine the nature and extent of the planning activities that are necessary, taking into +account the size and complexity of the company, the auditor’s previous experience with the +company, and changes in circumstances that occur during the audit. AS 9 ¶ 7. Additionally the +auditor should determine whether specialized skill or knowledge is needed to perform + + 9 +appropriate risk assessments, plan or perform audit procedures, or evaluate audit results. AS 9 ¶ +16. + +31. AB and Chen failed to adequately plan the 2012 audit because they failed +to properly plan audit procedures to address areas of particular risk at Longwei. For example, +inventory comprised 15% of Longwei’s total assets, and Chen identified it as a “high risk area” +for the 2012 audit. In fact, on August 2, 2012, before Chen held the planning meeting for the +2012 audit, Chen was put on notice by the PCAOB staff that Longwei’s 2011 audit was deficient +because, among other things, CVB had failed to perform sufficient procedures to test the +existence or quantity of Longwei’s inventory during the 2011 audit because CVB did not test the +accuracy of the Company’s computerized inventory system. Accordingly, Chen knew that +verifying the accuracy of Longwei’s computerized inventory system was a critical issue for the +2012 audit, but still failed to plan adequate procedures for understanding the inventory system, +inventory observation, and to obtain sufficient audit evidence of Longwei’s inventory. + +32. AB and Chen failed to adequately plan the audit because Chen failed to +instruct the Foreign Audit Staff to perform any procedures to determine whether Longwei’s fuel +storage tanks actually contained the specific petroleum products the Company claimed to have in +inventory. Even though Chen was put on notice by the PCAOB staff that Longwei’s 2011 audit +was deficient because CVB had failed to verify the contents of the fuel storage tanks, Chen +instructed the Foreign Audit Staff to confirm only that the tanks were not filled or contaminated +with water. + +33. AB and Chen also failed to adapt the audit plan to changes in +circumstances that occurred during the audit. Specifically, AB and Chen failed to follow up on +warnings raised by the Foreign Audit Staff during the course of the audit. As noted above, in an +August 6, 2012 email to Chen, the Foreign Audit Staff warned Chen of the need to engage an +independent party to perform testing that would verify the contents of Longwei’s tanks. In the +same email, the Foreign Audit Staff indicated to Chen that Longwei’s computer inventory +readings may be unreliable. Specifically, the lead auditor for the Foreign Audit Staff stated that +photos on June 19, 2012 and August 4, 2012 showed that “the height [reading] changed a little +bit but the volume of reading increased 10 times!” The lead auditor for the Foreign Audit Staff +also told Chen that Longwei did not “reasonably explain[]” its use of certain gasoline and fuel. +In all cases, besides asking for “more input” on the inventory issue and encouraging the Foreign +Audit Staff to “inquire more” about the gasoline use, AB and Chen did nothing to follow up. + +ii. Failure to Identify and Assess Risks of Material Misstatement + +34. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of +Material Misstatement, states that the auditor should perform risk assessment procedures that are +sufficient to provide a reasonable basis for identifying and assessing risks of material +misstatement, whether due to error or fraud, and designing further audit procedures. AS 12 ¶4. +The auditor should obtain an understanding of the company and its environment to understand +the events, conditions, and company activities that might reasonably be expected to have a +significant effect on the risks of material misstatement. AS 12 ¶ 7. The auditor should obtain a +sufficient understanding of each component of internal control over financial reporting. AS 12 ¶ + + 10 +18. The auditor should obtain an understanding of the information system, including the related +business processes, relevant to financial reporting. AS 12 ¶ 28. A company’s business processes +are the activities designed to develop, purchase, produce, sell and distribute a company’s +products or services and record information, including accounting and financial reporting +information. AS 12 ¶ 30 (a) and (b). + +35. Here, AB and Chen did not adequately identify and assess the risks of +material misstatement of the Company’s inventory, even though fuel inventory was an essential +asset, and a significant account, for Longwei, and even though Chen had identified inventory as a +“high risk area.” + +36. AB and Chen did not obtain adequate knowledge of Longwei’s business, +including its inventory procedures and internal controls. They failed to obtain a sufficient +understanding of Longwei’s computerized inventory system and had no understanding of how its +readings were calculated or whether they were accurate. Although Chen did instruct the Foreign +Audit Staff to attempt to verify the accuracy of the computerized inventory system by +performing a dipstick test, they performed that test on only two of Longwei’s tanks at a single +storage facility. Moreover, the test did not verify the accuracy of the system’s volume +calculations because it only verified the readings of height, but not circumference, when both +measurements were necessary to calculate volume. + +37. Even though AB and Chen failed to obtain an adequate basis for relying +on the accuracy of the volume measurements produced by Longwei’s computerized inventory +system, Chen nevertheless instructed the Foreign Audit Staff to rely on the computerized +inventory system when they performed fieldwork for the 2012 audit. + +iii. Failure to Properly Supervise the Foreign Audit Staff + +38. PCAOB Auditing Standard No. 10, Supervision of the Audit Engagement, +requires supervision of the audit engagement, including supervising the work of engagement +team members, so that the work is performed as directed and supports the conclusions reached. +AS 10 ¶ 2. The engagement partner is responsible for the engagement and its performance. +Accordingly, the engagement partner is responsible for proper supervision of the work of +engagement team members and for compliance with PCAOB standards including standards +regarding using the work of specialists, other auditors, internal auditors, and others who are +involved in testing controls. AS 10 ¶ 3. The engagement partner and, as applicable, other +engagement team members performing supervisory activities, should review the work of +engagement team members to evaluate whether the work was performed and documented, the +objectives of the procedures were achieved, and the results of the work support the conclusions +reached. AS 10 ¶ 5(c). + +39. Chen was the engagement partner for Longwei’s 2012 audit. AB and +Chen failed to properly supervise the 2012 audit. Although the Foreign Audit Staff’s work +papers showed multiple instances of audit procedures not being followed, Chen accepted the +work papers and failed to inquire why the audit procedures were not followed. For example, +Chen did not document raising any questions into why the Foreign Audit Staff failed to follow + + 11 +her instructions to use “water finding paste” to determine whether the fluids in Longwei’s fuel +storage tanks were uncontaminated. There is also no documentation that Chen ever asked why +the Foreign Audit Staff performed a dip-stick test on only two of the eight fuel storage tanks at +the Taiyuan Facility. Instead, Chen simply accepted the Foreign Audit Staff’s work without +asking them to perform additional procedures. + +iv. Failure to Perform an Adequate Observation of Inventories + +40. AU 331, Inventories, provides that when inventory quantities are +determined solely by means of a physical count, it is ordinarily necessary for the independent +auditor to be present at the time of the count. It is also ordinarily necessary that the auditor use +suitable observation, tests, and inquiries to satisfy himself that the methods of inventory-taking +are effective and to determine how much reliance may be placed upon the client’s +representations about the inventory. AU 331.09. If the independent auditor is not present at the +time of the count or does not use suitable observation, tests, and inquiries to satisfy himself as to +inventories in the possession of the client, tests of the accounting records alone will not be +sufficient for him to become satisfied as to quantities; it will always be necessary for the auditor +to make, or observe, some physical counts of the inventory and apply appropriate tests of +intervening transactions. This should be coupled with inspection of the records of any client’s +counts and procedures relating to the physical inventory on which the balance-sheet inventory is +based. AU 331.12. + +41. As previously discussed, Longwei’s inventory consisted of various types +of petroleum fluids. AB and Chen failed adequately to observe, or supervise observation of, +these inventories during the 2012 audit. In fact, there is no indication in AB’s work papers that +the Company ever performed a physical inventory observation of the 14 tanks for which AB failed +to conduct even a dipstick test. In addition, no evidence exists that AB obtained, tested, or +evaluated any physical inventory procedures performed by the Company. Considering this, +AB’s procedures for testing the accuracy of Longwei’s inventories in the remaining 14 tanks +were insufficient - AB relied only on dipstick tests from two tanks and readings from the +computerized inventory system, the accuracy of which AB did not verify. + +42. Also, the dipstick and float gauge measurements that the Foreign Audit +Staff observed, and that AB and Chen relied on, were insufficient to provide assurance that +Longwei’s storage tanks held the represented quantities of specific petroleum fluids. AB and +Chen did not know the dimensions or capacity of the fuel storage tanks at Gujiao, and did not +consider the dimensions of the fuel storage tanks at Taiyuan in conducting their testing, even +though such information was in AB’s files. If AB and Chen had properly considered the Taiyuan +dimensions during the 2012 audit, they would have realized that this facility had significantly less +capacity than Longwei claimed. + +43. Second, because Longwei’s financial statements disclosed fluid +inventories in figures derived from weight, not volume, it was critical that AB and Chen confirm +the specific petroleum fluids that were in the tanks. A cubic meter of diesel fuel weighs more +than a cubic meter of gasoline. Accordingly, even if one confirms the volume of a given +container, that measurement does not provide assurance that inventory representations based on + + 12 +the weight of product in that container are accurate. In order to accurately perform the +conversion from volume to weight, one must know what the product is. Thus, AB and Chen +failed to perform an adequate observation of inventories to obtain reasonable assurance that the +products in the tanks were as Longwei claimed. + +44. Contrary to AU 331, AB and Chen placed undue reliance on Longwei’s +accounting systems over inventory. AB and Chen did not understand how Longwei’s inventory +measurement systems worked, yet the audit work papers reflect that AB and Chen relied heavily +on Longwei’s representations of inventory in its accounting records. AB and Chen directed the +Foreign Audit Staff to undertake inventory price testing as an alternative procedure. However, +this procedure failed to provide sufficient evidence under the circumstances because the testing +depended on documents that Longwei provided and that AB failed to evaluate for sufficiency +and appropriateness for purposes of the audit.6 + +v. Failure to Obtain Sufficient Appropriate Audit Evidence + +45. PCAOB Auditing Standard No. 15, Audit Evidence, provides that the +objective of the auditor is to plan and perform the audit to obtain appropriate audit evidence that is +sufficient to support the opinion expressed in the auditor’s report. AS 15 ¶ 3. Under this standard, +sufficiency is the measure of the quantity of audit evidence, and the quantity of evidence needed is +affected by the risk of material misstatement (in the audit of financial statements) or the risk +associated with the control (in the audit of internal control over financial reporting) and the quality +of the audit evidence obtained. AS 15 ¶ 5. As the risk increases, the amount of evidence that the +auditor should obtain also increases. Id. Appropriateness is the measure of the quality of audit +evidence. To be appropriate, audit evidence must be both relevant and reliable in providing +support for conclusions on which the auditor’s opinion is based. AS 15 ¶ 6. + +46. AB and Chen failed to obtain sufficient appropriate audit evidence. As an +initial matter, Chen failed to obtain sufficient evidence of the capacities of Longwei’s fuel +storage depots because she did not consider the dimensions of the fuel storage tanks at the +Taiyuan Facility that were in AB’s files, or request or receive the dimensions of the fuel storage +tanks at the Gujiao Facility. Chen also failed to obtain sufficient evidence of the quantity of +inventory at Longwei’s depots because she permitted the Foreign Audit Staff to rely on the +Company’s computerized inventory system without performing any procedures that could +provide reasonable assurance that the readings of volume that system provided were accurate. +Further, Chen failed to obtain sufficient evidence of the existence of inventory because she +permitted the Foreign Audit Staff to test two of Longwei’s fuel storage tanks for water +contamination by merely sniffing samples of their contents and watching those samples +evaporate in the sunlight, and she failed to instruct the Foreign Audit Staff to perform any +procedures that could have provided reasonable assurance that the fuel storage tanks actually +contained the specific petroleum products Longwei claimed to have in inventory. + + +6 See AS 15 ¶ 10. Further, pursuant to AS 15 ¶ 8, in general, evidence obtained from a knowledgeable +source that is independent of the company is more reliable than evidence obtained only from internal +company sources. + + 13 +47. Performing a “smell test” and watching liquid samples from two of +Longwei’s tanks was not appropriate audit evidence. Here, a member of the Foreign Audit Staff +suggested to Chen that they use the enhanced procedure of obtaining an independent inspection +company, but Chen did not used that procedure or even follow up. Chen’s failure was particular +unreasonable in light of the previous warning she had received regarding the risk associated with +Longwei’s inventory. For example, when describing CVB’s fiscal 2011 audit deficiencies in a +Small Firm Inspection Comment Form dated August 2, 2012, the PCAOB staff stated, in part, +“Further, the Firm failed to obtain audit evidence to verify that the liquid within each tank was +the fuel type asserted by the Issuer.” + +vi. Failure to Conduct an Adequate Engagement Quality Review + +48. PCAOB Auditing Standard No. 7, Engagement Quality Review, provides +that the objective of the engagement quality reviewer is to perform an evaluation of the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the engagement report. AS 7 +¶ 2. To evaluate such judgments and conclusions, the engagement quality reviewer should, to +the extent necessary to satisfy the requirements, hold discussions with the engagement partner +and other members of the engagement team and review documentation. AS 7 ¶ 9. + +49. Denney was the engagement quality reviewer for the Longwei +engagement and failed to fulfill the requirements of AS 7. The work papers for the 2012 audit +showed that Chen failed to properly supervise the Foreign Audit Staff, that the procedures the +Foreign Audit Staff performed to audit Longwei’s inventory were inadequate, and that AB did +not address the concerns the PCAOB staff raised with respect to Longwei’s 2011 audit, i.e., +CVB’s failure to test the accuracy of the computerized inventory system or the contents of the +fuel storage tanks. Denney reviewed these inventory work papers in connection with performing +his duties as the engagement quality review partner on the 2012 audit, and he was aware of the +PCAOB staff’s concerns when he did so. However, despite the deficiencies in the work papers, +Denney completed his review and provided concurring approval of issuance without raising any +concerns or asking the engagement team any questions. + +50. Specifically, Denny failed to follow-up on the findings in the PCAOB +inspection report to see how the deficiencies of the 2011 audit were addressed in the 2012 audit. +Denny also failed to recognize that all planned audit procedures were not conducted, including a +proper analysis of how the audit team conducted its testing of Longwei’s tank capacities – which +he knew to be a significant issue. Further, Denny failed to realize that the audit procedures +performed failed to verify the type of liquid in the tanks. + +vii. Failure to Properly Consider Information Learned After Issuance of Audit +Report + +51. AU 561, Subsequent Discovery of Facts Existing at the Date of the +Auditor’s Report, provides that when an auditor becomes aware of information that relates to +financial statements previously reported on by him, but which was not known to him at the date of +his report, and which is of such a nature and from such a source that he would have investigated it + + 14 +had it come to his attention during the course of the audit, he should, as soon as practicable, +undertake to determine whether the information is reliable and whether the facts existed at the date +of his report. In connection with this obligation, the auditor should discuss the matter with his +client at whatever management levels he deems appropriate, including the board of directors, and +request cooperation in whatever investigation may be necessary. AU 561.04. If the information is +found to be reliable and would have affected his report, he is required to take certain actions, +including actions to prevent future reliance on his report. + +52. AB, Chen, and Anderson failed to comply with AU 561. In December +2012, about three months after AB issued an audit report expressing an unqualified opinion on +Longwei’s financial statements, AB, Chen, and Anderson became aware of information +indicating that Longwei might have overstated its storage capacity, inventory, and revenues. +First, they received an email from a third-party questioning the manner in which Longwei +reported its storage capacity as well as the figures themselves. While investigating these claims, +Chen found an Excel spreadsheet in AB’s files, originally obtained by CVB during its 2007 audit +of the Company, which showed the dimensions of the tanks at the Taiyuan facility. Those +dimensions indicated that the tanks had only 78% to 89% of the capacity that Longwei +represented them to have. Chen then asked the Foreign Audit Staff to use the dimensions to re- +calculate the inventory at the Taiyuan facility as of August 4, 2012, the day the Foreign Audit +Staff performed the inventory fieldwork for the 2012 audit. The Foreign Audit Staff’s new +calculations showed that inventory was over 40% less than what the Foreign Audit Staff +reviewed and recorded during their fieldwork, and which Longwei subsequently reported in its +public filings. + +53. Later, in January 2013, Chen and Anderson traveled to China to perform +additional procedures to determine whether allegations of fraud made against Longwei have +merit, whether Longwei had overstated the capacity of its fuel storage tanks, and whether AB +needed to withdraw its audit opinion on Longwei’s 2012 financial statements. In the course of +performing these procedures, Anderson observed a physical measurement of the circumference +of two fuel storage tanks at the Taiyuan Facility, and found that those dimensions were +consistent with the dimensions that appeared in the Excel spreadsheet Chen had found in AB’s +files (and were different from those reported by the Company). Anderson then used those +dimensions to perform his own calculations of the inventory at the Taiyuan Facility, and +discovered that Longwei’s computerized system had overstated the contents of the tanks at the +Taiyuan Facility by as much as 280%. + +54. Anderson and Chen’s additional audit procedures raised serious questions +about the accuracy of Longwei’s accounting records – records that Longwei refused to provide – +and the overall legitimacy of Longwei’s business, which had come under detailed attack by +investors and a private research firm. Longwei’s refusal to allow Anderson and Chen to visit +certain Longwei facilities, and the discovery that a key facility was apparently not in use, should +have led AB, Anderson, and Chen to advise Company management and to disclose publicly that +Longwei’s 2012 financial statements should no longer be relied upon. See AU 561.06. They +failed to do so, and therefore did not comply with AU 561. + + + 15 +viii. Failure to exercise due professional care + +55. PCAOB auditing standards require auditors to exercise due professional +care in the planning and performance of an audit and the preparation of the audit report. Due +professional care requires that the auditor exercise professional skepticism: an attitude that +includes a questioning mind and a critical assessment of audit evidence. The auditor should not +be satisfied with less than persuasive evidence because of a belief that management is honest. +AU 230.01, .07, and .09. Moreover, gathering and objectively evaluating audit evidence requires +the auditor to consider the competency and sufficiency of the evidence. Because evidence is +gathered and evaluated throughout the audit, professional skepticism should be exercised +throughout the audit process. AU 230.08. + +56. AB, Chen, and Denney failed to exercise due professional care in the 2012 +audit of Longwei. AB and Chen failed properly to plan, supervise, and perform the audit to +provide reasonable assurance of detecting material errors in the financial statements, and failed +to exercise due professional care to obtain reasonable assurance that the financial statements +were not materially misstated. Denney, as the engagement quality review partner, also failed to +exercise due professional care. Denney had responsibility for evaluating the significant +judgments made by the engagement team and the related conclusions reached for the 2012 audit, +so he knew (or reasonably should have known) that AB and Chen had not adequately planned, +conducted, or supervised the audit. + +57. AB, Chen, and Anderson also failed to exercise due professional care after +conducting additional inquiries and audit procedures in 2013. After learning information +indicating that Longwei had likely overstated its storage capacity and inventory, and may have +overstated its revenues, AB, Chen, and Anderson failed to investigate further or advise Longwei +to disclose publicly that its 2012 financial statements should no longer be relied upon, and as a +result, did not comply with AU 230. + +F. Violations + + 58. Rule 2-02(b)(1) of Regulation S-X mandates that an accountant’s report +“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.” See Interpretation: +Commission Guidance Regarding the Public Company Accounting Oversight Board’s Auditing +and Related Professional Practice Standard No. 1, SEC 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.” In re Andrew Sims, +CPA, Rel. No. 34-59584, AAER Rel. No. 2950 (Mar. 17, 2009). As a result of the conduct +described above, AB willfully violated, and Chen and Denney willfully aided and abetted and +caused violations of, Rule 2-02(b)(1) of Regulation S-X. + + 59. As a result of the conduct described above, AB, Anderson, Chen, and +Denney engaged in improper professional conduct as defined in Section 4C(b)(2) of the Exchange + + 16 +Act and Rule 102(e)(1)(iv)(B) of the Commission’s Rules of Practice in that their conduct +constituted negligent conduct, consisting of single instances of highly unreasonable conduct by +AB, Anderson, Chen, and Denney, and repeated instances of unreasonable conduct by AB and +Chen, each resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. + + 60. As a result of the conduct described above, AB willfully violated, and Chen +and Denney willfully aided and abetted violations of certain provisions of the federal securities +laws and the rules and regulations thereunder, which constitutes conduct subject to Section +4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +G. Findings + + Based on the foregoing, the Commission finds that: + +a. AB, Anderson, Chen, and Denney engaged in improper professional conduct +pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice; and + +b. AB willfully violated Rule 2-02(b)(1) of Regulation S-X; and + +c. Chen and Denney willfully aided and abetted and caused AB’s violation of Rule +2-02(b)(1) of Regulation S-X. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondents’ Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. AB, Chen, and Denney 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. Respondents are denied the privilege of appearing or practicing before the +Commission as accountants. + +C. After four years from the date of this order, AB 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 AB’s work in its practice +before the Commission will be reviewed either by the independent audit committee + + 17 +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) AB is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and +such registration continues to be effective. However, if registration with the +Board is dependent upon reinstatement by the Commission, the +Commission will consider the application on its other merits; + + (b) AB has hired an independent CPA consultant (“consultant”), who is +not unacceptable to the staff of the Commission and is affiliated with a +public accounting firm registered with the Board, that has conducted a +review of AB’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 AB’s employees will not receive appropriate supervision. AB +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 AB, or any of its present or former affiliates, directors, +officers, employees, or agents acting in their capacity. The agreement will +also provide that the consultant will require that any firm with which he/she +is affiliated or of which he/she is a member, and any person engaged to +assist the consultant in performance of his/her duties under this Offer shall +not, without prior written consent of the staff, enter into any employment, +consultant, attorney-client, auditing or other professional relationship with +AB, 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) AB 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) AB 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. + + + 18 +D. The Commission will consider an application by AB 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 AB’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission. + +E. After two years from February 11, 2018 (the first date that the Commission may +consider an application by Anderson for reinstatement to resume appearing or practicing before the +Commission as an accountant under the Order issued in In the Matter of Child, Van Wagoner & +Bradshaw, PLLC, et al. (Rel. No. 34-74262)), Anderson 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 Anderson’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) Anderson, 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) Anderson, 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 Anderson will not +receive appropriate supervision; +(c) Anderson 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) Anderson acknowledges his responsibility, as long as Anderson +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. + + 19 + +F. The Commission will consider an application by Anderson 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 Anderson’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + +G. After four years from the date of this order, Chen 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 Chen’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) Chen, 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) Chen, 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) Chen 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) Chen acknowledges her responsibility, as long as Chen 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. + + + 20 +H. The Commission will consider an application by Chen 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 Chen’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +I. After one year from the date of this order, Denney 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 Denney’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) Denney, 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) Denney, 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) Denney 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) Denney acknowledges his responsibility, as long as Denney 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. + +J. The Commission will consider an application by Denney 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 + + 21 +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 Denney’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +K. Each of Chen and Denney shall, within 14 days of the entry of this Order, pay a +civil money penalty in the amount of $5,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment must be made in one of the following ways: + +(1) Chen and Denney may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Chen and Denney 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) Chen and Denney 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 +Chen and Denney 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 David Peavler, Division of +Enforcement, Securities and Exchange Commission, 801 Cherry St., Suite 1900, Fort Worth, TX +76102. + +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 + + 22 +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondents by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3857.txt b/raw/aaer/2017/AAER-3857.txt new file mode 100644 index 0000000000000000000000000000000000000000..832af7dae393a9f0c42ba175a79422458ea63bd8 --- /dev/null +++ b/raw/aaer/2017/AAER-3857.txt @@ -0,0 +1,209 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79903 / January 31, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3857 / January 31, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17633 + + + +In the Matter of + +DAVID A. ARONSON, CPA, + +Respondent. + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S +RULES OF PRACTICE + +I. + + On October 19, 2016, the Securities and Exchange Commission (“Commission”) instituted +public administrative and cease-and-desist proceedings pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in characte r +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. +2 + +II. + + In connection with these proceedings, Respondent, David A. Aronson, has submitted an +Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purposes of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, Respondent consents to the entry of this Order Making Findings and Imposing +Remedial Sanctions and a Cease and Desist Order Pursuant to Sections 4C and 21C of the +Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. RESPONDENT + David A. Aronson, CPA, age 56, of North Miami, Florida, is a certified public accountant +licensed in the state of Florida. Aronson functioned as an accountant to Company A and Company +B, from at least October 2, 2015 to approximately February 2016. From March 2005 through +October 2, 2015, Aronson was the sole proprietor of a registered public accounting firm and was +engaged as Company A’s auditor from 2013 through July 2015, and as Company B’s auditor from +2011 through June 2015. Aronson consented to a PCAOB order dated October 2, 2015 pursuant to +which he was barred from being an associated person of a registered public accounting firm. +B. FACTS +1. ARONSON’S UNLAWFUL ASSOCIATION +a. Section 105(c)(7)(B) of Sarbanes-Oxley states that it is “unlawful for any +person that is ... barred from being associated with a registered public +accounting firm [...] willfully to become or remain associated with any issuer +[…] in an accountancy or financial management capacity [...] without the +consent of the [PCAOB] or the Commission.” +b. On October 2, 2015, the PCAOB filed a settled action against Aronson and his +firm, David A. Aronson, CPA, for multiple deficiencies in audit work +performed between 2011 and 2015 on several public company engagements, +including Company B (the “PCAOB Order”). The PCAOB Order, which was +and is available on its website, revoked the registration of his accounting firm +and barred Aronson from being an associated person of a registered public +accounting firm. +c. Company A is a Delaware corporation and at all relevant times its common +stock was registered with the Commission pursuant to Section 12(g) of the +Exchange Act. +3 + +d. Company B is a Nevada corporation and at all relevant times its common stock +was registered with the Commission pursuant to Section 12(g) of the Exchange +Act. +e. Aronson continued to perform accountancy or financial management services +after the PCAOB Order for Company A until February 2016, including, but not +limited to, preparing Company A’s financial statements, and the notes to the +financial statements, and preparation of the company’s Management Discussion +& Analysis section for its Form 10-Q for the period ended November 30, 2015. +f. Additionally, after the PCAOB Order was issued, Aronson continued to +perform accountancy or financial management services for Company B until +February 2016, including, but not limited to, preparing Company B’s financial +statements and the notes to the financial statements for its Form 10-Q for the +period ended September 30, 2015 and preparation of the financial statements for +Company B’s Form 10-K for the period ended December 31, 2015.3 +g. Aronson received payment for accountancy or financial management work he +performed despite having been barred by the PCAOB. + +h. Aronson never requested or received consent from the PCAOB or the +Commission to remain associated with Company A or Company B in this +accountancy or financial management capacity. +C. VIOLATION + As a result of the conduct described above, Aronson willfully violated Section 105(c)(7)(B) +of Sarbanes-Oxley, which prohibits a person barred from associating with a registered public +accounting firm from willfully becoming or remaining associated with an issuer in an accountancy +or financial management capacity without consent of the PCAOB or the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Aronson’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Aronson shall cease and desist from committing or causing any violations and any +future violations of Section 105(c)(7)(B) of Sarbanes-Oxley. + +B. Aronson is denied the privilege of appearing or practicing before the Commission +as an accountant. + + +3 Company B terminated Aronson as its accountant on February 10, 2016 prior to the filing of its 2015 Form 10 -K. +4 + +C. Aronson shall, within 30 days of the entry of this Order, pay disgorgement of +$2,750 and prejudgment interest of $20.81 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. + +D. Aronson 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 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 +Aronson 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 Russell Koonin, Division of +Enforcement, Securities and Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL +33131. + +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 +5 + +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3858.txt b/raw/aaer/2017/AAER-3858.txt new file mode 100644 index 0000000000000000000000000000000000000000..1e1bf84beca27dc717cd9db2690a494d55d85322 --- /dev/null +++ b/raw/aaer/2017/AAER-3858.txt @@ -0,0 +1,537 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10302 / February 3, 2017 +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79971 / February 3, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3858 / February 3, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17825 + +In the Matter of + +IXIA AND + VICTOR ALSTON, + +Respondents. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Victor Alston (“Alston”) and pursuant to Exchange Act Section 21C against Ixia, a +California corporation (“Ixia”) (collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange +Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + + 2 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY + +1. This matter principally involves material misrepresentations and omissions +concerning the internal controls of Ixia, a developer and seller of network testing products, +resulting from a directive by Victor Alston, Ixia’s former chief executive officer and president, to +improperly accelerate the recognition of revenue in contravention of not only those controls but +also well-established accounting rules and principles. This directive resulted in Alston’s fraudulent +misrepresentations, omissions, and certifications concerning Ixia’s internal controls, namely +Internal Control over Financial Reporting (“ICFR”), as well as concerning Ixia’s compliance with +those accounting rules and principles in Ixia’s filings with the Commission in 2012. In addition, +Alston’s misconduct resulted in misleading representations and omissions to Ixia’s auditors, +circumvention of internal accounting controls, and falsification of books and records. +2. In October 2012, Alston, in coordination with others at Ixia, directed Ixia to “Split +POs” (or “Splitting POs”) in an effort to improperly accelerate the recognition of revenue. Ixia +typically packaged and sold multiple products to its customers. In instances when Ixia sold its +software and professional services, such as training, together, Generally Accepted Accounting +Principles (“GAAP”), notably software revenue recognition accounting rules, required that the +company defer revenue from both its software and professional services until its professional +services were delivered to its customer. GAAP required the deferral of revenue because Ixia had +not established fair value for professional services. Alston ordered that Ixia Split POs – artificially +break apart these services onto separate purchase orders in instances where professional services +were included in any sale – which gave the false appearance that these professional services sales +were stand-alone sales. Splitting POs was designed to accomplish two improper goals. First, the +practice allowed Ixia to immediately, but improperly, recognize revenue from its software sales. +Second, Ixia intended to improperly use the now-separated professional services to establish fair +value in order to prevent the deferral of revenue in future sales that included both software and +those services. + + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + + + 3 +RESPONDENTS + +3. Ixia is a California corporation based in Calabasas, California that develops and +sells network testing, visibility and security products. Ixia’s securities trade on the NASDAQ +Global Select Market and are registered pursuant to Exchange Act Section 12(b). +4. Victor Alston, age 39, joined Ixia as its vice president of applications at or around +2004 and served in sequentially higher positions until his elevation to chief executive officer and +president at or around May 2012. Alston resigned from Ixia in October 2013 following certain +findings from an internal investigation conducted by Ixia into whether Alston had misrepresented +his educational and professional experience prior to joining Ixia. +5. The matters addressed in this Order first came to light as a result of an investigation +that the Audit Committee of Ixia’s Board of Directors (the “Audit Committee”) conducted into +Ixia’s financial statements following Alston’s departure. Ixia informed the Commission staff of +this investigation at its outset, and as a result of this investigation restated its first and second +quarter 2013 financial statements, including to correct errors in the recognition of revenue caused +by Split POs, and made remedial efforts to address internal controls weaknesses. Ixia also +cooperated with the Commission staff in the staff’s investigation. +BACKGROUND +Ixia’s Revenue Recognition for Its Key Products and Services + +6. Like many of its peers in the software and hardware industry, Ixia was bound by +accounting rules that required, in some circumstances, a significant deferral of revenue from its +sales. +7. This deferral of revenue was a result of the required accounting for most of Ixia’s +sales. Ixia’s primary product line is a combination of hardware and software designed to test, +assess, and validate the performance of technology networks. Ixia also sells post-contract support +(“PCS”) – this line of products includes technical support and extended warranty and maintenance +for Ixia’s hardware and software products. Last, Ixia sells professional services, including +providing customized software and product training in the use of Ixia’s hardware and software. +8. Because Ixia typically sold a combination of its products to customers in a single +transaction, those sales were known in accounting as “multi-element arrangements” that were +subject to revenue recognition rules that required deferral of some or all of the revenue depending +on the products included in the sale, and how they related to each other. +9. Under GAAP, revenue from a multi-element arrangement involving software must +be allocated to each element (e.g., the separate products sold in the combination sale) based on the +fair value of each element (e.g., dollar value established through evidence of a consistent price paid +by customers for the same or similar element), as measured by vendor-specific objective evidence +of fair value (“VSOE”). Thus, if VSOE does not exist for any of the elements of the transaction, + + 4 +then any software revenue from the multi-element arrangement must be deferred until either the +point in time when all elements have been delivered to the customer, or when VSOE does exist for +each individual element, whichever is earlier. +10. Consistent with this, Ixia’s internal revenue recognition policy provided that: +If evidence of fair value (or VSOE) cannot be established for an undelivered +element within the software group or software arrangement, we defer +revenue on the entire order until the earlier of (i) delivery of all elements or +(ii) establishment of VSOE of the undelivered element. We have not been +able to establish VSOE for our Professional Services, therefore, if the only +undelivered element is Professional Services, the entire order or group is +recognized as revenue over the service term or when the service is +completed, depending on the arrangement. +11. Given its significance to Ixia’s financial statements, Ixia’s 2012 Form 10-K +explicitly referenced and incorporated this aspect of Ixia’s revenue recognition policy in the +company’s disclosures to investors. Within the Form 10-K’s discussion of its “Significant +Accounting Policies,” the company represented that: +As our systems typically include hardware and software products, and the +related services, we recognize our revenue in accordance with +authoritative guidance on both hardware and software revenue +recognition. +*** +If VSOE cannot be established for an undelivered element within the +software group (or arrangement), we defer the entire value allocated to the +software group (or arrangement) until the earlier of (i) delivery of all +elements (other than technical support, warranty and software maintenance +services, provided VSOE has been established) or (ii) establishment of +VSOE of the undelivered element(s). +Alston signed Ixia’s 2012 Form 10-K in his capacity as Ixia’s chief executive officer. +12. Crucially, Ixia had never established VSOE for any of its professional services. +13. Accordingly, Alston knew that whenever Ixia sold a combination of software and +professional services in a multi-element arrangement, Ixia could not recognize revenue from its +sale of the software element until the professional services element of the transaction was fully +delivered. This requirement to defer software revenue was compelled by GAAP as well as Ixia’s +stated revenue recognition policy. +14. These accounting rules and the required deferral of revenue in certain +circumstances subjected Ixia to considerable pressure at quarter or year end. Much of Ixia’s sales +occurred at or near the conclusion of reporting periods. In many instances, Ixia was prohibited +from recognizing all the revenue from those sales if professional services were included in the deal. + + 5 +Consequently, these accounting rules introduced a level of uncertainty even when sales and +earnings targets appeared within reach. +Professional Services’ Impact on Ixia’s Revenue was Highlighted in the Third +Quarter 2012 +15. Events at the end of third quarter 2012 coalesced to place the impact of these +accounting rules on Ixia’s revenue recognition in sharp focus. On September 28, 2012, Ixia closed +a significant, seven-figure sale to a large technology company. The transaction was a multi- +element arrangement comprised of software, along with a nominal amount of hardware and +professional services. Although in the aggregate, the value of the deal was substantial, Ixia could +not recognize any of the revenue from the software licensed in the transaction in third quarter 2012 +because the professional services sold to Ixia’s customer would not be delivered in the two days +before quarter-end. +16. Once briefed on the situation, Alston requested bi-weekly meetings to review status +on delivery of professional services to ascertain the timing of revenue associated with those sales. +17. Soon thereafter, certain Ixia employees learned that recognition of revenue from +Ixia’s large transaction at the end of third quarter 2012 would be deferred even further because +Ixia’s customer had decided that it wanted delivery of professional services to complete in 2013, +rather than fourth quarter 2012. +18. Faced with this, certain Ixia employees asked its customer to “split” its original +purchase order into two purchase orders. One purchase order would refer to software and already- +completed professional services. The other purchase order would reference the uncompleted +professional services previously negotiated and agreed to by the customer. The terms of the +original agreement were unchanged, with the only difference being the issuance of two purchase +orders, rather than one, to document what was in substance a single multi-element arrangement. +Ixia’s customer agreed to its request to submit new purchase orders. On that fiction, Ixia +prematurely recognized approximately $530,000 of software revenue in its financial statements +including with its 2012 Form 10-K. +19. This course of action circumvented Ixia’s internal accounting controls, which +required that the documentation for orders reflect the details of all other orders or open negotiations +for products that were discussed as part of the order. Further, these controls also required any +quote provided to a customer to reflect the entirety of the contemplated sales transaction. Split POs +circumvented these key controls. +Ixia Split POs to Improperly Accelerate Ixia’s Revenue +20. The sale to the large technology company focused Alston and others on +professional services’ impact on Ixia’s ability to immediately recognize revenue. In approximately +October 2012, Alston (along with others at Ixia) fundamentally changed the way Ixia did business +by instructing his team to artificially separate all professional services from sales. + + 6 +21. Ixia’s historic sales practice was to submit a single sales quote to a potential +customer that typically reflected a combination of its products. Now, Ixia would Split POs in +instances when a sale included professional services. Ixia would submit two quotes to that +potential customer, one quote reflecting professional services and the other reflecting all of the +other components of the sale. Ixia then requested that its customer keep its purchase of +professional services separate by submitting two separate purchase orders. + +After consulting and in coordination with others at Ixia, Alston sent an April 21, 2013 email to Ixia +management that stated: +Team +Carrier deals that involve services need to be quoted with [professional +services] on a separate quote. +We cannot have [hardware/software] and Services quoted on the same +order. That includes [professional services,] RE, or any other custom +work. +Ixia cannot deliver the quarter or meet revenue recognition any longer if +we continue to book orders in this manner … +Its [sic] not a business choice. It’s a business reality … +22. Splitting POs was designed to accomplish two important but prohibited goals. +First, in sales that included both software and professional services, Ixia could recognize the +revenue from software immediately because professional services had been excised from the sale. +Second, Ixia purportedly planned to separately establish VSOE for professional services through +Split POs by relying on artificially-separated professional services orders as evidence of fair value. +And once that fabricated VSOE was established, Ixia would be in a position to avoid deferring +revenue from multi-element arrangements involving both professional services and software in the +future, whether or not it chose to continue Splitting POs. But GAAP requires, among other +criteria, that VSOE be established on the basis of truly independent sales, and professional services +that are sold as part of a multi-element arrangement, do not constitute an independent sale. +Accordingly, Ixia would be utilizing a false record of these sales to establish VSOE, in violation of +GAAP. + +23. Split POs violated Ixia’s revenue recognition policy and circumvented Ixia’s +internal accounting controls. Split POs also created a trail of sales documentation, including sales +quotes, purchase orders, and invoices that did not accurately reflect the true nature of the sale. Ixia +prematurely and improperly recognized revenue as a result. +24. Some in Ixia’s accounting and finance department knew or recklessly disregarded +that Splitting POs was likely resulting in Ixia’s premature recognition of revenue. Although some + + 7 +advised Alston against the practice, no one pushed back in any meaningful way on Alston’s desire +to institutionalize the practice. +Split POs Resulted in Misrepresentations and Omissions in Ixia’s SEC Filings +25. Alston’s directive to Split POs resulted in material misrepresentations and +omissions in Ixia’s 2012 Form 10-K. Specifically, Split POs rendered false and misleading Ixia’s +and Alston’s representations concerning Ixia’s ICFR and Ixia’s representations of its compliance +with GAAP, including the applicable software revenue recognition rules. +26. Ixia is required to maintain ICFR pursuant to Exchange Act Rule 13a-15(a). +Pursuant to Exchange Act Rule 13a-15(f), Ixia’s ICFR is defined 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[.] +27. Item 308 of Regulation S-K required Ixia’s management to provide a report on +ICFR that contains management’s assessment of the effectiveness of the company’s ICFR, and in +that report, management must disclose any material weaknesses in the company’s ICFR identified +by management. Further, Item 308 of Regulation S-K prohibited Ixia’s management from +concluding that its ICFR was effective if there were one or more material weaknesses in that ICFR. + +28. A “material weakness” in a company’s ICFR 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.” 17 C.F.R. 210.1-02(a)(4). A misstatement is reasonably possible if the chance of a +misstatement is more than remote but less than likely. +29. Management’s report on the company’s ICFR is found in Item 9A of Ixia’s 2012 +Form 10-K. That report, entitled “Management’s Report on Internal Control over Financial +Reporting,” stated: +As of December 31, 2012, our management (with the participation of our +Chief Executive Officer and our Chief Financial Officer) conducted an +evaluation of the effectiveness of our internal control over financial +reporting based on the framework in Internal Control – Integrated +Framework issued by the Committee of Sponsoring Organizations of the +Treadway Commission (“COSO”). Based on this evaluation, management +concluded that our internal control over financial reporting was not effective +as of December 31, 2012 based on criteria in Internal Control – Integrated +Framework issued by the COSO. + + 8 +30. The report, however, set forth only two reasons that led to management’s +conclusion that Ixia’s ICFR was not effective as of December 31, 2012. Neither concerned Split +POs. Rather, management’s report only disclosed deficiencies arising from warranty and +software maintenance revenue recognition. Therefore, although management had concluded that +Ixia’s ICFR was not effective, that assessment was on the basis of material weaknesses unrelated +to the issues caused by Alston’s directive to Split POs. +31. This undisclosed material weakness made management’s report on Ixia’s ICFR +materially misleading. Alston’s directive to Split POs, a practice designed to inappropriately and +prematurely recognize revenue, resulted in the exploitation of that undisclosed material +weakness. As Ixia’s chief executive officer and president, Alston could not omit the existence of +this material weakness while simultaneously exploiting that weakness. Specifically, Ixia had no +process in place to identify all software and professional services sales arising from a multi- +element arrangement once those POs were artificially split. Since Ixia could no longer reliably +identify its multi-element arrangements, it was now impossible for the company to comply with +its revenue recognition policy – namely, the rules that policy set forth on how to recognize +revenue from multi-element arrangements. Alston knew or was reckless in not knowing that the +foregoing representations were materially false and misleading. +32. Alton’s directive to Split POs also violated Ixia’s revenue recognition policies and +circumvented Ixia’s internal accounting controls requiring that the documentation for orders reflect +the details of all other orders or open negotiations for products that were discussed as part of the +order. +33. Alston’s directive to Split POs caused Ixia to recognize revenue in contravention +of Ixia’s revenue recognition policy and the applicable software revenue recognition rules +explicitly referenced in Ixia’s 2012 Form 10-K’s “Significant Accounting Policies.” +34. Alston knew or was reckless in not knowing that the foregoing representations +were materially false and misleading. +Alston’s False SOX Certifications +35. In accordance with SOX Section 302 and Exchange Act Rule 13a-14, Alston +signed certifications which the company attached to its 2012 Form 10-K. +36. Alston represented that: +- He had disclosed all significant deficiencies in the company’s ICFR to the +company’s outside auditors and publicly disclosed all material weaknesses +in ICFR. +- He had disclosed to the company’s outside auditors all fraud – whether or +not material – involving Ixia’s management or other employees with +significant roles in the company’s ICFR. + + 9 +37. Alston’s certifications were materially false and misleading because: he directed +Split POs for all multi-element transactions involving professional services, Split POs exploited +a material weakness in Ixia’s ICFR, violated Ixia’s revenue recognition policy, and circumvented +internal accounting controls. None of these facts were ever disclosed by Alston, or anyone else +at the company, to Ixia’s outside auditors. +Alston Concealed Split POs from Ixia’s Auditors +38. Alston submitted management representation letters to Ixia’s auditors during the +2012 year-end audit and first and second quarter 2013 reviews that misrepresented or omitted +material information relating to Split POs. Specifically, Alston misrepresented or omitted +material information related to Split POs, including that: +- Ixia had identified and accounted for all multi-element arrangements in +accordance with GAAP. +- Ixia had disclosed all significant deficiencies in the design or operation of +Ixia’s ICFR. +- Alston had no knowledge of any fraud or suspected fraud at Ixia involving +either senior management, or employees with significant roles in Ixia’s +ICFR. +- There were no material transactions or agreements that had not been +properly recorded. +39. Alston knew or was reckless in not knowing that these representations were +materially false and misleading. +Ixia’s Discovery of Alston’s False Resume Shed Light on Split POs +40. Split POs came to light due to Ixia’s discovery of unrelated issues in the second half +of 2013. Ixia’s Audit Committee then decided to conduct an investigation due to his +misrepresentations’ implications on the integrity of the Ixia’ Commission filings and incorporated +financial statements. Ixia informed the staff of these improprieties at the onset of the Audit +Committee’s investigation. +41. As a consequence of the Audit Committee’s investigation, Ixia restated its first and +second quarter 2013 financial statements, in part to correct errors related to Split POs, disclosed +among other things, material weaknesses in its ICFR, and made substantial remedial efforts to +address internal controls weaknesses. Alston resigned from Ixia in October 2013. +VIOLATIONS +42. As a result of the conduct described above, Ixia violated Exchange Act Section +13(a) and Rule 13a-1 thereunder, which require that every issuer of a security registered pursuant + + 10 +to Exchange Act Section 12 file with the Commission, among other things, annual reports as the +Commission may require, and, pursuant to Rule 13a-14, mandate, among other things, that an +issuer’s principal executive and principal financial officers certify each periodic report. +43. As a result of the conduct described above, Ixia violated Exchange Act Section +13(b)(2)(A), which requires reporting companies to make and keep books, records and accounts +which, in reasonable detail, accurately and fairly reflect their transactions and dispositions of their +assets. +44. As a result of the conduct described above, Ixia violated Exchange Act Section +13(b)(2)(B), which requires all reporting companies to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit preparation of financial statements in accordance with GAAP. +45. As a result of the conduct described above, Ixia violated Exchange Act Rule 12b- +20, 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. +46. As a result of the conduct described above, Alston violated Securities Act Section +17(a)(3), Exchange Act Section 10(b) and Rule 10b-5(b) and (c) thereunder, which prohibit +fraudulent conduct in the offer or sale of securities and in connection with the purchase or sale of +securities. +47. As a result of the conduct described above, Alston violated Exchange Act Section +13(b)(5), which prohibits any person from knowingly circumventing or knowingly failing to +implement a system of internal accounting controls or knowingly falsifying any book, record, or +account described in Exchange Act Section 13(b)(2). +48. As a result of the conduct described above, Alston violated Exchange Act Rule +13b2-1, which prohibits any person from, directly or indirectly, falsifying or causing to be falsified, +any book, record, or account subject to Exchange Act Section 13(b)(2)(A). +49. As a result of the conduct described above, Alston violated Exchange Act Rule +13b2-2, which prohibits any officer or director from directly or indirectly making or causing to be +made a materially false or misleading statement to an accountant in connection with any audit, +review, or examination of the financial statements of an issuer. +50. As a result of the conduct described above, Alston violated Exchange Act Rule 13a- +14, which requires a principal executive and principal financial officer to certify each periodic +report containing financial statements filed by an issuer in accordance with Exchange Act 13(a). +51. As a result of the conduct described above, Alston caused Ixia’s violations of +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20 and 13a-1 +thereunder. + + 11 +IXIA’S REMEDIAL EFFORTS +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Ixia and its cooperation afforded the Commission staff. +IV. +UNDERTAKINGS + 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 +Ixia (i) agrees to use its best efforts to cause its officers, employees, and directors to be +interviewed by the 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 its +undersigned attorneys as agents 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 interview or testimony reimburses the travel, lodging, and subsistence expenses at +the then-prevailing U.S. Government per diem rates; and (v) consents to personal jurisdiction +over it in any United States District Court for purposes of enforcing any such subpoena. +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 +Alston (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 his undersigned attorneys as agents 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 interview or testimony reimburses his travel, +lodging, and subsistence expenses at the then-prevailing U.S. Government per diem rates; and +(v) consents to personal jurisdiction over him in any United States District Court for purposes of +enforcing any such subpoena. +In determining whether to accept Respondents’ Offers, the Commission has considered +these undertakings. +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents Ixia’s and Alston’s Offers. + + + 12 + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED, effective immediately, that: + +A. Respondent Ixia cease and desist from committing or causing any violations and any +future violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 13a-1 and +12b-20 thereunder. +B. Respondent Ixia shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $750,000.00 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +C. Respondent Ixia acknowledges that the Commission is not imposing a civil penalty +in excess of $750,000.00 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 Ixia knowingly provided materially +false or misleading information or materials to the Commission, or in a related proceeding, the +Division may, at its sole discretion and with prior notice to the Respondent Ixia, petition the +Commission to reopen this matter and seek an order directing that the Respondent Ixia pay an +additional civil penalty. Respondent Ixia 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. +D. Respondent Alston cease and desist from committing or causing any violations and +any future violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a), +13(b)(2)(A), 13(b)(2)(B) and 13(b)(5), and Rules 10b-5, 12b-20, 13a-1, 13b2-1, 13b2-2, and 13a- +14 thereunder. +E. Respondent Alston be, and hereby is, prohibited for five years from the date of this +Order from acting as an officer or director of any issuer that has a class of securities registered +pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section +15(d) of the Exchange Act, in accordance with Section 8A(f) of the Securities Act and Section +21C(f) of the Exchange Act. +F. Respondent Alston shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $100,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. +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; + + 13 + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the Commission website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Ixia +or Alston 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 W. Berry, Division of +Enforcement, Securities and Exchange Commission, 444 S. Flower Street, Suite 900, Los Angeles, +CA 90071. + +H. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of 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. +I. Respondents shall comply with the undertakings enumerated in Section IV above. +VI. + +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 +Alston, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent Alston 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 + + 14 +violation by Respondent Alston of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3860.txt b/raw/aaer/2017/AAER-3860.txt new file mode 100644 index 0000000000000000000000000000000000000000..e6fb431bfd7f330904fd6df3f08ec1c120a809bc --- /dev/null +++ b/raw/aaer/2017/AAER-3860.txt @@ -0,0 +1,573 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80103 / February 24, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3860 / February 24, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17857 + + + + +In the Matter of + +Edward Richardson Jr., +CPA and Edward +Richardson Jr., + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE AND NOTICE OF +HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +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 Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s +Rules of Practice2 against Edward Richardson Jr., CPA (“Firm”) and Edward Richardson +Jr. (“Richardson”) (collectively, “Respondents”). + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + +2 + +II. + +After an investigation, the Division of Enforcement alleges that: + + A. RESPONDENTS + +1. Edward Richardson Jr., age 68 and a resident of West Bloomfield, +Michigan, is a CPA licensed in Michigan. Richardson also holds accounting licenses and +permits in several additional states. Richardson, the sole owner of the Firm, was the +engagement partner responsible for all of the audits conducted by the Firm for the fiscal +years ended January 1, 2010 through December 31, 2015 (the “Relevant Period”). + +2. Edward Richardson Jr., CPA is an accounting and auditing firm registered +with the Public Company Accounting Oversight Board (“PCAOB”) since 2009. The +Firm’s primary business is auditing small broker-dealers. The Firm is located in +Southfield, Michigan. During most of the Relevant Period, the Firm employed one +professional staff member in addition to Richardson and one clerical assistant. + +B. RESPONDENTS FAILED TO OBTAIN ENGAGEMENT QUALITY +REVIEWS REQUIRED BY PCAOB STANDARDS + +1. PCAOB Auditing Standard No. 7, Engagement Quality Review, requires +auditors to obtain an Engagement Quality Review (“EQR”) and concurring approval from a +competent reviewer who is independent from the audit client. + +2. The Firm served as the independent public accountant for an SEC registrant +(“Issuer A”) in connection with financial statement audits for the fiscal years ended +December 31, 2012 and December 31, 2013. Respondents failed to obtain an EQR and +concurring approval in connection with each audit of Issuer A for the fiscal years ended +2012 and 2013. In addition, the Firm issued an audit report in connection with each of its +audits of Issuer A stating that the audit had been conducted in accordance with PCAOB +standards. + +3. The Firm served as the independent public accountant for over 80 broker- +dealer audit clients in connection with financial statement audits required under paragraph + + 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 . . . 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 +(d) of Exchange Act Rule 17a-5 for the fiscal years ended after June 1, 2014 and through +December 31, 2014.3 Respondents failed to obtain an EQR and concurring approval in +connection with each of these audits. In addition, the Firm issued an audit report in +connection with each of these audits stating that the audit had been conducted in +accordance with PCAOB standards. + +4. The Firm served as the independent public accountant for over 80 broker- +dealer audit clients in connection with financial statement audits required under paragraph +(d) of Exchange Act Rule 17a-5 for the fiscal years ended January 31, 2015 through +December 31, 2015. Respondents engaged an accountant to perform the required EQR +with respect to a small number of these audits, but failed to do so for the remaining audits. +For each of these remaining audits, the Firm issued an audit report stating that the audit had +been conducted in accordance with PCAOB standards when Respondents knew that EQRs +were required under PCAOB standards and had not been performed. + +5. As a result of Respondents’ conduct, Issuer A and dozens of the Firm’s +broker-dealer audit clients filed with the Commission financial statements that included +audit reports that falsely stated the audits had been conducted in accordance with PCAOB +standards. + +C. RESPONDENTS FAILED TO COMPLY WITH NUMEROUS OTHER +PCAOB STANDARDS AND/OR GENERALLY ACCEPTED AUDITING +STANDARDS + +1. The Firm served as the independent public accountant for the financial +statement audits of Issuer A for the fiscal years ended December 31, 2012 and December +31, 2013, for the financial statement audit of a broker-dealer (“Broker-Dealer A”) for the +fiscal year ended December 31, 2014, and for the financial statement audit of a broker- +dealer (“Broker-Dealer B”) for the fiscal year ended May 31, 2012. In connection with +these audits, Richardson and the Firm failed to comply with numerous PCAOB auditing +standards and/or generally accepted auditing standards (“GAAS”), as described below. +Taken together, these failures evidence a persistent lack of due care by +Respondents. Respondents neither possess the degree of skill commonly possessed by +auditors nor exercised reasonable care and diligence in performing audit work. + +2. In 2012, 2013, and 2014 respectively, the Firm served as the independent +public accountant for the financial statement audits of over 75 clients each year that filed +audited financial statements with the Commission. A large percentage of these audit clients +have fiscal years ending on December 31. For example, the Firm audited over 75 broker- +dealers with fiscal years ended December 31, 2014, and approximately 70 of the audit +reports signed by the Firm are dated February 16, 2015. + + +3 Audits of broker-dealers for fiscal years ending on or after June 1, 2014 are required to be +performed in accordance with PCAOB standards. See Exchange Act Rule 17 C.F.R. § 240.17a-5(g)(1); +Broker-Dealer Reports, SEC Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). + + +4 +3. Auditing Standard No. 8, Audit Risk, discusses the auditor’s consideration +of audit risk and requires the auditor to plan and perform the audit to obtain reasonable +assurance about whether the financial statements are free of material misstatement due to +error or fraud. Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement, establishes requirements regarding the process of identifying and assessing +risks of material misstatement of the financial statements, thereby providing a basis for +designing and implementing responses to those risks. Auditing Standard No. 13, The +Auditor’s Response to the Risks of Material Misstatement, establishes requirements +regarding designing and implementing responses to the risks of material misstatement +through appropriate overall audit responses and audit procedures. Respondents did not +appropriately perform risk assessment procedures during the audits of Issuer A and/or +Broker-Dealer A. For example, in instances where Respondents identified fraud risks +during their audits of Issuer A and/or Broker-Dealer A, the audit responses to such risks +were inappropriate, inconsistent, or incomplete. During the audit of Broker-Dealer A, +Respondents identified revenue recognition and management override of controls as +possible fraud risks and documented that the audit responses were to confirm revenue and +test controls. Respondents, however, only subjected one of the client’s three revenue +streams to confirmation procedures, and the confirmation procedures that were performed +were inadequate, including, but not limited to, the design and timing of the confirmation +procedures and the failure to address exceptions and non-responses. In addition, +Respondents did not obtain or document a sufficient understanding of, or adequately test, +internal controls, yet concluded that internal controls were designed and implemented +effectively and that the risk of material misstatement related to control risk was low for all +audit areas. In addition, when documenting opportunities for fraud, Respondents identified +a lack of segregation of duties due to the size of Broker-Dealer A as an opportunity for +fraud, but inappropriately noted that this risk was “offset by the fact that the FINOP and +FINRA auditors closely watches [sic] and reviews financial statement activity.” The +FINOP4 was an employee of Broker-Dealer and FINRA does not perform the function +noted by Respondents. During the audits of Issuer A, Respondents inappropriately +identified reliance upon reviews by SEC staff as part of their risk assessment procedures, +and inaccurately identified such reviews as being a “key control.” Respondents also +identified risks related to financial reporting by stating: “Shortcomings in financial +statements would be frowned [sic] by the SEC.” + +4. AU Section 334,5 Related Parties, provides guidance on procedures that +should be considered by the auditor to address related party transactions. Respondents did +not obtain an understanding of the nature, purpose, or collectability of related party +receivables during the audit of Broker-Dealer A. Respondents also did not identify that + +4 A “FINOP” is a broker-dealer’s Financial and Operations Principal, who has responsibilities +related to, among other things, financial reporting and recordkeeping. + +5 The PCAOB adopted as interim standards, on a transitional basis, the auditing standards +promulgated by the Auditing Standards Board of the American Institute of Certified Public Accountants as +in existence on April 16, 2003, to the extent not superseded or amended by the PCAOB. See PCAOB Rule +3200T, Interim Auditing Standards. Standards identified by the letters “AU” are such standards. + + +5 +required disclosures concerning related party transactions were missing from the footnotes +to Broker-Dealer A’s financial statements despite being aware of the transactions. + +5. AU Section 330, The Confirmation Process, provides guidance about the +confirmation process in audits performed in accordance with PCAOB standards, including +the design of confirmations and performing alternative procedures when responses to +confirmation requests are not received. With respect to the audits of Issuer A and/or +Broker-Dealer A, Respondents did not appropriately design confirmations and performed +insufficient procedures, including, but not limited to, performing no procedures whatsoever +when confirmations were either returned with discrepancies or not returned at all. + +6. Auditing Standard No. 3, Audit Documentation, establishes general +requirements for documentation the auditor should prepare and retain in connection with +engagements conducted pursuant to PCAOB standards. Audit documentation created and +maintained by Respondents during the audits of Issuer A and/or Broker-Dealer A, and +created by staff under Richardson’s supervision, was inadequate, incomplete, unclear, and +contained numerous mistakes and inconsistencies. For example, audit documentation +frequently failed to indicate the source, person responsible for the preparation and/or +review of the document, and the dates of preparation and/or review; details of +conversations with clients’ management were not documented, even when such +conversation was the sole support for the completion of relevant audit steps; and certain +workpapers were dated after the date of the audit report, and there was no documentation of +the reason for adding such workpapers. In addition, an experienced auditor could not look +at the audit documentation and understand the procedures performed, evidence obtained, or +conclusions reached. + +7. Auditing Standard No. 14, Evaluating Audit Results, establishes +requirements regarding the auditor’s evaluation of the audit results and determination of +whether he or she has obtained sufficient appropriate audit evidence. Auditing Standard +No. 15, Audit Evidence, explains what constitutes audit evidence and establishes +requirements regarding designing and performing audit procedures to obtain sufficient +appropriate audit evidence. Respondents failed to appropriately evaluate audit results +during the audits of Issuer A and/or Broker-Dealer A. For example, Respondents’ +workpapers for Broker-Dealer A include an Accumulated Misstatement Evaluation Form, +which purports to list, and evaluate, the misstatements or errors identified during the audit. +This workpaper is incomplete and inaccurate because it identifies only one misstatement or +error, although several misstatements or errors were identified by Respondents during the +audit. Moreover, the required evaluation of misstatements in their totality was neither +performed nor documented. In addition, Respondents signed off on the audit report prior to +performing audit procedures that were intended to respond to the identified fraud risk +related to revenue recognition. + +8. Respondents also failed to comply with additional PCAOB auditing +standards during their audits of Issuer A and/or Broker-Dealer A, including, but not limited +to, Auditing Standard No. 16, Communication with Audit Committees, including, but not +limited to, the lack of required communications with the audit committee; PCAOB Rule + + +6 +3526, including the lack of communication with the audit committee concerning +independence; AU Section 316, Consideration of Fraud in the Financial Statement +Process, including, but not limited to, deficient testing of journal entries; AU Section 333, +Management Representations, including, but not limited to, the fact that Broker-Dealer A’s +management representation letter is dated after the date of the audit report; AU Section +508, Reports on Audited Financial Statements and AU Section 530, Dating of Independent +Auditor’s Report, including, but not limited to, inaccurate audit report dates; and AU +Section 550, Other Information in Documents Containing Audited Financial Statements, +including, but not limited to, the failure to read and consider information included in Issuer +A’s Form 10-K and Form 10-K/A filings, other than the audited financial statements, prior +to filing with the SEC. + +9. AU Section 230, Due Professional Care in the Performance of Work, +imposes upon an auditor the responsibility to observe the standards of field work and +reporting and to exercise professional skepticism. In addition to the foregoing, +Respondents failure to comply with AU Section 230 includes, but is not limited to, the use +of outdated and inapplicable audit programs in connection with audits of Issuer A. For +example, Respondents used a superseded disclosure requirements checklist for nonpublic +businesses from January 2007 in connection with the audit of Issuer A’s financial +statements for the fiscal year ended December 31, 2012. Respondents’ workpapers also +reflect responses that were cut-and-pasted from the workpapers of other audit clients. For +example, some workpapers for the audit of Broker-Dealer B document discussions with a +different audit client’s President and some workpapers for the audit of Issuer A identify +clearing broker statements as a source document – as so identified in the workpapers for +Broker-Dealer B as well as other broker-dealer audit clients – although Issuer A was not in +the brokerage business. In total, the breadth and depth of the audit issues related to +Respondents’ audits, including the audit failures described above and the presence of +numerous mistakes, errors, and/or oversights in the workpapers, demonstrate a lack of due +professional care in the performance of work. + +10. As a result of Respondents’ conduct, Issuer A, Broker-Dealer A, and +Broker-Dealer B filed with the Commission financial statements that included audit reports +that falsely stated the audits had been conducted in accordance with PCAOB standards. + +D. RESPONDENTS PREPARED CLIENT FINANCIAL STATEMENTS +FILED WITH THE COMMISSION IN VIOLATION OF AUDITOR +INDEPENDENCE REQUIREMENTS + +1. The Firm served as the independent public accountant for the financial +statement audits of over 80 broker-dealer audit clients for the fiscal years ended January 1, +2010 through December 31, 2012 (the “Relevant Period for Independence”). In connection +with at least one audit performed for each of these broker-dealer audit clients during the +Relevant Period for Independence, Respondents prepared the financial statements and/or +notes to the financial statements that were filed with the Commission under paragraph (d) +of Exchange Act Rule 17a-5 in violation of the Commission’s auditor independence +regulations set forth in Rule 2-01(b) and (c) of Regulation S-X. + + +7 + +2. For example, during the audit of Broker-Dealer B for the year ended May +31, 2012, Respondents were provided with financial documents generated by Broker- +Dealer B. Respondents reviewed and tested these documents, and the financial data +contained therein, as part of the audit. Respondents then utilized the information contained +in these documents to create a set of financial statements to be filed with the Commission. +In particular, Firm personnel working on Firm computers entered Broker-Dealer B’s +financial data into the Firm’s engagement software and then used that engagement software +to generate a new set of financial statements, including the notes to the financial statements, +using the prior year’s financial statements as a template. Respondents updated or revised +the financial statements and notes to the financial statements as needed. Respondents then +provided the set of financial statements that Respondents had prepared to Broker-Dealer +B’s management for approval. + +3. In July 2012, Broker-Dealer B filed with the Commission an annual report +required under paragraph (d) of Exchange Act Rule 17a-5 for the fiscal year ended May 31, +2012. Included in that filing is an audit report signed by the Firm and stating, among other +things, that the Firm’s audit of Broker-Dealer B was conducted “in accordance with +auditing standards generally accepted in the United States of America.” + +4. Section 17(e)(1)(A) of the Exchange Act requires that every registered +broker or dealer “shall annually file with the Commission a balance sheet and income +statement certified by an independent public accounting firm, or by a registered public +accounting firm if the firm is required to be registered under the Sarbanes-Oxley Act of +2002, prepared on a calendar or fiscal year basis, and such other financial statements +(which shall, as the Commission specifies, be certified) and information concerning its +financial condition as the Commission, by rule may prescribe as necessary or appropriate in +the public interest or for the protection of investors.” + +5. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a +public accountant who shall be in fact independent as defined in paragraph (f)(3) of this +section herein, and he shall give an opinion covering the statements filed pursuant to +paragraph (d) . . . .”6 Exchange Act Rule 17a-5(f)(3) further states that, for such audits, +“[a]n accountant shall be independent in accordance with the provisions of Rule 2-01(b) +and (c) of Regulation S-X.” + + +6 The provisions of Exchange Act Rule 17a-5 referred to in paragraphs II.D.5 and 6 are those in effect +during, and applicable to, the Relevant Period for Independence. On July 30, 2013, the Commission +adopted certain amendments to Rule 17a-5. See Broker-Dealer Reports, Exchange Act Release No. +34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). Among other things, the +amendments to Rule 17a-5 require that audits of brokers and dealers be performed in accordance +with PCAOB standards, effective for audits of fiscal years ending on or after June 1, 2014. The +auditor independence requirement of Rule 2-01 of Regulation S-X applied to broker-dealer audits +both before and after the July 30, 2013 amendments. At the time of the Relevant Period for +Independence, prior to the amendments, that requirement was set out in Rule 17a-5(f)(3). It is now +set out in Rule 17a-5(f)(1). + + +8 +6. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in +accordance with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) +requires that “[t]he accountant’s report shall . . . [s]tate whether the audit was made in +accordance with generally accepted auditing standards.” GAAS require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any +obligation to or interest in the client, its management or its owners.” See Statement on +Auditing Standard No. 1, Section 220.03. Accordingly, if an auditor’s report states that its +audit was performed in accordance with GAAS when the auditor was not independent, then +it has violated Exchange Act Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker +Berman & Company and Brian Zucker, CPA, Exchange Act Release No. 69765 at p. 5 +(June 14, 2013). + +7. Rule 2-01(c)(4) of Regulation S-X provides that an accountant is not +independent if, at any point during the audit and professional engagement period, the +accountant provides prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of +Regulation S-X provides that prohibited non-audit services include bookkeeping or other +services related to the accounting records or financial statements of the audit client, and +defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will +not be subject to audit procedures during an audit of the audit client’s financial +statements, including: +(A) Maintaining or preparing the audit client’s accounting +records; + +(B) Preparing the audit client’s financial statements that are +filed with the Commission or that form the basis of +financial statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client’s financial statements. + +8. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm +from preparing an audit client’s financial statements that are filed with the Commission. +With respect to the audit of Broker-Dealer B described above, Respondents violated this +rule by, among other things: aggregating line items from internal books and records to the +financial statements; changing line item descriptions; drafting or editing notes to the +financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. + +9. Respondents engaged in substantially similar conduct in connection with at +least one audit for dozens of additional broker-dealer clients during the Relevant Period for +Independence. + + + +9 +10. As a result of Respondents’ conduct in preparing the financial statements, +including the notes thereto, Respondents were not independent of their broker-dealer audit +clients under the independence criteria established by Rule 2-01(c)(4) of Regulation S-X, +which Exchange Act Rule 17a-5 makes applicable to the audits of broker-dealer financial +statements. As a result, each such broker-dealer client filed with the Commission financial +statements that included an audit report that falsely stated the audit had been conducted in +accordance with GAAS. + +E. VIOLATIONS + + 1. As a result of the conduct described above, the Firm willfully violated, and +Richardson willfully aided and abetted and caused the Firm’s violations of, Rule 2-02(b)(1) +of Regulation S-X, which requires an accountant’s report to state whether the audit was +made in accordance with generally accepted auditing standards.7 + +2. As a result of the conduct described above, the Firm willfully violated, and +Richardson willfully aided and abetted and caused the Firm’s violations of, Exchange Act +Rule 17a-5, which requires an accountant’s report to state (1) whether the audit was made +in accordance with PCAOB standards,8 or (2) with respect to the Relevant Period for +Independence, whether the audit was made in accordance with GAAS. + +3. As a result of the conduct described above, the Firm and Richardson +willfully aided and abetted and caused Issuer A to file with the Commission annual reports +that contained false and misleading information in violation of Exchange Act Sections +13(a) and 15(d) and Rules 13a-1 and 15d-1 promulgated thereunder.9 + +4. As a result of the conduct described above, the Firm and Richardson +willfully aided and abetted and caused dozens of broker-dealer audit clients to file with the +Commission annual reports that were not audited by an independent accountant and/or that +contained false and misleading information in violation of Exchange Act Section 17(a) and +Rule 17a-5 promulgated thereunder. + + +7 “[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the standards +of the PCAOB plus any applicable rules of the Commission.” See Commission Guidance Regarding the +Public Company Oversight Board’s Auditing and Related Professional Practice Standard No. 1, SEC +Exchange Act Release No. 34-49708 (May 14, 2004). + +8 As part of the Rule 17a-5 amendments adopted by the Commission on July 30, 2013, see supra +note 6, Rule 17a-5(i)(2)(i) was amended to state: “The independent public accountant’s reports must . . . +[s]tate whether the examinations or review, as applicable, were made in accordance with standards of the +Public Company Accounting Oversight Board.” + +9 At the time Issuer A filed its Form 10-K for the year ended December 31, 2013, Issuer A had +securities registered pursuant to Exchange Act Section 12(g) and therefore filed annual reports with the +Commission pursuant to Exchange Act Section 13(a). At the time Issuer A filed its Form 10-K for the year +ended December 31, 2012, Issuer A was required to file annual reports with the Commission pursuant to +Exchange Act Section 15(d). + + +10 +5. Rule 102(e) of the Commission’s Rules of Practice allows the Commission +to censure a person or deny the privilege of appearing or practicing before it to any person +if it finds that such person has engaged in “improper professional conduct” or has willfully +violated or willfully aided and abetted the violation of any provision of the Federal +securities laws. Exchange Act §§ 4C(a)(2) and (3); Rules 102(e)(1)(ii) and (iii). Rule +102(e) defines improper professional conduct, in part, as either: + +(1) A single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which +the registered public accounting firm or associated person knows, or +should know, that heightened scrutiny is warranted. + +(2) Repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. + +Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + +6. Questions regarding an auditor’s independence always warrant heightened +scrutiny. See Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. +Reg. 57164, 57168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has +defined the “highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than +the traditional definition of recklessness used in cases brought under +Section 10(b) of the Exchange Act and Rule 10b-5 of the Exchange Act. +The highly unreasonable standard is an objective standard. The conduct +at issue is measured by the degree of the departure from professional +standards and not the intent of the accountant. + +Id. at 57,167. + +7. As a result of the conduct described above, the Firm and Richardson +engaged in improper professional conduct subject to Section 4C(a)(2) of the Exchange +Act and the Commission’s Rules of Practice 102(e)(1)(ii). + +8. As a result of the conduct described above, the Firm and Richardson +willfully violated and/or willfully aided and abetted violations of the federal securities +laws, which constitute conduct subject to Section 4C(a)(3) of the Exchange Act and the +Commission’s Rules of Practice 102(e)(1)(iii). + +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: + + +11 + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondents an opportunity to establish any defenses to such +allegations; + +B. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of +the Commission’s Rules of Practice, Respondents should be censured or denied, +temporarily or permanently, the privilege of appearing or practicing before the +Commission as accountants; + +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 Sections 13(a), 15(d), and 17(a) of the Exchange Act and Rules 13a-1, 15d-1, +and 17a-5 promulgated thereunder and Rule 2-02(b)(1) of Regulation S-X, 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 purposes of taking evidence on the +questions set forth in Section III hereof shall be convened not earlier than 30 days and not +later than 60 days from service of this Order at a time and place to be fixed and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the +allegations contained in this Order within twenty (20) days after service of this Order, as +provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + +If Respondents fail to file the directed answer, or fail to appear at a hearing after +being duly notified, 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, pursuant to Rule 360(a)(2) of the +Commission’s Rules of Practice, 17 C.F.R. § 201.360(a)(2), the Administrative Law +Judge shall issue an initial decision no later than 120 days from the occurrence of one of +the following events: (A) The completion of post-hearing briefing in a proceeding where +the hearing has been completed; (B) Where the hearing officer has determined that no +hearing is necessary, upon completion of briefing on a motion pursuant to Rule 250 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.250; or (C) The determination by the + + +12 +hearing officer that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3861.txt b/raw/aaer/2017/AAER-3861.txt new file mode 100644 index 0000000000000000000000000000000000000000..94f8b8cfbe5ab1c122fb496aa86087db7ca34880 --- /dev/null +++ b/raw/aaer/2017/AAER-3861.txt @@ -0,0 +1,1395 @@ + + + + + + + + + + + + + + + + SEC.gov | Nasir N. Shakouri, Robert S. Torino, Bronson L. Quon, John S. Hong and Jonathan K. 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Shakouri, Robert S. Torino, Bronson L. Quon, John S. Hong and Jonathan K. Skarie + + + + + + + + + + + + Nasir N. Shakouri, Robert S. Torino, Bronson L. Quon, John S. Hong and Jonathan K. Skarie + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Lit. Release No. 23775 / March 10, 2017 + + Accounting and Auditing Enforcement Release No. 3861 / March 10, 2017 + + Securities and Exchange Commission v. Nasir N. Shakouri, Robert S. Torino, Bronson L. Quon, John S. Hong and Jonathan K. Skarie, 17-cv-01929 (C.D. Cal. March 10, 2017) + + Executives Charged With Manipulating Company's Accounting Systems To Steal Money + + + + + The Securities and Exchange Commission today charged two former executives at a credit card processing company with masterminding a fraudulent scheme to steal millions of dollars through phony expense reimbursements, inflated invoices, and other improper accounting tactics. + + The SEC's complaint alleges that iPayment's then-senior vice president of sales and marketing Nasir N. Shakouri and then-executive vice president and chief operating officer Robert S. Torino routinely reimbursed themselves for payments that were never actually made to third-party vendors using their personal credit cards. They also allegedly conspired with vendors to inflate invoices and receive kickbacks from the overpayments, and claimed improper commissions and bonuses related to other corporate funds they improperly diverted in various ways. + + The SEC's complaint also charges three other iPayment executives - Bronson L. Quon, John S. Hong, and Jonathan K. Skarie - with participating in the scheme and helping Shakouri and Torino falsify books and records to hide the thefts of corporate funds. Quon, Hong, and Skarie were allegedly rewarded for their assistance with misappropriated iPayment funds. + + In a parallel action, the U.S. Attorney's Office for the Central District of California today announced criminal charges against Shakouri and Torino. + + The SEC's complaint charges: (i) Shakouri and Torino with violating Sections 17(a)(1) and (3) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5(a) and (c), 13b2-1 and 13b2-2 thereunder, and with aiding and abetting violations of Section 17(a)(2) of the Securities Act, Sections 10(b), 13(b)(2)(A) and (B) and 15(d) of the Exchange Act and Rules 10b-5(b), 12b-20 and 15d-1 thereunder, in violation of Section 15(b) of the Securities Act and Section 20(e) of the Exchange Act; (ii) Quon with violating Sections 17(a)(1) and (3) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5(a), (b) and (c), 13b2-1 and 13b2-2 thereunder, and with aiding and abetting violations of Section 17(a)(2) of the Securities Act, Sections 13(b)(2)(A) and (B) and 15(d) of the Exchange Act and Rules 12b-20 and 15d-1 thereunder, in violation of Section 15(b) of the Securities Act and Section 20(e) of the Exchange Act; and (iii) Hong and Skarie with violating Sections 17(a)(1) and (3) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5(a) and (c) and 13b2-1 thereunder, and with aiding and abetting violations of Section 17(a)(2) of the Securities Act, Sections 10(b), 13(b)(2)(A) and 15(d) of the Exchange Act and Rules 10b-5(b), 12b-20 and 15d-1 thereunder, in violation of Section 15(b) of the Securities Act and Section 20(e) of the Exchange Act. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains plus interest, civil monetary penalties, and officer-and-director bars against all defendants. + + The SEC's investigation has been conducted by Kristin M. Pauley, Melissa A. Coppola, Maureen P. King, Roseann Daniello, Diego Brucculeri, Richard Hong, Nicholas Pilgrim, Scott B. York, and Valerie A. Szczepanik in the New York office. The litigation will be led by Mr. Hong and Ms. Pauley along with John Bulgozdy, who works in the Los Angeles office. The case is being supervised by Mr. Wadhwa. The SEC appreciates the assistance of the U.S. Attorney's Office for the Central District of California, the Federal Bureau of Investigation, and the Internal Revenue Service. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Desarrolladora Homex S.A.B. de C.V + + + + + + + + + + + + Desarrolladora Homex S.A.B. de C.V + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 23765 / March 3, 2017 + + Accounting and Auditing Enforcement Release No. 3862 / March 3, 2017 + + Securities and Exchange Commission v. Desarrolladora Homex S.A.B. de C.V , No. 17-civ-00432-L-WVG (S.D. Cal. filed Mar. 3, 2017) + + SEC Charges Mexico-Based Homebuilder In $3.3 Billion Accounting Fraud + + + + + The Securities and Exchange Commission today announced that Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. has agreed to settle charges that it reported fake sales of more than 100,000 homes to boost revenues in its financial statements during a three-year period. + + The SEC used satellite imagery to help uncover the accounting scheme and illustrate its allegation that Homex had not even broken ground on many of the homes for which it reported revenues. + + The SEC alleges that Homex, one of the largest homebuilders in Mexico at the time, inflated the number of homes sold during the three-year period by approximately 317 percent and overstated its revenue by 355 percent (approximately $3.3 billion). The SEC's complaint highlights, for example, that Homex reported revenues from a project site in the Mexican state of Guanajuato where every planned home was purportedly built and sold by December 31, 2011. Satellite images of the project site on March 12, 2012, show it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt. + + According to the SEC's complaint, Homex filed for the Mexican equivalent of bankruptcy protection in April 2014 and emerged in October 2015 under new equity ownership. The company's then-CEO and then-CFO have been placed on unpaid leave since May 2016. Homex has since undertaken significant remedial efforts and cooperated with the SEC's investigation. + + The SEC separately issued a trading suspension in the securities of Homex. + + Without admitting or denying the allegations in the SEC's complaint filed in U.S. District Court for the Southern District of California, Homex consented to the entry of a final judgment permanently enjoining the company from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, and 13a-16 thereunder, and agreed to be prohibited from offering securities in the U.S. markets for at least five years. The settlement is subject to court approval. + + The SEC's investigation, which continues, is being conducted by Alfred C. Tierney, Benjamin D. Brutlag, Andrew M. Shirley, Juan M. Migone and Richard Hong. The case is being supervised by J. Lee Buck II. The SEC appreciates the assistance of the Mexican Comisiƒ³n Nacional Bancaria y de Valores. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2017/AAER-3863.txt b/raw/aaer/2017/AAER-3863.txt new file mode 100644 index 0000000000000000000000000000000000000000..0e3d8accf76ad85e79bf9af39dd6cd04c1489a7a --- /dev/null +++ b/raw/aaer/2017/AAER-3863.txt @@ -0,0 +1,263 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80238 / March 14, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3863 / March 14, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17881 + + + +In the Matter of + +NIMA HEDAYATI, + +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 Nima +Hedayati (“Respondent” or “Hedayati”) pursuant to Sections 4C +1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + + +2 +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondent consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C +and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of +Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary +1. These proceedings involve insider trading by Nima Hedayati, a former junior audit +staff member at a major public company accounting and audit firm. In October 2015, Hedayati +learned, in the course of his employment, material nonpublic information regarding a planned +acquisition of KLA-Tencor Corporation (“KLA”) by Lam Research Corporation (“Lam”). Soon +thereafter, Hedayati purchased a total of 40 contracts for out-of-the-money KLA call options, both +in his own account and in the account of his then-fiancée. Hedayati also advised his mother to trade +KLA, and on the basis of this suggestion, his mother purchased 1,400 shares of KLA common +stock. On October 21, 2015, Lam and KLA issued a joint press release announcing their entry into +a merger agreement. Shares of KLA closed that day at $63.98, up 19% from the previous day’s +close of $53.86. Collectively, Hedayati and his mother profited from the illegal trades by +approximately $43,000. + +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 Responde nt’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 +Respondent +2. Nima Hedayati, age 34, resides in San Jose, CA. During the relevant time period, +Hedayati was an audit staff member employed by Lam’s PCAOB-registered independent auditor. +Hedayati has passed the CPA exam but does not hold a CPA license. +Other Relevant Entities +3. KLA-Tencor Corporation, a Delaware corporation headquartered in Milpitas, CA, +is a manufacturer of equipment used in the creation of semiconductors. At all relevant times, +KLA-Tencor’s common stock was registered with the Commission pursuant to Section 12(b) of +the Securities Exchange Act of 1934 (“Exchange Act”) and was quoted on the NASDAQ Global +Select Market under the ticker symbol KLAC. +4. Lam Research Corporation, a Delaware corporation headquartered in Fremont, CA, +is a manufacturer of equipment used in the creation of semiconductors. At all relevant times, Lam +Research’s common stock was registered with the Commission pursuant to Section 12(b) of the +Securities Exchange Act of 1934 (“Exchange Act”) and was quoted on the NASDAQ Global +Select Market under the ticker symbol LRCX. +Facts +5. During his time as an audit staff member at Lam’s auditor, Hedayati participated in +trainings and received written policies cautioning him to safeguard confidential information +concerning his employer’s clients and not to use that information for his own benefit. He also +received and was familiar with his employer’s code of conduct, which prohibited employees from +trading on the basis of material, nonpublic information. Hedayati understood that he had a duty not +to disclose confidential client information, and that he had a duty not to buy or sell securities on the +basis of nonpublic information he received in the course of his employment. +6. From August 2015 to October 2015, Lam and KLA held meetings and exchanged +communications concerning a potential combination. On September 22, 2015, Lam made an offer +to acquire KLA at a price of $32 per share and 0.5 shares of Lam common stock, its third and best +offer. On the basis of this offer, Lam and KLA signed an exclusivity agreement on September 24, +and from September 29 to October 20, Lam and KLA engaged in mutual due diligence. From +October 4 to October 20, Lam and KLA negotiated a merger agreement. On October 20, 2015 the +companies’ respective boards approved the agreement, and on October 21, the companies publicly +announced the intended acquisition. +7. Hedayati became aware of Lam’s intent to acquire KLA at an October 2015 +meeting where Hedayati and other employees of Lam’s auditor were discussing the upcoming Lam +year-end 2015 audit and related procedures. During the meeting, Hedayati learned that Lam was +going to acquire KLA. +During the month of October 2015, and in the course of his employment, +Hedayati also reviewed minutes from meetings of the Lam board of directors that made reference +to the proposed merger. Hedayati knew that information regarding the proposed merger was + +4 +nonpublic, and that he had a duty to refrain from trading while in possession of such information +and a duty to refrain from sharing that information with others who might trade on the information. +8. Hedayati subsequently told his mother to “look into” trading KLA. On the basis of +this suggestion, and before the Lam-KLA merger was publicly announced, Hedayati’s mother +purchased 1,400 shares of KLA common stock. +9. Hedayati knew, or was reckless in not knowing, that his tip to his mother was a +breach of his duty of trust and confidence to his employer. +10. On October 19, 2015, Hedayati bought 20 contracts for out-of-the money KLA call +options in his brokerage account. He also purchased 20 contracts for out-of-the money KLA call +options in the brokerage account of his fiancée at the time. +11. Hedayati knew, or was reckless in not knowing, that these purchases were a breach +of his duty of trust and confidence to his employer. +12. Lam and KLA issued a joint press release announcing their entry into the merger +agreement prior to the opening of the markets on October 21, 2015. Shares of KLA closed that +day at $63.98, up 19% from the previous day’s close of $53.86. +13. Hedayati sold all the options he had purchased, in both his own account and his +fiancée’s account, soon after the markets opened on October 21, realizing profits of $27,971.59. +14. Hedayati’s mother’s profited by $15,056.00. She sold her KLA shares gradually +over a period of two months. +15. Hedayati’s mother subsequently thanked Hedayati for the tip and sent him $2,000 +as a “thank you” gift. +16. Hedayati’s employer terminated Hedayati’s employment in January 2016, when it +discovered the conduct described above. + +Findings + +17. As a result of the conduct described above, the Commission finds that Hedayati +willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Hedayati’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + +5 + A. Pursuant to Section 21C of the Exchange Act, Hedayati cease and desist from +committing or causing any violations and any future violations of Section 10(b) of the Exchange +Act and Rule 10b-5 thereunder. + + B. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, Hedayati is denied the privilege of appearing or practicing before +the Commission as an accountant. + + C. After five (5) years from the date of this order, Respondent may request that +the Commission consider his reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as an +accountant. + +D. Respondent shall pay disgorgement of $43,027.59 , prejudgment interest of +$1,269.70 and civil penalties of $43,027.59, 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) Respondent shall pay +disgorgement of $43,027.59, prejudgment interest of $1,269.70, and civil penalties of $15,056.00 +within 10 days of the entry of the Order, and (2) Respondent shall pay civil penalties of $27,971.59 +within a year 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 +pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further application. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm +; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Nima Hedayati as a Respondent in these proceedings, and the file number of these proceedings; a + +6 +copy of the cover letter and check or money order must be sent to Erin Schneider, Associate +Director, Division of Enforcement, Securities and Exchange Commission, San Francisco Regional +Office, 44 Montgomery Street, Suite 2800, San Francisco, CA 94104. + + 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 + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3864.txt b/raw/aaer/2017/AAER-3864.txt new file mode 100644 index 0000000000000000000000000000000000000000..d7a6f79aa08e9d5ac1979a8c4115f4e39676c265 --- /dev/null +++ b/raw/aaer/2017/AAER-3864.txt @@ -0,0 +1,644 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80370/ April 4, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3864/ April 4, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17898 + + + + +In the Matter of + +William Joseph Kouser Jr., +CPA, and Ryan James +Dougherty, CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against William Joseph Kouser Jr., CPA +(“Kouser”) and Ryan James Dougherty, CPA (“Dougherty” and with Kouser, the “Respondents”) +pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully + +2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), +as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. During 2013-2014, the accounting firm of BBD, LLP (“BBD”) and two individuals +at the firm, Respondent Kouser and Respondent Dougherty, served as the auditors for an +investment company called the GL Beyond Income Fund (“The Fund”). The Fund was managed +by Daniel Thibeault (“Thibeault”) and his registered investment adviser firm, GL Capital Partners +LLC (“GL Capital”). From at least 2013 through late 2014, Thibeault and GL Capital committed a +fraud on The Fund and its investors by, among other things, misappropriating at least $16 million +that belonged to The Fund. Kouser and Dougherty were responsible for The Fund’s fiscal year +2014 audit, and failed to comply with Public Company Accounting Oversight Board’s +(“PCAOB”) auditing standards (“PCAOB Standards”) in this audit. Specifically, the +Respondents’ violations of the auditing standards stemmed from their failures to: (1) act with due +professional care and exercise professional skepticism; (2) obtain sufficient appropriate audit +evidence; and, (3) prepare proper audit documentation during the fiscal year 2014 audit (between + +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 + +February 1, 2013 and January 31, 2014). As a result of these audit failures, Respondents Kouser +and Dougherty did not uncover Thibeault’s and GL Capital’s fraud. + +B. RESPONDENTS + +2. Respondent Kouser is an engagement partner at accounting firm BBD who was +responsible for The Fund’s fiscal year 2014 audit. Kouser is still employed by BBD, but he no +longer serves as an engagement partner responsible for audits of registered investment companies +effective January 1, 2016. Respondent Kouser, 51 years old, is licensed to practice as a certified +public accountant (“CPA”) in Pennsylvania. + +3. Respondent Dougherty was an audit manager at accounting firm BBD who was +responsible for executing the audit program, audit planning, and supervising staff as part of The +Fund’s fiscal year 2014 audit. He left BBD in February 2015. Respondent Dougherty, 36 years +old, is licensed to practice as a CPA in Pennsylvania. + +C. OTHER RELEVANT ENTITIES AND INDIVIDUAL + +4. BBD, LLP (“BBD”) is a PCAOB-registered public accounting firm with its +headquarters in Philadelphia, PA. BBD was The Fund’s auditor for fiscal years 2013 and 2014 and +issued audit reports pursuant to PCAOB Standards. BBD currently has 62 employees and nine +partners. + +5. Daniel Thibeault (“Thibeault”) was the Managing Director of GL Capital and +assisted in the execution of The Fund’s investment strategies and marketing between December +2011 and December 2014 when he was arrested and charged with securities fraud. In the same +time period, he was also The Fund’s co-portfolio manager. + +6. GL Capital Partners, LLC (“GL Capital”) was a registered investment adviser +firm controlled by Thibeault. It acted as the sole investment manager of The Fund. + +7. GL Beyond Income Fund (“The Fund”) is a registered investment company +created by Thibeault on or about March 23, 2012 and managed by GL Capital. + +8. TAFT Financial Services, LLC (“TAFT”) was a special purpose limited liability +company formed under the laws of the state of South Dakota in December 2011 as a loan +originator. Thibeault controlled TAFT, directed the origination and incorporation of this special +purpose entity, and conducted its business in Massachusetts. + + + + + + +4 + +D. FACTS + + Thibeault’s and GL Capital’s Fraud + +9. Since its inception, The Fund pooled investor money to purchase consumer loans. +These loans were considered assets of The Fund and the interest payments on these loans were +intended to provide The Fund’s return on investment. The Fund contained mostly small unsecured +consumer loans each averaging approximately $12,000 in value. By January 31, 2013 (the end of +fiscal year 2013), there were more than 500 individual loans in The Fund. And by January 31, +2014 (the end of fiscal year 2014), the total number of loans in The Fund grew to more than 1,000. +Starting in February 2013 (the beginning of fiscal year 2014), Thibeault misappropriated his +investors’ money by creating fictitious loans and diverting the disbursement of loan proceeds to his +personal and business bank accounts. Thibeault used the names and personal information of +friends and associates without their knowledge or permission to create these fraudulent loans. +Using these identities, Thibeault prepared forged promissory notes to cover up his +misappropriations. + +10. In the books and records of The Fund, the fraudulent loans Thibeault had created +were designated with a program code “TA,” which indicated that the loans were originated through +TAFT Financial Services, LLC (each a “TA Loan” or together the “TA Loans”). TAFT, a special +purpose vehicle controlled by Thibeault, was used as an intermediary to issue the fraudulent loans. +During the period covered by the fiscal year 2014 audit (February 1, 2013 to January 31, 2014), +The Fund purportedly acquired 22 TA Loans valued at $8,500,000, or $387,000 on average with +the largest being $537,000. Each of the TA Loans was significantly larger than the typical loans +acquired by The Fund, which rarely exceeded $20,000. After the close of fiscal year 2014 +(January 31, 2014), The Fund purportedly acquired additional TA Loans, some of which were +purportedly acquired while the audit for fiscal year 2014 was ongoing. By the end of calendar year +2014, The Fund’s valuation report reflected 40 TA Loans with an aggregate reported value of +approximately $16 million. All $16 million had, in fact, been misappropriated by Thibeault and +GL Capital. + +11. Throughout fiscal year 2014 (February 1, 2013 to January 31, 2014), The Fund also +“invested” approximately $6 million in private placement promissory notes called LAOH Notes +for factoring transactions with Philippine companies that purportedly had supplied raw materials to +two major conglomerates in the Philippines. Factoring transactions involve the sale of a business’s +accounts receivable to a third party at a discount in order to meet the business’s cash needs. The +factoring transaction here involved the use of two shell companies (one domestic and one in the +Philippines). Money from The Fund was purportedly used to purchase the accounts receivable of +the Philippine suppliers such that, when the two conglomerates made payments, the money would +be transferred back to The Fund. In reality, all of the funds related to the LAOH Notes were +misappropriated. + + +5 + +12. On December 11, 2014, Thibeault was arrested and charged with criminal securities +fraud by the United States Attorney’s Office for the District of Massachusetts. On March 3, 2016, +Thibeault pled guilty to one count of securities fraud and one count of obstruction of justice. On +June 16, 2016, he was sentenced to nine years in prison with three years of supervised release, and +was ordered to pay $15,300,403 in restitution. + +13. On January 9, 2015, the Commission filed a civil securities fraud action against +Thibeault, GL Capital, and others. On September 23, 2016, a final judgment was entered against +Thibeault in the Commission’s civil action against him. The final judgment permanently enjoined +Thibeault from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section +17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act +of 1940. In addition, the final judgment ordered that Thibeault’s obligation to pay disgorgement of +$15,300,403 and prejudgment interest thereon be deemed satisfied by the order of restitution +entered in the parallel criminal proceeding. + +Audit Work Performed by Kouser and Dougherty for The Fund + +14. BBD performed the audits for The Fund for the fiscal years ended January 31, 2013 +(fiscal year 2013) and January 31, 2014 (fiscal year 2014). Kouser was the engagement partner for +both of these audits, and Dougherty was the audit manager for these audits. Both Kouser and +Dougherty had no experience with the kind of factoring transactions in the LAOH Notes. Further, +neither Kouser nor Dougherty ever audited any funds with consumer loans as assets. Numerous +delays in confirming information regarding the LAOH Notes as part of valuation procedures +caused BBD to delay the issuance of its audit report for fiscal year 2014. BBD’s audit report for +the fiscal year 2014 audit was not issued until May 29, 2014, nearly four months after The Fund’s +fiscal year-end. + +15. Kouser only had one meeting with Thibeault over the course of the audits even +though Thibeault was the principal of GL Capital and the co-portfolio manager of The Fund. +During that meeting, Kouser and Thibeault focused on a PowerPoint document Thibeault had +created regarding the LAOH Notes. Dougherty never met with Thibeault. The procedures +performed for GL Capital and The Fund by BBD’s auditing team were not sufficient, even though +Kouser understood that The Fund’s audit was “more involved” than a typical audit because of the +type of assets held by The Fund. + +Failure to Act with Due Professional Care and Exercise Professional Skepticism + +16. Under PCAOB Standards, auditors are required to exercise due professional care in +the planning and performance of the audit and the preparation of the audit report.4 AU Section +230.01. Due professional care requires the engagement partner to know, at a minimum, the + +4 Citations to PCAOB Standards (“AU” or “AS”) are citations to standards in effect at the +time of the relevant conduct. + +6 + +relevant professional accounting and auditing standards, as well as to be knowledgeable about the +client. AU Section 230.06. Further, the auditors are required to exercise professional skepticism, +an attitude that includes a questioning mind and a critical assessment of audit evidence. AU +Section 230.07. + +17. PCAOB Standards further require that auditors evaluate whether matters such as +the subject entity’s business, operating characteristics, extent of recent changes in operations and +internal controls, among others, are important to the company’s financial statements and if so, how +they will affect the auditor’s procedures. AS No. 9.7. Further, “they should perform risk +assessment procedures that are sufficient to provide a reasonable basis for identifying and +assessing the risk of material misstatement, whether due to error or fraud, and designing further +audit procedures.” AS No. 12.4. + + Failure to Understand the TA Loans and Their Impact on The Fund + +18. In early 2014, at the outset of the fiscal year 2014 audit, GL Capital informed +Kouser and Dougherty that The Fund had acquired larger loans, which had been originated during +fiscal year 2014, and that these loans were larger because they were purportedly backing +businesses or professional practices. + +19. In actuality, as of January 31, 2014 (the end of fiscal year 2014), The Fund’s +records reflected 22 TA Loans totaling $8.5 million (or $387,000 on average), with the largest loan +valued at $537,000. The TA Loans were significantly different in nature and size from the more +than 1,000 consumer loans ordinarily held by The Fund, which averaged $12,000 each and rarely +exceeded $20,000. The TA Loans represented over 36% of the total consumer loan amounts in +The Fund as of January 31, 2014. Moreover, 18 additional TA Loans had been acquired after +January 31, 2014 (fiscal year 2015), for a total of 40 TA Loans, with a combined value of +approximately $16 million. Because Thibeault was arrested in December 2014, the fiscal year +2015 audit was never conducted. The TA Loans were all serviced through a loan servicing entity +affiliated with Thibeault, GL Capital, and The Fund. + +20. TAFT, the entity that purportedly originated the TA Loans, was nominally run by a +bartender friend of Thibeault’s with no banking, lending, or investment experience. Thibeault was +not listed in the company’s state filings as an owner of TAFT, but he had the authority to disburse +funds from TAFT bank accounts. Kouser and Dougherty were also aware that The Fund had a +line-of-credit account with TAFT, which had a zero balance as of January 31, 2014. Yet, neither +Kouser nor Dougherty asked about the owner of TAFT. They also did not make sufficient +inquiries to determine whether TAFT was a related-party to The Fund. + +21. Kouser and Dougherty did not pay proper attention to the TA Loans. In fact, they +asked no questions about them even though at the start of the 2014 audit, the TA Loans were brand + +7 + +new to The Fund, and represented over 36% of the value of all consumer loans in The Fund.5 +Further, Kouser and Dougherty did not recognize the significance of the TA Loans and failed to +make inquiries about them even though they were significantly different from the historically +smaller unsecured consumer loans made by The Fund. + +22. None of the documents prepared by or for Kouser and Dougherty as part of The +Fund’s fiscal 2014 audit planning even identified that the larger TA Loans were new to the +portfolio and represented a significant portion of the total consumer loan value in The Fund. By +not scrutinizing the TA Loans, not only did they fail to obtain an adequate understanding of The +Fund and its business environment, but Kouser and Dougherty also failed to gain an understanding +of the investments made by The Fund and GL Capital. As a result, Kouser and Dougherty failed to +identify and assess investment risks and fraud risks related to the significantly larger loans as part +of the audit planning process, and thus failed to perform appropriate audit procedures to address +these risks. + +23. Kouser and Dougherty signed off on BBD’s audit planning memo and risk +assessment, which failed to note that the significantly larger TA Loans were purportedly used to +back businesses or professional practices, in contrast to the traditional smaller loans in The Fund +that were unsecured consumer loans. Further, neither Kouser nor Dougherty understood or asked +whether money distributed to these purported borrowers was going to any actual businesses or +professional practices. + +Failure to Understand and Properly Confirm Information Related to the LAOH +Notes +24. Facts about the LAOH Notes, as they were known to Kouser and Dougherty, +required heightened scrutiny. First, the LAOH Notes were substantially different from the +investments The Fund had traditionally made—the LAOH Notes were private placement +promissory notes and not small unsecured consumer loans. Second, the structure of the LAOH +Notes was very different from the direct lending investments that The Fund had historically made +and included the creation of two shell companies to facilitate these transactions. Third, one of the +shell companies that facilitated the LAOH Notes was owned by someone who also had owned +more than 5% of the shares of The Fund in 2012 (in fact, that person owned more than 20%). +Fourth, before investing in the LAOH Notes, the Fund had never entered into either a factoring +transaction or an international investment. + +25. During The Fund’s fiscal year 2014 audit, Kouser and Dougherty should have also +learned additional facts concerning the LAOH Notes. For instance, Thibeault solicited one of his +college friends to create one of the shell companies that facilitated the LAOH Notes. + + +5 After January 31, 2014 (close of fiscal year 2014) and while the 2014 audit was being +performed, The Fund continued to acquire TA Loans which grew to be an even larger +percentage of the Fund’s assets. + +8 + +26. Kouser and Dougherty did not ask why either of the shell companies created to +facilitate the LAOH Notes transactions was necessary to the transactions. Further, they failed to +identify and assess the fraud risks of these transactions in the Philippines in the audit work papers. + +27. Auditors “should place emphasis on testing material transactions with parties he +knows are related to the reporting entity.” AU Section 334.07. To determine the existence of +related party transactions, auditors may review material investment transactions to “determine +whether the nature and extent of investments during the period create related parties.” AU Section +334.07. Despite knowing that one individual currently owned one of the shell companies that +facilitated the LAOH Notes and had owned more than 5% (and in fact owned 20%) of the shares of +The Fund in 2012, Kouser and Dougherty failed to ask anyone at GL Capital or the shell company +about the relationship between the entities. Had Kouser and Dougherty appropriately inquired +about the nature of these transactions, it would have revealed that, in addition to owning a +significant portion of The Fund, the individual who owned that shell company (i) had created the +shell company solely at the direction of Thibeault, and (ii) was listed as a borrower in The Fund +who held a note of approximately $418,000 with an interest rate over 15%. Had the auditors +known this information, they would have been required to perform additional auditing procedures +to determine the legitimacy and valuation of the LAOH Notes. + +28. During the process of confirming information related to the LAOH Notes as part of +valuation procedures, Kouser and Dougherty failed to seek confirmation from the two major +conglomerates in the Philippines that were purportedly the entities ultimately responsible for +payment on the LAOH Notes. Had confirmations been obtained from these two companies, it +would have likely revealed that the factoring transactions did not exist and the funds had been +misappropriated. + +29. PCAOB Standards require auditors to consider the competency and sufficiency of +evidence gathered during the audit, assess the fraud risk throughout the audit, and maintain +professional skepticism throughout the confirmation process. AU Section 230.08, AS No. 14.28, +and AU Section 330.15. Further, in evaluating the assessed fraud risks, auditors should take into +account matters like “documents that appear to have been altered,” “unusual discrepancies between +the company’s records and confirmation responses,” and “unusual delays by management in +providing requested information” such as during the confirmation process, among others. AS No. +14 (Appendix C). + +30. Kouser and Dougherty failed to exercise heightened scrutiny when several +circumstances surrounding the process of confirming information related to the valuation of the +LAOH Notes called into question the reliability of the purported confirmations. First, as Kouser +and Dougherty were aware, there were significant delays in getting responses from the suppliers in +the Philippines as to the amounts they purportedly received from one of the shell companies. +Indeed, these delays were so significant that they held up the issuance of BBD’s audit report. +Second, when the confirmations were finally sent to BBD, the documents had identical type-face +and dates, even though they purported to come from different businesses in the Philippines. + +9 + +Dougherty and Kouser were aware of this anomaly; indeed, Dougherty remarked to Kouser that +everyone in the Philippines “must use the same type-writer.” Third, the purported confirmations +were all sent to BBD within 30 minutes of each other. Lastly, the confirmations contained multiple +errors. With all these unusual circumstances and discrepancies surrounding the confirmation +process, which would have led a reasonably skeptical auditor to question the reliability of those +confirmations, Kouser and Dougherty should have taken additional steps to verify the LAOH +Notes as assets of The Funds. For instance, an internet search would have revealed that the +purported email addresses for these Philippine suppliers provided to Kouser and Dougherty by GL +Capital did not match the public website domain addresses for the actual Philippine companies +with those business names and were thus likely fictitious. Further, Kouser and Dougherty could +have attempted to verify the source of the email responses with a telephone call to the purported +sender. But even these steps were not taken. + + Failure to Understand The Fund’s Internal Controls + +31. As the engagement partner who is ultimately responsible for the audit, Kouser +failed to obtain an appropriate understanding of the internal controls for The Fund, as required by +AS No. 12.18. In its planning work papers, BBD determined The Fund’s control environment to +be low risk due to The Fund’s use of third-party service providers, including The Fund’s custodian +(the “custody bank”). As a result, Kouser relied solely on the custody bank to confirm the +existence of The Fund’s assets. But Kouser did not understand, and did not inquire of anyone at +the custody bank or The Fund, what steps, if any, the custody bank undertook to substantiate +ownership of the loans. Kouser also never asked about and thus never understood what loan +documents were verified or maintained by the custody bank, nor did he ask who was providing the +underlying loan documents to the custody bank. Further, Kouser failed to inquire whether the +custody bank actually verified anything with the underlying borrowers of the consumer loans. +Kouser obtained and reviewed a service report from the custody bank for the period covering the +audit; however, the report did not specifically address procedures covering the alternative assets +present in The Fund. + + Failure to Select Representative Sample of The Fund’s Assets + +32. PCAOB Standards require that samples used in an audit be “selected in such a way +that the sample can be expected to be representative of the population.” AU Section 350.24. +Though Kouser and Dougherty signed work papers confirming that they tested a representative +sample of loans in The Fund’s portfolio, their method involved a haphazard selection of 40 loans in +The Fund’s portfolio, and did not include any of the (fraudulent) TA Loans. The TA Loans were +more than a third of the portfolio, and were significantly larger in value and made on different +terms than the other loans. These loans purportedly backed businesses or professional practices +and had different interest rate structures and collateral arrangements from the traditional loans in +the portfolio. For instance, collateral arrangements did not exist for the traditional unsecured +consumer loans. Kouser and Dougherty failed to recognize that there were different types of loans +in The Fund’s portfolio and that different samples should have been created for each type of loan + +10 + +for testing. As a result, the sample tested was not representative of The Fund’s portfolio of +investments and Kouser and Dougherty did not obtain the loan origination documents for the TA +Loans that were fabricated, with fictitious borrower information and forged signatures. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +33. PCAOB Standards require that auditors “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. + +34. Kouser and Dougherty failed to obtain sufficient evidence as to the valuation of the +TA Loans. The Fund’s annual report stated that securities it held would be measured at “fair +value.” PCAOB Standards require that auditors obtain sufficient appropriate audit evidence that +provides “reasonable assurance that fair value measurements and disclosures are in conformity +with GAAP.” AU Section 328.03. To do so, auditors should gain an understanding of the entity’s +process for determining fair value measurement and disclosures in order to plan the nature, timing, +and extent of the audit procedures. AU Sections 328.11 and 328.12. The unsecured consumer loan +investments historically made by The Fund were $12,000 on average and were valued using GL +Capital’s proprietary valuation model. The model, designed for loans up to $35,000, primarily +used borrower’s credit scores and payment history to value the consumer loans. The TA Loans, +however, were much larger and had an average value of $387,000 as of the end of fiscal year 2014 +(January 31, 2014). Kouser and Dougherty failed to ask about or understand the propriety of using +a valuation model designed for loans up to $35,000 for the much larger TA Loans. The TA Loans +also had different valuation factors from the smaller traditional consumer loans, and Kouser and +Dougherty did not understand or make any inquiries into these valuation factors, which included +the collateral that purportedly secured the TA Loans and the one-year interest deferral on the TA +Loans. Because they had no understanding and made no inquiries into these valuation factors, +Kouser and Dougherty failed to properly assess the TA Loans’ value. + +35. Had Kouser and Dougherty made the necessary inquiries, they would have +recognized that the TA Loans were different in several ways from The Fund’s traditional +unsecured consumer loan investments and these differences made additional audit procedures +necessary. Kouser and Dougherty should have evaluated the value of the collateral by obtaining +evidence of the underlying promissory notes, collateral arrangements, and lending documents. +Instead, Kouser and Dougherty considered only the historical payments on the TA Loans and +performed no analysis or inquiry into the promissory notes or collateral underlying the TA Loans. + +36. Kouser and Dougherty failed to obtain sufficient evidence to confirm information +concerning the valuation of the LAOH Notes with the two Philippine conglomerates that were +purportedly responsible for the payment on the LAOH Notes. Had confirmations been sent to +these entities, it would have likely revealed that the factoring transactions did not exist and that +investor funds had been misappropriated. By failing to assess payment terms with the entities + +11 + +holding the “credit risk” to the transactions, Kouser and Dougherty did not properly audit the +valuation of the LAOH Notes. AU Section 328.03. + + Failure to Properly Prepare Audit Documentation + +37. Under PCAOB Standards, auditors should prepare audit documentation in sufficient +detail to provide a clear understanding of its purpose, source, and the conclusions reached. AS No. +3.4. Also, the documentation should be appropriately organized to provide a clear link to the +significant findings or issues. AS No. 3.4. + +38. Kouser repeatedly failed to prepare adequate documentation for numerous aspects +of the audit of The Fund. For instance, he failed to document information concerning the custody +bank’s procedures on the custody and verification of consumer loans in The Fund’s portfolio and +information concerning the two fraud risk discussions he claims he had with The Fund’s co- +portfolio manager and an associate general counsel at GL Capital. + +E. Findings + +39. Based on the foregoing, the Commission finds that the Respondents engaged in +improper professional conduct under Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Kouser is denied the privilege of appearing or practicing before the Commission as +an accountant. + + 1. After three years from the date of this order, Kouser may request that +the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Exchange Act). Such an +application must satisfy the Commission that Kouser’s work in his +practice before the Commission as an accountant will be reviewed either + +12 + +by the independent audit committee of the public company for which he +works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + +b. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Exchange Act. Such an application +will be considered on a facts and circumstances basis with respect to +such membership, and the applicant’s burden of demonstrating good +cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +c. an independent accountant. + + Such an application must satisfy the Commission that: + + (1) Kouser, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance +with the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; + + (2) Kouser, 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 Kouser’s or the firm’s quality control system that +would indicate that Kouser will not receive appropriate +supervision; + (3) Kouser has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of +any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + + (4) Kouser acknowledges his responsibility, as long as he +appears or practices before the Commission as an +independent accountant, to comply with all requirements of +the Commission and the PCAOB, including, but not limited +to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. + + 2. The Commission will consider an application by Kouser 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 + +13 + +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 Kouser’s character, integrity professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + + B. Dougherty is denied the privilege of appearing or practicing before the Commission +as an accountant. + + 1. After two years from the date of this order, Dougherty may request that +the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Exchange Act). Such an +application must satisfy the Commission that Dougherty’s work in his +practice before the Commission as an accountant will be reviewed either +by the independent audit committee of the public company for which he +works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + +b. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Exchange Act. Such an application +will be considered on a facts and circumstances basis with respect to +such membership, and the applicant’s burden of demonstrating good +cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +c. an independent accountant. + + Such an application must satisfy the Commission that: + + (1) Dougherty, 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; + +14 + + + (2) Dougherty, 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 Dougherty’s or the firm’s quality +control system that would indicate that Dougherty will not +receive appropriate supervision; + (3) Dougherty has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of +any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + (4) Dougherty acknowledges his responsibility, as long as he +appears or practices before the Commission as an +independent accountant, to comply with all requirements of +the Commission and the PCAOB, including, but not limited +to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. + + 2. The Commission will consider an application by Dougherty 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 Dougherty’s character, integrity professional conduct, +or qualifications to appear or practice before the Commission as an accountant. Whether +an application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3866.txt b/raw/aaer/2017/AAER-3866.txt new file mode 100644 index 0000000000000000000000000000000000000000..740ebc12b727dbe75469cddb88d268350e408c43 --- /dev/null +++ b/raw/aaer/2017/AAER-3866.txt @@ -0,0 +1,158 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80507 / April 21, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3866 / April 21, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17938 + +In the Matter of +MARK MCKINNIES, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Mark +McKinnies (“Respondent” or “McKinnies”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. McKinnies, age 65, was a certified public accountant licensed to practice in the State +of Colorado until he allowed the license to expire in 2013. He served as Chief Financial Officer and +a member of the Board of Directors of Advanced Emissions Solutions, Inc. and its predecessor +entity, ADA-ES, Inc. (together, “Advanced Emissions”)2 from 1996 until 2014. + +2. Advanced Emissions was, at all relevant times, a Delaware corporation with its +principal place of business in Colorado. Advanced Emissions provides environmental solutions to +customers primarily in the power generation industry. At all relevant times, Advanced Emissions’ +shares were registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”) and traded on the NASDAQ National Market. The shares were de-listed from +the NASDAQ National Market as of March 30, 2015 and were re-listed on the NASDAQ Global +Market as of July 7, 2016. + +3. On April 19, 2017, a final judgment was entered against McKinnies, permanently +enjoining him from future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 and +Rule 13b2-1 under the Exchange Act, in the civil action entitled Securities and Exchange +Commission v. Mark McKinnies, Civil Action Number 17-cv-00566-JDB, in the United States +District Court for the District of the District of Columbia. McKinnies was also ordered to pay +$126,808 in disgorgement of ill-gotten gains, and $11,884 in prejudgment interest, and a $100,000 +civil money penalty. + +4. The Commission’s complaint alleged, among other things, that McKinnies violated +the federal securities laws by approving and signing Advanced Emissions’ periodic reports, a +registration statement and other public filings that included materially misstated financial +statements. The complaint alleged that McKinnies reviewed and approved financial statements for +Advanced Emissions included in filings with the Commission that violated Generally Accepted +Accounting Principles (“GAAP”). The complaint alleged that Advanced Emissions, among other +things: (a) failed to record a large loss contingency in connection with an adverse arbitration ruling +against the company; (b) prematurely recognized revenues on long-term contracts; (c) failed to +properly account for warranty accruals; (d) improperly consolidated a joint venture in Advanced +Emissions’ balance sheet accounts; and (e) overstated revenues and gross profits from one of its +subsidiaries. The complaint also alleged that McKinnies oversaw the inaccurate recording of +transactions in the company’s books and records. + +2 In 2013, the company undertook a restructuring pursuant to which Advanced Emissions +Solutions, Inc. replaced ADA-ES, Inc. as the public, reporting company and ADA-ES, Inc. became a +subsidiary of Advanced Emissions Solutions, Inc. + 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 McKinnies’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent McKinnies is suspended from appearing or practicing before the +Commission as an accountant. + + B. After five years from the date of this Order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is + 4 +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3867.txt b/raw/aaer/2017/AAER-3867.txt new file mode 100644 index 0000000000000000000000000000000000000000..5d36b5a5db5b92f94da08675d5a488fefbe36d54 --- /dev/null +++ b/raw/aaer/2017/AAER-3867.txt @@ -0,0 +1,460 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80547 / April 28, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3867 / April 28, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17949 + + +In the Matter of + +Mark Wentlent, + +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 Mark Wentlent (“Wentlent” 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 +Exchange Act, Making Findings and Imposing a Cease-and-Desist Order (“Order”), as set forth +below. + + + 2 + +III. + +On the basis of this order and Respondent’s Offer, the Commission finds1 that: + +A. SUMMARY + +1. These proceedings arise out of L3 Technologies, Inc.’s (“L3”) (formerly known +as “L3 Communications Holdings, Inc.”) improper recognition of $17.9 million in revenue at its +Army Sustainment Division (“ASD”) subsidiary in 2013 and Q1 2014. The improperly +recognized revenue was related to unresolved claims under a fixed-price aircraft maintenance +contract between ASD and the U.S. Army, referred to as the C-12 Contract. +2. In late December 2013, the VP of Finance at ASD (“VP of Finance”) instructed a +subordinate to create 69 invoices related to disputed claims under the C-12 Contract in L3’s +internal accounting system (“SAP”), and withhold delivery of those invoices from the U.S. +Army. However, other than a handful of invoices that were delivered to the U.S. Army in early +2014, the vast majority of these invoices were never submitted to the U.S. Army, but instead +were discovered during an investigation of ASD’s finances approximately six months later. By +entering the invoices in SAP, ASD improperly recognized approximately $17.9 million in +additional revenue at the end of 2013, and in Q1 2014. +3. Wentlent—the President of ASD—claims that he has little knowledge of +accounting rules, but relied on the VP of Finance’s assurances that he had approval from L3’s +corporate headquarters in New York (“L3 Corporate”), and from the VP of Finance and CFO of +the Aerospace Systems segment of L3 (“Aerospace Systems CFO”), ASD’s indirect corporate +parent, to create the invoices, withhold delivery, and recognize the associated revenue. +However, Wentlent—who was integrally involved in ASD’s effort to recover revenue on the +unresolved claims—decided to demote the VP of Finance during this time, which officially +occurred in January 2014, and Wentlent disregarded certain red flags that should have put him on +notice that the revenue was not properly recognized. Wentlent also helped procure a misleading +e-mail from the Army which suggests—contrary to the truth—that the U.S. Army was prepared +to accept invoices on the disputed claims. +4. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A the first quarter of 2014. Among other things, L3 disclosed in its +amendments that it was revising its financial statements to record aggregate pre-tax charges of +$94 million in the Aerospace Systems segment for periods prior to 2011 up to 2013, and +approximately $75 million for the first and second quarters of 2014. Of the adjustments, $69 +million were attributable to the C-12 Contract, and $15.4 million of the adjustments were related +to the improper revenue recognition related to the invoices. + +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 +B. RESPONDENT + +5. Wentlent, 67 years old, is a resident of Raleigh, NC. Wentlent began working for +L3 in 2010, and served as President of ASD from September 2012 until his termination on July 30, +2014. +C. OTHER RELEVANT ENTITIES + +6. L3, (NYSE ticker: LLL), a Delaware corporation with its principal place of business +in New York, NY, is a prime contractor for various foreign and U.S. Government agencies, +including the U.S. Department of Defense. L3’s securities are registered with the Commission +pursuant to Section 12(b) of the Exchange Act. L3 is a prime contractor in aerospace systems and +national security solutions. For fiscal year 2013, L3 reported net sales of $12.6 billion and an +operating income of $1.2 billion on its consolidated statements of operations. +D. BACKGROUND +7. Aerospace Systems is one of four business segments of L3, delivering integrated +solutions for the global intelligence market and providing maintenance and logistics support for a +wide variety of aircraft and ground systems. Each business segment is comprised of multiple +business “sectors,” and each business sector is comprised of multiple business “divisions.” Of +relevance to this matter are the Logistics Solutions sector of Aerospace Systems, which provides, +among other things, logistics support and aircraft maintenance services to its military customers, +and ASD, a subsidiary of Logistics Solutions, which provides support for United States Army +aircraft at bases throughout the United States and around the world. +8. L3, through its subsidiary Vertex, and later ASD, contracted to maintain a fleet of +approximately 100 fixed-wing C-12 airplanes for the U.S. Army pursuant to the C-12 Contract. +The contract had a five year term, commencing on June 2, 2010, and ending on January 31, 2015, +with the partial initial year referred to as a “base year,” and each subsequent year referred to as an +“option year.” Almost immediately after receiving the results of its first quarter of operations +under the C-12 Contract, Vertex realized that it underbid for the contract, and that the margins +going forward would be very low—in the range of 1-2%—creating significant obstacles for +Vertex’s management. ASD was formed at the beginning of 2013, in large part to take over the C- +12 Contract from Vertex, and improve L3’s performance under the contract. ASD, particularly +ASD’s VP of Finance, as well as others, worked through 2013 to resolve various issues with the C- +12 Contract. +E. THE REVENUE RECOVERY INITIATIVE AND LEGAL ENTITLEMENT +9. In the summer of 2013, Wentlent, the VP of Finance, and others within ASD, +learned that ASD had unaccounted for costs on its balance sheet related to the C-12 Contract in the +range of $30 to $35 million. The C-12 Contract Business Manager (“C-12 Business Manager”) +believed the growth in that particular balance was a result of cost overruns that would result in a +large loss to ASD. The C-12 Business Manager informed the VP of Finance of the costs, and +prepared him for a meeting with Wentlent and the President of Logistics Solutions—the corporate +parent of ASD—to discuss the potential loss. + + 4 +10. On or about September 20, 2013, the VP of Finance, Wentlent, and the C-12 +Business Manager reported to the President of Logistics Solutions that they had identified a +growing work in progress (“WIP”) balance on ASD’s books arising from the C-12 Contract, and +that the Division may need to write off some of the WIP (approximately $8-9 million). The report +angered the President of Logistics Solutions, and he asked members of ASD to re-check their +numbers and verify that it was true. The President of Logistics Solutions also directed ASD to +determine what work the WIP balance related to, and asked Wentlent, the VP of Finance and other +members of ASD to determine how to bill it to the U.S. Army. The President of Logistics +Solutions requested weekly—and later, daily—meetings with ASD officers, including Wentlent +and the VP of Finance, to obtain a better understanding of the WIP balance. Wentlent and the VP +of Finance were in constant communication with each other from September to December 2013 +concerning the status of the review. During the September time period, the VP of Finance and +Wentlent were aware that ASD would not meet its annual operating plan EBIT (Earnings Before +Interest and Taxes), and it was also evident at the time that ASD was at risk of falling below the +required EBIT threshold (i.e., 75% of plan) necessary for management to receive incentive +bonuses. +11. Wentlent directed the C-12 Contract team at ASD to review the contract in detail to +determine if there were items not billed to the Army that should have been billed. This became +known as the Revenue Recovery Initiative. By mid-November 2013, the C-12 Contract Manager +identified approximately $50.6 million in work performed by ASD under the contract that was not +billed to the Army. The $50.6 million value was comprised of nine different work stream items +and costs under the C-12 Contract. +12. During the fall of 2013, the focus of the Revenue Recovery Initiative turned to +identifying ways to recognize revenue on the unbilled $50.6 million. Based on the President of +Logistics Solutions’ words and conduct, Wentlent and the VP of Finance believed that the +President of Logistics Solutions expected ASD to achieve some accounting benefit on the $50.6 +million revenue recovery items by the end of 2013. On November 8, 2013, after reviewing +operations review slides prepared by Wentlent, the President of Logistics Solutions sent an email +(copying the VP of Finance) directing Wentlent to “please identify with coordination with [the VP +of Finance and Aerospace Systems CFO], the C-12 Army accounting to be used for Q4, +specifically, which costs will be deferred related to the claims, and take this accounting into +consideration on your LRE [i.e. long range estimate] so we know where we expect to get to in +EBIT for 2013.” +13. Also during the fall of 2013, certain individuals at ASD and Logistics Solutions +began discussing the possibility of recognizing revenue on the $50.6 million in claims based on a +concept called “legal entitlement,” even though the claims had not been resolved with the Army. +Wentlent and the VP of Finance both participated in discussions concerning the recognition of +revenue based on legal entitlement. +14. On November 22, 2013, there was a conference call among the VP of Finance, the +CFO of Aerospace Systems, and others to discuss certain options for how to record revenue +pursuant to legal entitlement. The CFO of Aerospace Systems recalled that the task was for the C- +12 Contract experts—i.e., the General Counsel of ASD and the General Counsel of Logistics +Solutions—to find clauses in the C-12 Contract that entitled ASD to payment, show that the + + 5 +government did not follow its obligations under the clauses, determine what to submit as a request +for equitable adjustment (“REA”), and estimate based on the contract’s history how much the +Army would pay. REAs were formal methods under the C-12 Contract by which ASD could +request an equitable adjustment to the funding amounts for each Contract Line Item (“CLIN”). +15. At the VP of Finance’s request, the General Counsel of ASD and the General +Counsel of Logistics Solutions estimated that ASD was likely to recover approximately $30 +million of the entire $50.6 million, based on their history of negotiations with the government. +16. The VP of Finance recalls discussing three options with the President of Logistics +Solutions and the Aerospace Systems CFO about how to address the revenue recovery items in +November 2013: (1) record the transactions as inventory, increasing the WIP balance; (2) accrue +the revenue associated with the legal entitlement issues; and (3) invoice the Army for amounts to +which ASD believed it was legally entitled. While no contemporaneous documents corroborate +the VP of Finance’s account that invoicing was considered, the VP of Finance further claims that +he input the transactions in L3’s live SAP system to analyze and evaluate the output before a +decision was made with respect to recording legal entitlement. After the analysis was complete, +according to the VP of Finance, the transactions were reversed out of SAP. +17. In November 2013, a decision was made by Wentlent and the President of Logistics +Solutions to reassign the VP of Finance from his role at ASD, based on his performance related to +working through several accounting issues including disclosure statements. Wentlent notified the +VP of Finance in early December 2013 of the decision, but kept him on in his role until the end of +January 2014. +18. On December 3, 2013, Wentlent presented an operations review regarding ASD to +the President of Logistics Solutions. Included was a slide entitled, “Army C-12 Contract Dispute +Summary,” which listed a table of ten rows with separate “REA/Claim Values” adding up to $50.6 +million. A column on the table was entitled “Legal Entitlement” and applied a discount of either +50% or 60% to each claim value that comprised the $50.6 million. The presentation also included +detailed slides on six of the claims, and noted that ASD planned to meet with the government to +reach an amicable resolution and that “[a]fter the negotiations with the government, L3 is postured +to immediately invoice and bill the government.” +19. The revenue recovery claims were presented by ASD to the U.S. Army in meetings +that took place in late November and early December 2013. On December 5, 2013, the C-12 +Contract Manager and the General Counsel of ASD met with representatives of the U.S. Army to +discuss the C-12 contract disputes. An email from the C-12 Contract Manager to the President of +Logistics Solutions reporting on this meeting indicates that the U.S. Army planned to meet +internally on December 17, 2013, and begin meeting with L3 after the new year with the “intent [] +to resolve every one of the disputes outside of the REA/Claim process… as quickly as possible.” +Nothing in the email indicates any request by the U.S. Army to invoice any of the claims before the +end of the year. In fact, neither Wentlent nor the VP of Finance expected to resolve the disputes +concerning the revenue recovery items by the end of 2013, and Wentlent did not expect to resolve +some disputes until the end of 2014. + + + 6 +F. GENERATION OF INVOICES AND IMPROPER REVENUE RECOGNITION +20. In late December 2013, the VP of Finance approached the C-12 Business Manager +and asked him to explain how revenue was recorded on ASD’s books. The C-12 Business +Manager told the VP of Finance that it was either billed or accrued. The VP of Finance +subsequently asked the C-12 Business Manager at what point along the path revenue was +recognized. With respect to the unresolved claims concerning the C-12 Contract, the C-12 +Business Manager explained that in order to recognize revenue, a sales order must be created and +then released to the Billing Clerk at ASD. The Billing Clerk then generated an invoice in SAP, at +which point revenue was recognized on ASD’s books. The invoice was then supposed to be +submitted into Wide Area Work Flow (“WAWF”), which transmits invoices to the customer, but +the submission of the invoice into WAWF did not have to occur in order for ASD to recognize +revenue. +21. The VP of Finance and the Aerospace Systems CFO had a telephone call on or +about Friday, December 20, 2013. The VP of Finance claims they discussed a one-page list of the +revenue recovery claims that he purportedly emailed the Aerospace Systems CFO prior to the call. +The VP of Finance claims that he and the Aerospace Systems CFO went down the list and the +Aerospace Systems CFO instructed him on which items to invoice and which to accrue. The +Aerospace Systems CFO denies giving the VP of Finance blanket authority to invoice for the +claims, but does recall a conversation in which he told the VP of Finance that he could invoice for +work performed during option year 3 (i.e., 2013). +22. On Monday, December 23, 2013, the VP of Finance emailed the C-12 Business +Manager “billing amounts” for seven of the revenue recovery items. The C-12 Business Manager +emailed ASD’s Controller, copying the C-12 Contract Manager and the VP of Finance, asking the +individual to “[p]lease add planned revenue . . . for the revenue recovery billings that I did today,” +and further stating, “I believe the current course of action is that they are not to be released to the +government.” +23. To physically generate the invoices, ASD had to seek the assistance of Vertex’s +Shared Services department in Madison, AL, because ASD’s invoicing specialist was out of the +office. Two clerks in Vertex’s billing department indicated that not entering invoices through +WAWF was unusual, and one conferred with a supervisor, the Controller of Vertex. The +Controller of Vertex had seen this type of practice on other smaller accounts while working for an +audit firm, but he had never seen it at L3 and recognized that not submitting the invoices through +WAWF would violate certain “work procedures.” The Controller of Vertex called the VP of +Finance, and the VP of Finance said that based on an agreement with the U.S. Army, ASD and the +U.S. Army were going to negotiate each invoice before submitting it through WAWF. The +Controller of Vertex was appeased by this conversation, and 69 invoices were generated in SAP, +but withheld from WAWF, causing ASD to recognize approximately $17.9 million in revenue, +without delivery of the related invoices to the Army by WAWF. +24. The C-12 Business Manager reported concerns with the VP of Finance’s invoicing +request to the C-12 Contract Manager on Friday, December 27, 2013, in a conversation that was +memorialized in an email that night: + + 7 +It appears as thought [sic] the Revenue Recovery items are being handled outside of +the L-3 corporate policy….I know that a revenue accrual the size of the one that it +would take to account for the Revenue Recovery would require Corporate approval. +To avoid that Corporate approval, we have been directed to cut invoices through the +billing system, but not send the invoices to the government. I believe that is being +done to avoid Corporate policy and try to “hide” this from the auditors. I could be +mistaken, but this doesn’t pass the smell test. +25. That same day, the C-12 Contract Manager had a conversation with the VP of +Finance in which he relayed the C-12 Business Manager’s concerns, and also noted that certain +employees were concerned regarding “invoice directives” from ASD. The VP of Finance +explained, as the C-12 Contract Manager later wrote in a report to L3’s ethics office (“Ethics”), +that: +[I]nvoicing in SAP with no immediate intent to extend the invoice to the +Government was a “technique” to utilize since New York had forbid [ASD] to +accrue the designated Army C-12 Revenue Recovery amounts. This technique had +the same year and effect on the financials that accrual would have had—potentially +up to $18M revenue and associated EBIT recognition. I asked [the VP of Finance] +if this “technique” was known to and approved by New York. [The VP of Finance] +answered that he did not know, but that Group had directed him to take this path. I +asked if we had this direction in writing and the answer was no. +26. In that same December 31, 2013 email, the C-12 Contract Manager also reported on +a conversation that occurred on Monday, December 30, 2013, stating: +Yesterday in a conversation with [the C -12 Business Manager] and the [ASD +Controller] over year end close outs, [ the VP of Finance ], according to the [C -12 +Business Manager], stated that the Army C -12 year end numbers needed to be +whatever they had to be in order for Division to make $40M EBIT. I’m sure [ the +VP of Finance] meant something other than how the comment was taken. However, +we, and especially the CFO, need to be careful with what we say —in particular in +this current environment. +27. Wentlent was on vacation in Antarctica from December 9 to December 23, 2013. +His first day back in the office was after the Christmas holiday, on or around December 27, 2013. +The recognition of revenue on the C-12 Contract was a priority of Wentlent’s, driven by his +perception that the President of Logistics Solutions wanted the revenue recognized by the end of +2013, and by the fact that without the additional revenue, ASD would likely fall short of meeting +its annual plan. Thus, upon returning to the office from vacation, Wentlent asked the VP of +Finance how things were going with the year-end close out. The VP of Finance informed +Wentlent that L3 Corporate would not allow ASD to record revenue on the revenue recovery items +a certain way, but that he came up with an alternative method, and that corporate had approved his +method. Despite having been told by the President of Logistics Solutions to coordinate the +accounting with the Aerospace Systems CFO, and knowing that the VP of Finance had been +performing unsatisfactorily, Wentlent did not take any steps to confirm that the Aerospace Systems +CFO or L3 Corporate approved of the VP of Finance’s methods. + + 8 +28. Late in the evening on Monday, December 30, 2013, Wentlent emailed the +President of Logistics Solutions stating that the end of year close is “going well” and “December’s +numbers will be a little better than STF [short term forecast].” He further noted “[s]ales are up +$11.4 M the major driver is C-12 and the posting to account for the revenue recovery.” Although it +was unclear at that time whether ASD would meet the required 75% of their plan to make bonuses +(in part because the financial statements were not yet finalized with all accruals posted), the +additional revenue recognized by ASD in late December 2013 allowed ASD to achieve the 75% +threshold. Consequently, the VP of Finance received a bonus of $62,100 on a base salary of +$189,673, and Wentlent received a bonus of $183,500 on a base salary of $258,654, each +attributable to ASD achieving 75% of plan. Both of these bonuses were later rescinded by L3. +G. JANUARY 2014 ISSUES REGARDING ACCRUALS AND INVOICES +29. As part of the year-end close, the VP of Finance also requested that the Business +Manager on the C-12 Contract enter $8.8 million of accruals related to three revenue recovery +items. In connection with these accruals, the CFO of Aerospace Systems sought approval from the +head of audit and the L3 Corporate Controller to reverse costs charged in prior option years based +on anticipated recovery from the government. +30. The L3 Corporate Controller did not allow the accrual of these items. As the +Aerospace Systems CFO explained to the VP of Finance on January 7, 2014, “[b]ased on +consultation with [the L3 Corporate Controller and another individual from L3 corporate] … the +following needs to take place: 1. reverse the [$8.8M] entries [ ]…[and] Record as billed A/R and +revenue the Option Year 3 amounts that are approximately $2.8M for the PMO Support and $450k +for the Reduced Payments.” The Aerospace Systems CFO further explained, “[t]he reversal of +cost of sales charged in prior option years is not allowed under SAB [Staff Accounting Bulletin] +104, so we will not be allowed to pick up that profit.” +31. The Controller’s office requested through the Aerospace Systems CFO that ASD +obtain a letter from the U.S. Army indicating that ASD had permission to bill for the $3.2 million +Option Year 3 claims. In connection with seeking this letter, the VP of Finance received from the +C-12 Contract Manager two separate email chains from late December and early January, neither +of which the VP of Finance had been copied on previously, discussing whether L3 should invoice +for all of the revenue recovery items (i.e., not just the $3.2 million). Both email chains suggest that +the U.S. Army intended for L3 to send invoices that would be paid if justified or denied. In one of +the email chains, the C-12 Contract Manager specifically asks, “[j]ust to be clear . . . are you telling +me to invoice (bill) the government for what we believe we are owed to start the conversation? Or +are you telling me to file a claim? I see those as two different actions.” The response was, “I +think the first step is to invoice the Government, then a claim will follow if the invoice is denied.” +Neither email chain mentioned invoicing in L3’s SAP system but withholding the invoice from the +U.S. Army. +H. L3’s INVESTIGATION AND DISCOVERY OF IMPROPER ACCOUNTING +32. In June 2014 – approximately six months after the invoice allegations were first +raised – L3 investigators discovered a billing supervisor at L3 had kept the hard copy revenue + + 9 +invoices on a shelf in her office. The invoices had not been delivered to the U.S. Army, in +violation of a specific internal control of L3 that required delivery of invoices. +I. RELEVANT PROFESSIONAL STANDARDS +33. Accounting Standards Codification 605-10-25-1 provides that revenue can be +recognized when it is realized or realizable and earned. Consistent with the authoritative literature, +paragraph (A)(1) of the Codification of Staff Accounting Bulletins, Topic 13: Revenue +Recognition (which provided guidance on the C-12 Contract) states that collectability be +reasonably assured and that the amount of revenue be fixed or determinable as conditions to +recognizing revenue. By failing to deliver the invoices at the time, ASD’s recognition of the $17.9 +million in revenue violated these standards and therefore did not comply with U.S. GAAP. +34. L3 filed its Form 10-K for the fiscal year ending December 31, 2013 on February +25 and its Form 10-Q for the quarter ending March 31, 2014 on May 1, 2014. These filings were +inaccurate. +J. L3’s REVISED FINANCIAL STATEMENTS +35. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A the first quarter of 2014. Among other items, the amended filings +disclosed that with respect to its Aerospace Systems segment, L3 identified and recorded pre-tax +charges of $60 million for 2013; $25 million for 2012; $5 million for 2011; $4 million for periods +prior to 2011; $20 million for 1Q:14; and $55 million for 2Q:14, for a total of $169 million in the +segment. Of the adjustments, $69 million were attributable to the C-12 Contract due to “cost +overruns inappropriately deferred, sales invoices inappropriately prepared, and the failure to timely +and accurately perform contract estimates at completion and valuation assessments of inventories +and receivables,” at the Army Sustainment Division. Of the $69 million, $15.4 million in +improperly recognized revenue was related to the creation of invoices related to disputed claims. +K. VIOLATIONS + +36. As a result of the conduct described above, Wentlent caused L3’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep books, +records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. +37. As a result of the conduct described above, Wentlent violated Rule 13b2-1 of the +Exchange Act, which prohibits any person from, directly or indirectly, falsifying or causing to be +falsified, any book, record, or account that the Exchange Act requires an issuer to maintain. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: + + + 10 +A. Pursuant to Section 21C of the Exchange Act, Respondent Wentlent cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) of the +Exchange Act, and Rule 13b2-1 thereunder. + +B. Respondent Wentlent shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000.00 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(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 +Wentlent as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate +Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 200 Vesey Street, New York, NY 10281. + +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he shall +not argue that he is entitled to, nor shall he benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private + + 11 +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 \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3868.txt b/raw/aaer/2017/AAER-3868.txt new file mode 100644 index 0000000000000000000000000000000000000000..ea2fd871d0e0439f3a9c15b1598b6b7237c7af55 --- /dev/null +++ b/raw/aaer/2017/AAER-3868.txt @@ -0,0 +1,521 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80548 / April 28, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3868 / April 28, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17950 + + +In the Matter of + +David Pruitt, CPA + +Respondent. + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +AND NOTICE OF HEARING + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against David Pruitt, +CPA (“Pruitt” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking +in character or integrity, or to have engaged in unethical or improper professional conduct; or (3) +to have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + + 2 +II. + +After an investigation, the Division of Enforcement alleges that: + +A. SUMMARY + +1. These proceedings arise out of L3 Technologies, Inc.’s (formerly known as L-3 +Communications Holdings, Inc.) (“L3”) improper recognition of $17.9 million in revenue at its +Army Sustainment Division (“ASD”) subsidiary in 2013 and Q1 2014. The improperly +recognized revenue was related to a fixed-price aircraft maintenance contract between ASD and +the U.S. Army, referred to as the C-12 Contract. +2. In late December 2013, Pruitt—the VP of Finance at ASD—instructed a +subordinate to create 69 invoices related to unresolved claims under the C-12 Contract in L3’s +internal accounting system (“SAP”), and withhold delivery of those invoices from the U.S. +Army. However, other than a handful of invoices that were delivered to the U.S. Army in early +2014, the vast majority of these invoices were never submitted to the U.S. Army, but instead +were discovered during an investigation of ASD’s finances approximately six months later. By +entering the invoices in SAP, ASD improperly recognized approximately $17.9 million in +additional revenue at the end of 2013, and in Q1 2014. +3. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A the first quarter of 2014. Among other things, L3 disclosed in its +amendments that it was revising its financial statements to record aggregate pre-tax charges of +$94 million in the Aerospace Systems segment for periods prior to 2011 up to 2013, and +approximately $75 million for the first and second quarters of 2014. Of the adjustments, $69 +million were attributable to the C-12 Contract, and $15.4 million of the adjustments were related +to the improper revenue recognition related to the invoices. +B. RESPONDENT + +4. Pruitt, 60 years old, is a resident of Owens Cross Roads, AL. Pruitt began working +for L3 in 2003, and served as the VP of Finance for ASD from January 2013 until January 2014. In +January 2014, he was reassigned to the position of Senior Director of Finance for Army Fleet +Support at ASD, and served in that role until his termination from L3 on July 30, 2014. Pruitt is a +certified public accountant (“CPA”) (licensed in Kentucky), certified management accountant, +certified government financial manager, and certified defense financial manager. +C. OTHER RELEVANT ENTITY + +5. L3, (NYSE ticker: LLL), a Delaware corporation with its principal place of business +in New York, NY, is a prime contractor for various foreign and U.S. Government agencies, +including the U.S. Department of Defense. L3’s securities are registered with the Commission +pursuant to Section 12(b) of the Exchange Act. L3 is a prime contractor in aerospace systems and +national security solutions. For fiscal year 2013, L3 reported net sales of $12.6 billion and an +operating income of $1.2 billion on its consolidated statements of operations. + 3 +D. BACKGROUND +6. Aerospace Systems is one of four business segments of L3, delivering integrated +solutions for the global intelligence market and providing maintenance and logistics support for a +wide variety of aircraft and ground systems. Each business segment is comprised of multiple +business “sectors,” and each business sector is comprised of multiple business “divisions.” Of +relevance to this matter are the Logistics Solutions sector of Aerospace Systems, which provides, +among other things, logistics support and aircraft maintenance services to its military customers, +and ASD, a subsidiary of Logistics Solutions, which provides support for United States Army +aircraft at bases throughout the United States and around the world. +7. L3, through its subsidiary Vertex, and later ASD, contracted to maintain a fleet of +approximately 100 fixed-wing C-12 airplanes for the U.S. Army pursuant to the C-12 Contract. +The contract had a five year term, commencing on June 2, 2010, and ending on January 31, 2015, +with the partial initial year referred to as a “base year” and each subsequent twelve-month period +referred to as an “option year.” Almost immediately after receiving the results of its first quarter of +operations under the C-12 Contract, Vertex realized that it underbid for the contract, and that the +margins going forward would be very low—in the range of 1-2%—creating significant obstacles +for Vertex’s management. ASD was formed at the beginning of 2013, in large part to take over the +C-12 Contract from Vertex, and improve L3’s performance under the contract. ASD, and +particularly Pruitt, worked through 2013 to resolve various issues with the C-12 Contract. +E. THE REVENUE RECOVERY INITIATIVE AND LEGAL ENTITLEMENT +8. In the summer of 2013, Pruitt and the President of ASD (“ASD President”) learned +that ASD had unaccounted for costs on its balance sheet related to the C-12 Contract in the range +of $30 to $35 million. The business manager on the C-12 contract (the “C-12 Business Manager”) +believed the growth in that particular balance was a result of cost overruns that would result in a +large loss to ASD. The C-12 Business Manager informed Pruitt of the costs, and prepared him for +a meeting with the ASD President and the President of Logistics Solutions—the corporate parent +of ASD—to discuss the potential loss. +9. On or about September 20, 2013, Pruitt, the ASD President, and the C-12 Business +Manager reported to the President of Logistics Solutions that they had identified a growing work in +progress (“WIP”) balance on ASD’s books arising from the C-12 Contract, and that the Division +may need to write off some of the WIP (approximately $8-9 million). The report angered the +President of Logistics Solutions, and he asked members of ASD to re-check their numbers and +verify that it was true. The President of Logistics Solutions also directed ASD to determine what +work the WIP balance related to, and asked Pruitt, the ASD President, and other members of ASD +to determine how to bill it to the U.S. Army. The President of Logistics Solutions requested +weekly meetings—and later, daily meetings—with ASD officers, including the ASD President and +Pruitt, to obtain a better understanding of the WIP balance. Pruitt and the ASD President were in +constant communication with each other from September to December 2013 concerning the status +of the review. During the September time period, Pruitt and the ASD President were aware that +ASD would not likely meet its annual operating plan EBIT (Earnings Before Interest and Taxes), +and it was also evident at the time that ASD was at risk of falling below the required EBIT +threshold (i.e., 75% of plan) necessary for management to receive incentive bonuses. + 4 +10. The ASD President directed the C-12 Contract team at ASD to review the contract +in detail to determine if there were items not billed to the Army that should have been billed. This +became known as the Revenue Recovery Initiative. By mid-November 2013, the C-12 Contract +Manager identified approximately $50.6 million in work performed by ASD under the contract that +was not billed to the Army. The $50.6 million value was comprised of nine different work stream +items and costs under the C-12 Contract. +11. During the fall of 2013, the focus of the Revenue Recovery Initiative turned to +identifying ways to recognize revenue on the unbilled $50.6 million. Based on the President of +Logistics Solutions’ words and conduct, Pruitt and the ASD President believed that the President +of Logistics Solutions expected ASD to achieve some accounting benefit on the $50.6 million +revenue recovery items by the end of 2013. On November 8, 2013, after reviewing operations +review slides prepared by the ASD President, the President of Logistics Solutions sent an email +(copying Pruitt) directing the ASD President to “please identify with coordination with [the VP of +Finance and CFO of the Aerospace Systems segment (“Aerospace Systems CFO”)] the C-12 Army +accounting to be used for Q4, specifically, which costs will be deferred related to the claims, and +take this accounting into consideration on your LRE [i.e. long range estimate] so we know where +we expect to get to in EBIT for 2013.” +12. Also during the fall of 2013, certain individuals at ASD and Logistics Solutions +began discussing the possibility of recognizing revenue on the $50.6 million in claims based on a +concept called “legal entitlement,” even though the claims had not been resolved with the Army. +Pruitt and the ASD President both participated in discussions concerning the recognition of +revenue based on legal entitlement. +13. On November 22, 2013, there was a conference call among Pruitt, the Aerospace +Systems CFO, and others to discuss certain options for how to record revenue pursuant to legal +entitlement. The Aerospace Systems CFO recalled that the task was for the C-12 Contract +experts—i.e., the General Counsel of ASD and the General Counsel of Logistics Solutions —to +find clauses in the C-12 Contract that entitled ASD to payment, show that the government did not +follow its obligations under the clauses, determine what to submit as a request for equitable +adjustment (“REA”), and estimate based on the contract’s history how much the Army would pay. +REAs were formal methods under the C-12 Contract by which ASD could request an equitable +adjustment to the funding amounts for each Contract Line Item (“CLIN”). +14. At Pruitt’s request, the General Counsels of ASD and of Logistics Solutions +estimated that ASD was likely to recover approximately $30 million of the entire $50.6 million, +based on their history of negotiations with the government. Between Thanksgiving and December +5, 2013, Pruitt asked the General Counsels of ASD and of Logistics Solutions to prepare letters of +legal entitlement that would be used to support the revenue recognition. The General Counsel of +ASD indicated that as to one legal entitlement letter, Pruitt drafted it and put the General Counsel +of ASD’s name on the signature block, asking him to sign it. Because the letter was drafted +without his permission, the General Counsel of ASD refused to sign it, and indicated that he was +upset that Pruitt had attempted to draft a letter purporting to be from him. +15. Pruitt recalls discussing three options with the President of Logistics Solutions and +the Aerospace Systems CFO about how to address the revenue recovery items in November 2013: + 5 +(1) record the transactions as inventory, increasing the WIP balance; (2) accrue the revenue +associated with the legal entitlement issues; and (3) invoice the Army for amounts to which ASD +believed it was legally entitled. While no contemporaneous documents corroborate Pruitt’s +account that invoicing was considered, Pruitt further claims that he input the transactions in L3’s +live SAP system to analyze and evaluate the output before a decision was made with respect to +recording legal entitlement. After the analysis was complete, according to Pruitt, the transactions +were reversed out of SAP. +16. In November 2013, a decision was made by the ASD President and the President of +Logistics Solutions to reassign Pruitt from his role as VP of Finance at ASD, based on his +performance related to working through several accounting issues including disclosure statements. +The ASD President notified Pruitt in early December 2013 of the decision, but kept Pruitt on in his +role until the end of January 2014. +17. The Aerospace Systems CFO learned in or around May 2014 that Pruitt was not +preparing estimates at completion (“EACs”) for the C-12 Contract while the contract was in effect +as he was required to do. EACs allowed divisions to project revenue and EBIT, and were therefore +relied on by ASD to create forecasts and the annual operating plan. Pruitt falsely represented to the +Aerospace Systems CFO and others at group meetings that EACs were completed for each option +year. +18. On December 3, 2013, the ASD President presented an operations review regarding +ASD to the President of Logistics Solutions. Included was a slide entitled, “Army C-12 Contract +Dispute Summary,” which listed a table of ten rows with separate “REA/Claim Values” adding up +to $50.6 million. A column on the table was entitled “Legal Entitlement” and applied a discount of +either 50% or 60% to each claim value that comprised the $50.6 million. The presentation also +included detailed slides on six of the claims, and noted that ASD planned to meet with the +government to reach an amicable resolution and that, “[a]fter the negotiations with the government, +L3 is postured to immediately invoice and bill the government.” +19. The revenue recovery claims were presented by ASD to the U.S. Army in meetings +that took place in late November and early December 2013. On December 5, 2013, the C-12 +Contract Manager and the General Counsel of ASD met with representatives of the U.S. Army to +discuss the C-12 contract disputes. An email from the C-12 Contract Manager to the President of +Logistics Solutions reporting on this meeting indicates that the U.S. Army planned to meet +internally on December 17, 2013, and begin meeting with L3 after the new year with the “intent [] +to resolve every one of the disputes outside of the REA/Claim process… as quickly as possible.” +Nothing in the email indicates any request by the U.S. Army to invoice any of the claims before the +end of the year. In fact, neither Pruitt nor the ASD President expected to resolve the disputes +concerning the revenue recovery items by the end of 2013. +F. GENERATION OF INVOICES AND IMPROPER REVENUE RECOGNITION +20. In late December 2013, Pruitt approached the C-12 Business Manager and asked +him to explain how revenue was recorded on ASD’s books. The C-12 Business Manager told +Pruitt that it was either billed or accrued. Pruitt subsequently asked him at what point along the +path revenue was recognized. With respect to the unresolved claims concerning the C-12 Contract, + 6 +the C-12 Business Manager explained that in order to recognize revenue, a sales order must be +created and then released to the Billing Clerk at ASD. The Billing Clerk then generated an invoice +in SAP, at which point revenue was recognized on ASD’s books. The invoice was then supposed +to be submitted into Wide Area Work Flow (“WAWF”), which transmits invoices to the customer, +but the submission of the invoice into WAWF did not have to occur in order for ASD to recognize +revenue. +21. Pruitt and the Aerospace Systems CFO had a telephone call on or about Friday, +December 20, 2013. Pruitt claims they discussed a one-page list of the revenue recovery claims +that he purportedly emailed the Aerospace Systems CFO prior to the call. Pruitt claims that he +and the Aerospace Systems CFO went down the list and the Aerospace Systems CFO instructed +Pruitt which items to invoice and which to accrue. The Aerospace Systems CFO denies giving +Pruitt blanket authority to invoice for the claims, but does recall a conversation in which he told +Pruitt that he could invoice for work performed during option year 3 (i.e., 2013). +22. On Monday, December 23, 2013, Pruitt emailed the C-12 Business Manager +“billing amounts” for seven of the revenue recovery items. The C-12 Business Manager emailed +ASD’s Controller, copying the C-12 Contract Manager and Pruitt, asking the individual to +“[p]lease add planned revenue . . . for the revenue recovery billings that I did today,” and further +stating, “I believe the current course of action is that they are not to be released to the +government.” +23. To physically generate the invoices, ASD had to seek the assistance of Vertex’s +Shared Services department in Madison, AL, because ASD’s invoicing specialist was out of the +office. Two clerks in Vertex’s billing department indicated that not entering invoices through +WAWF was unusual, and one conferred with a supervisor, the Controller of Vertex. The +Controller of Vertex had seen this type of practice on other smaller accounts while working for an +audit firm, but had never seen it at L3 and recognized that not submitting the invoices through +WAWF would violate certain “work procedures.” The Controller of Vertex called Pruitt, and +Pruitt said that based on an agreement with the U.S. Army, ASD and the U.S. Army were going to +negotiate each invoice before submitting it through WAWF. The Controller of Vertex was +appeased by this conversation, and 69 invoices were generated in SAP but withheld from WAWF, +causing ASD to recognize approximately $17.9 million in revenue, without delivery of the related +invoices to the Army by WAWF. +24. The C-12 Business Manager reported concerns with Pruitt’s invoicing request to +the C-12 Contract Manager on Friday, December 27, 2013, in a conversation that was +memorialized in an email that night: +It appears as thought [sic] the Revenue Recovery items are being handled outside of +the L3 corporate policy. I cannot quote the policy, however, I know that a revenue +accrual the size of the one that it would take to account for the Revenue Recovery +would require Corporate approval. To avoid that Corporate approval, we have been +directed to cut invoices through the billing system, but not send the invoices to the +government. I believe that is being done to avoid Corporate policy and try to +“hide” this from the auditors. I could be mistaken, but this doesn’t pass the smell +test. + 7 +25. That same day, the C-12 Contract Manager had a conversation with Pruitt in which +the C-12 Contract Manager relayed the C-12 Business Manager’s issues, and also noted that +certain employees were concerned regarding “invoice directives” from ASD. Pruitt explained, as +the C-12 Contract Manager later wrote in a report to L3’s ethics office on December 31, 2013 +(“Ethics”), that: +[I]nvoicing in SAP with no immediate intent to extend the invoice to the +Government was a “technique” to utilize since New York had forbid [ASD] to +accrue the designated Army C-12 Revenue Recovery amounts. This technique had +the same year and effect on the financials that accrual would have had—potentially +up to $18M reven ue and associated EBIT recognition. I asked [Pruitt] if this +“technique” was known to and approved by New York. [Pruitt] answered that he +did not know, but that Group had directed him to take this path. I asked if we had +this direction in writing and the answer was no. +26. In that same December 31, 2013 email, the C-12 Contract Manager also reported on +a conversation that occurred on Monday, December 30, 2013, stating: +Yesterday in a conversation with [the C -12 Business Manager] and the [ASD +Controller] over year end close outs, [Pruitt], according to the [C -12 Business +Manager], stated that the Army C-12 year end numbers needed to be whatever they +had to be in order for Division to make $40M EBIT. I’m sure [Pruitt] meant +something other than how the comment was taken. However, we, and especially the +CFO, need to be careful with what we say—in particular in this current environment. +27. ASD, with the revenue from the invoices, met the required 75% of their plan to +make bonuses. Pruitt received a bonus of $62,100 on a base salary of $189,673 attributable to +ASD achieving 75% of plan. This bonus was later rescinded by L3. +G. JANUARY 2014 ISSUES REGARDING ACCRUALS AND INVOICES +28. As part of the year-end close, Pruitt also requested that the C-12 Business Manager +enter $8.8 million of accruals related to three revenue recovery items. In connection with these +accruals, the Aerospace Systems CFO sought approval from the head of audit and the Corporate +Controller to reverse costs charged in prior option years based on anticipated recovery from the +government. +29. The Corporate Controller did not allow the accrual of these items. As the +Aerospace Systems CFO explained to Pruitt on January 7, 2014, “[b]ased on consultation with [the +Corporate Controller and another individual from L3 Corporate] … the following needs to take +place: 1. reverse the [$8.8M] entries [ ]…[and] Record as billed A/R and revenue the Option Year +3 amounts that are approximately $2.8M for the PMO Support and $450k for the Reduced +Payments.” The Aerospace Systems CFO further explained, “[t]he reversal of cost of sales +charged in prior option years is not allowed under [Staff Accounting Bulletin] 104, so we will not +be allowed to pick up that profit.” +30. The Controller’s office requested through the Aerospace Systems CFO that ASD +obtain a letter from the U.S. Army indicating that ASD had permission to bill for the $3.2 million + 8 +Option Year 3 claims. In connection with seeking this letter, Pruitt received from the C-12 +Contract Manager two separate email chains from late December and early January, neither of +which Pruitt had been copied on previously, discussing whether L3 should invoice for all of the +revenue recovery items (i.e., not just the $3.2 million). Both email chains suggest that the U.S. +Army intended for L3 to send invoices that would be paid if justified or denied. In one of the +email chains, the C-12 Contract Manager specifically asks, “[j]ust to be clear . . . .are you telling +me to invoice (bill) the government for what we believe we are owed to start the conversation? Or +are you telling me to file a claim? I see those as two different actions.” The response was, “I think +the first step is to invoice the Government, then a claim will follow if the invoice is denied.” +Neither email chain mentioned invoicing in L3’s SAP system but withholding the invoice from the +U.S. Army. +H. PRUITT MISLEADS L3’s AUDITORS +31. While ASD was focused on obtaining the letter from the U.S. Army, L3’s external +auditor sampled ASD invoices and noticed 12 were “pending coordination with the government.” +L3’s auditor requested “the WAWF acceptance document or proof of cash receipt as proof of the +billing.” On January 14, Pruitt sent a draft explanation to ASD’s Controller (copying the General +Counsels of ASD and Logistics Solutions) stating, “[l]et’s review prior to providing to [L3’s +auditor].” The document states, in part: +The USG Fixed Wing Division Chief of Contracting [“Army Contracting +Officer”]has requested that we coordinate certain 2013 invoices with her prior to +submitting to the ACO via WAWF. These invoices are related to contractual +interpretation of the contract for which we have a legal basis for our interpretation. +This is a slight change in the invoice approval routing process since [ the Army +Contracting Officer] is not currently in the WAWF routing and she desires to +review these invoices prior to the ACO, who is the first level of USG approval in +the WAWF. +32. This statement, provided to L3’s auditor, was false and misleading in several +respects. First, it omitted that the invoices had not been delivered to the U.S. Army, through +WAWF or otherwise. Notably, when the invoices had been generated, Pruitt told the C-12 +Business Manager and the C-12 Contract Manager that the procedure was a “technique” to utilize +since Corporate had forbidden ASD from accruing revenue. Pruitt told the C-12 Contract Manager +that group was directing it, not that the U.S. Army had requested the change (as noted in the +email). Later, when the Controller of Vertex questioned why ASD was withholding the invoices +from WAWF, Pruitt said that they were going to negotiate each invoice. Moreover, after having +just seen the two email chains the C-12 Contract Manager had sent him indicating confusion as to +whether or not to invoice the U.S. Army, Pruitt understood that the Army Contracting Officer had +not requested ASD to follow the detailed procedure he explained to L3’s auditor. But Pruitt’s +misleading statement had the intended effect. –L3’s auditor took comfort that the invoices in +question would in fact be presented to the U.S. Army. + + 9 +I. THE MISLEADING LETTER TO L3 CORPORATE +33. On January 17, 2014 – three days after Pruitt sent the above explanation to L3’s +auditor – the General Counsel of ASD met with the Army Contracting Officer regarding three +revenue recovery issues. Pruitt reported to the Aerospace Systems CFO that the General Counsel +of ASD “addressed the letter on the invoicing process [with the Army Contracting Officer] and +[the Army Contracting Officer] stated [they] would [get ASD a letter] but needed to route through +their legal prior to release” and that the General Counsel of ASD “believes it may be possible when +they meet legal next Friday.” The Aerospace Systems CFO spoke to the President of Logistics +Solutions, who then called the President of ASD to reiterate the importance of urgently getting the +letter from the U.S. Army. The General Counsel of ASD then sent the Army Contracting Officer +an e-mail – drafted by Pruitt – requesting the Army Contracting Officer’s acknowledgment that +ASD could issue invoices to the U.S. Army. The e-mail reads as follows: +We appreciate the opportunity to address our contract status with you today. We +would like to confirm our understanding of the process going forward. L3 intends +to present each contract request with supporting documentation and invoice to the +USG Contracting Office for review prior to submitting into WAWF for system +processing. We agree this is the most efficient manner to resolve pass [sp.] due +invoice actions and we intend to follow the same format presented to you today for +Option Year 3. We would appreciate your understanding and acknowledgment of +this process. +34. The Army Contracting Officer responded the same day with the following message: +I acknowledge that this is the process we agreed to earlier. It would be an exercise +in futility to submit invoices for these requested contract funding adjustments at this +point, as they would be rejected by the DCMA Administrative Contracting Officer. +If we are able to reach resolution on these issues (which is the ultimate goal), my +office will do one of two things: 1) Prepare a modification to the contract, adding +additional funding if required; 2) Communicate our acknowledgment/acceptance of +the proposed invoices to the DCMA ACO. (emphasis added) +35. The General Counsel of ASD then forwarded the Army Contracting Officer’s reply +to Pruitt and the President of ASD. Pruitt asked the General Counsel of ASD to delete the sentence +stating that “[i]t would be an exercise in futility to submit invoices . . .” and forward the doctored +e-mail to L3 Corporate. The General Counsel of ASD told Pruitt he was “out of [his] freaking +mind.” Pruitt and the President of ASD then asked the General Counsel of ASD to go back to the +Army Contracting Officer to ask the Army Contracting Officer to remove that sentence. Initially, +the General Counsel of ASD adamantly opposed going back to the Army Contracting Officer, and +even threatened to quit, but eventually agreed to do so. The Army Contracting Officer then sent a +new e-mail to the General Counsel of ASD removing the “exercise in futility” sentence, which was +satisfactory to Pruitt and the President of ASD. The e-mail was later forwarded to L3 Corporate. +L3’s auditor claims that based in part on the e-mail exchange between ASD and the U.S. Army, it +believed that the Army Contracting Officer was aware of the revenue recovery invoices, but that +the invoices were being reviewed by the U.S. Army before they were submitted into WAWF. + 10 +36. The modified e-mail that Pruitt and the President of ASD procured from the Army +Contracting Officer is deceptive, however, because it gave L3 Corporate and L3’s auditor the +impression that ASD had permission to invoice the U.S. Army for unresolved claims, when that +was not actually the case. Pruitt knew, based on his prior conversations with the General Counsel +of ASD, as well as the Army Contracting Officer’s original e-mail, that the U.S. Army was not +prepared to accept invoices. +J. PRUITT’S ADDITIONAL MISSTATEMENTS TO L3’s AUDITOR +37. In April 2014, L3’s auditor requested information from L3 to explain why the +accounts receivable balance at ASD had grown by $18.5 million from Q1 2013 to Q1 2014. Pruitt +drafted the below explanation, which was communicated to L3’s auditor: +The Army C -12 Program has experienced a $18.5M growth in Accounts +Receivable (AR) bills created in SAP for the period ending 3 -28-14 compared to +the previous year’s Q1 ending AR balance. Of this variance, $17.9M is directly +associated with L3 and the USG regarding contract technical review. The USG has +requested extensive documentation beyond the normal requirements to complete +their review. These inv oices cross multiple contract years and involve technical +over and above requirements that also cross over functional government oversight +boundaries. Although we expected a reasonable response time from the USG, we +understand their requirement to conduct due diligence. +38. The statement is misleading because it suggested that invoices had already been +delivered to the U.S. Army. Also the sentence that “[t]he USG has requested extensive +documentation beyond the normal requirements to complete their review” was not accurate +because there was no expectation for the government to respond and perform due diligence on +claims that had not yet been submitted. +K. L3’s INVESTIGATION AND DISCOVERY OF IMPROPER ACCOUNTING +39. In June 2014 – approximately six months after the invoice allegations were first +raised – L3 investigators discovered a billing supervisor at L3 had kept the hard copy revenue +invoices on a shelf in her office. The invoices had not been delivered to the U.S. Army, in +violation of a specific internal control of L3 that required delivery of invoices. +40. Accounting Standards Codification 605-10-25-1 provides that revenue can be +recognized when it is realized or realizable and earned. Consistent with the authoritative literature, +paragraph (A)(1) of the Codification of Staff Accounting Bulletins, Topic 13: Revenue +Recognition (which provides guidance on the C-12 Contract) states (“Topic 13(A)(1)”) that +collectability be reasonably assured and that the amount of revenue be fixed or determinable as +conditions to recognizing revenue. By failing to deliver the invoices, ASD’s recognition of the +$17.9 million in revenue violated these standards and therefore did not comply with U.S. GAAP. +41. L3 filed its Form 10-K for the fiscal year ending December 31, 2013 on February +25 and its Form 10-Q for the quarter ending March 31, 2014 on May 1, 2014. These filings were +inaccurate. + 11 +L. L3’s REVISED FINANCIAL STATEMENTS +42. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A the first quarter of 2014. Among other items, the amended filings +disclosed that with respect to its Aerospace Systems segment, L3 identified and recorded pre-tax +charges of $60 million for 2013; $25 million for 2012; $5 million for 2011; $4 million for periods +prior to 2011; $20 million for 1Q:14; and $55 million for 2Q:14, for a total of $169 million in the +segment. Of the adjustments, $69 million were attributable to the C-12 Contract due to “cost +overruns inappropriately deferred, sales invoices inappropriately prepared, and the failure to timely +and accurately perform contract estimates at completion and valuation assessments of inventories +and receivables,” at the Army Sustainment Division. Of the $69 million, $15.4 million in pre-tax +income was related to the creation of invoices related to unresolved claims. +M. VIOLATIONS + +43. As a result of the conduct described above, Pruitt caused L3’s violations of Section +13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep books, records, and +accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions +of the assets of the issuer. +44. As a result of the conduct described above, Pruitt willfully 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. +45. As a result of the conduct described above, Pruitt willfully 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. +III. + +In view of the allegations made by the Division of Enforcement, the Commission deems it +appropriate that public administrative and cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing any violations and any future violations of +Sections 13(b)(2)(A) of the Exchange Act, and Rule 13b2-1 thereunder; Respondent should be +ordered to cease and desist from committing or causing any violations and any future violations of +Section 13(b)(5) of the Exchange Act; and whether Respondent should be ordered to pay a civil +penalty pursuant to Section 21B(a) of the Exchange Act. + +C. Whether, pursuant to Section 4C of the Exchange Act, and Rule 102(e) of the +Commission’s Rules of Practice, Respondent should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as an accountant. + 12 + +IV. + +IT IS ORDERED that a public hearing for purposes of taking evidence on the questions set +forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days from +service of this Order at a time and place to be fixed and before an Administrative Law Judge to be +designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fail to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +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 Respondent as provided for in the Commission’s +Rules of Practice. + +IT IS FURTHER ORDERED that, pursuant to Rule 360(a)(2) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.360(a)(2), the Administrative Law Judge shall issue an initial +decision no later than 120 days from the occurrence of one of the following events: (A) The +completion of post-hearing briefing in a proceeding where the hearing has been completed; (B) +Where the hearing officer has determined that no hearing is necessary, upon completion of +briefing on a motion pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250; or (C) The determination by the hearing officer that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no hearing is +necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3869.txt b/raw/aaer/2017/AAER-3869.txt new file mode 100644 index 0000000000000000000000000000000000000000..494ed73258be497e4598247e1a7eeb58eac71738 --- /dev/null +++ b/raw/aaer/2017/AAER-3869.txt @@ -0,0 +1,693 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10352 / May 1, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80564 / May 1, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3869 / May 1, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17956 + + +In the Matter of + +MAGNACHIP +SEMICONDUCTOR +CORPORATION and +MARGARET HYE- +RYOUNG SAKAI, CPA, + +Respondents. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND CEASE- +AND-DESIST ORDERS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 and Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against +MagnaChip Semiconductor Corporation (“MagnaChip”) and Margaret Hye-Ryoung Sakai +(“Sakai”); and that public administrative proceedings be, and hereby are, instituted against Sakai +pursuant to Exchange Act Section 4C1 and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to +any person the privilege of appearing or practicing before the Commission in any +way, if that person is found . . . (1) not to possess the requisite qualifications to + + 2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V.J, Respondents +consent to the entry of this Order, as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +Summary + +1. This matter involves accounting practices at MagnaChip Semiconductor Corp., +which violated the antifraud, books and records and internal control provisions of the federal +securities laws. MagnaChip is a South-Korea-based semiconductor company which has been +publicly traded in the United States since its Initial Public Offering (“IPO”) in 2011. Shortly after + +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. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + 3 +its IPO, MagnaChip began engaging in a variety of practices to inappropriately inflate its revenues +and meet the gross margin targets it previously had announced to the public. In several instances, +the improper accounting practices involved employees throughout the company, including some +employees directed and overseen by MagnaChip’s former Chief Financial Officer. At all relevant +times, most of MagnaChip’s employees and management, including the CFO, were based in Korea. + +2. MagnaChip’s fraudulent accounting practices were executed through a variety of +means. From mid-2011 through December 2013 (the “relevant period”), it engaged in a variety of +practices that artificially boosted revenue, improperly delayed or avoided expenses or reductions in +revenue, smoothed reported gross margin, and concealed delays in collections. For example, to +boost revenue, MagnaChip employees based in Korea engaged in channel stuffing by entering into +undisclosed side agreements giving distributors concessions to incentivize them to take products +earlier than wanted or needed. MagnaChip employees in Korea also maintained false corporate +records that made it appear as if products that had not yet completed manufacturing had in fact been +completed and shipped to customers. As MagnaChip’s accounts receivable on these products began +to age, the Company entered into a series of transactions that made it appear that distributors were +paying down invoices when, in reality, they were not. MagnaChip also improperly delayed the +recording of certain expenses and manipulated its reserves to hit pre-defined targets. + +3. As a result, MagnaChip’s financial statements and related disclosures were +materially misstated in its periodic, annual, and current reports relating to fiscal years 2011 and +2012 and fiscal quarters in 2013, each of which was filed with the Commission. MagnaChip also +falsely stated in an October 2013 press release that it had met its revenue and gross margin +guidance for ten consecutive quarters following its IPO. Over the relevant period, MagnaChip’s +stock price increased by 69% and the Company benefitted from issuing debt at more favorable +rates than were historically available to it. + +4. Beginning in the Fall of 2013, members of MagnaChip’s Board and Audit +Committee began to question management in Korea about the Company’s rising accounts +receivable balances. In late 2013, MagnaChip’s outside auditors also raised concerns about the +Company’s accounts receivable balances. After discussing these concerns with MagnaChip’s +outside auditors in late 2013, the Audit Committee initiated an independent internal investigation +in January 2014 that uncovered certain revenue recognition problems. The Company self-reported +the revenue issues, and during the ensuing investigation uncovered additional fraudulent practices. +As a result, the Company restated its financial statements in early 2015, reducing its previously +reported revenue during the relevant period by $121 million. For 2011, MagnaChip’s previously +reported net profit was restated to a net loss. For the first three quarters of 2013, MagnaChip had +overstated revenue by more than 5% in every quarter, creating the false impression that revenue +was growing when in fact it was declining. The restatement also revealed that, contrary to +MagnaChip’s claim to have met its guidance for ten consecutive quarters, it had in fact missed its +revenue guidance from Q4 2012 through Q3 2013 and its gross margin guidance from Q1 2012 +through Q3 2013. Following the announcement, MagnaChip’s stock price dropped by 50% and +has not yet recovered. + + 4 +Respondents + +5. MagnaChip Semiconductor Corp. (“MagnaChip” or “the Company”) is a +Delaware corporation headquartered in Luxembourg with the majority of its operations in South +Korea. It designs, manufactures and sells semiconductor products through a subsidiary in South +Korea. MagnaChip also has a sales subsidiary in Cupertino, CA. Since its initial public offering in +March 2011, MagnaChip’s stock has been registered pursuant to Section 12(b) of the Exchange +Act and listed on the New York Stock Exchange under the ticker “MX.” Throughout the relevant +period, MagnaChip filed with the Commission public reports on Forms 10-Q and 10-K. In +addition, MagnaChip filed an S-3, an S-4 and two Forms S-8 during the relevant period, which +incorporated various Forms 10-K and 10-Q filed during the relevant period. MagnaChip stated in +its public filings that it prepared its financial statements in accordance with United States Generally +Accepted Accounting Principles (“GAAP”). + +6. Margaret Hye-Ryoung Sakai, age 60, is a U.S. citizen who maintains residences in +South Korea and Weston, MA. She is a Certified Public Accountant licensed to practice in +California since 1991 (license currently inactive). She joined MagnaChip as Senior Vice President, +Finance in November 2006, and served as the Company’s Chief Financial Officer and Principal +Accounting Officer from April 2009 until she resigned from the positions at the Company in March +2014. + +Background + +7. Following its March 2011 IPO, MagnaChip’s senior-most executives in Korea +placed immense pressure on employees to meet the revenue and gross margin targets MagnaChip +communicated to its Board and to the public. It was well known throughout the organization in +Korea that the Company executives wanted to demonstrate the Company’s financial strength and +stability after emerging from a prior bankruptcy. MagnaChip’s then-CEO also hoped that strong +financial performance would facilitate the sale of its majority shareholder’s position (which was +acquired by a U.S. turnaround firm as part of MagnaChip’s reorganization) so that the Company +could return to South Korean control. MagnaChip’s executives set aggressive revenue and gross +margin targets and, in several instances when employees objected to the targets, management +refused to lower them. Executives in Korea held weekly sales meetings with the Company’s +sales and manufacturing personnel to track their progress, often berating them when they fell +short. As a result, employees throughout MagnaChip’s sales, finance, and manufacturing +organizations in Korea resorted to committing improper acts to meet the Company’s revenue and +gross margin targets. Although these improper practices were well-known through MagnaChip’s +Korea-based management, the Company’s then-CFO Sakai directed or approved several of the +practices, failed to remediate other practices, and understood how the practices would impact +MagnaChip’s reported financial results. + + 5 +A. MagnaChip’s Fraudulent Revenue Recognition Practices + +8. To help ensure that MagnaChip hit its targets, certain employees in Korea engaged +in two primary improper practices to inflate its revenue. The first, which certain employees +referred to as “pull-in” sales, was a systematic effort to offer distributors incentives or concessions +to purchase products earlier than they otherwise would have. The second, which certain +MagnaChip employees referred to as “sun ip go,” a Korean phrase translated roughly as “advance +warehousing,” involved improperly recognizing revenue on unfinished goods that had not yet been +completed or shipped. MagnaChip also improperly recognized revenue on certain discrete +transactions in order to help it meet its revenue targets. + +“Pull-in” Sales + +9. During the relevant period, MagnaChip sold its products both through a direct sales +force and a network of distributors. For sales through distributors, MagnaChip stated in its public +filings that it recognized revenue on a “sell-in” basis under GAAP, i.e., when it sold and shipped +the product to a distributor, not when the distributor sold and shipped the product to an end +customer. This revenue recognition treatment for sales to distributors is consistent with GAAP +only when persuasive evidence of an arrangement exists, the product has been delivered and title +and risk of loss have transferred, the price is fixed and determinable, and collection of the resulting +receivable is reasonably assured. To ensure MagnaChip complied with GAAP, its internal +financial policy required the CFO among others to approve new significant sales contracts and any +changes to existing payment terms and the issuance of credit or credit limit increases above certain +thresholds, and that revenue could be recognized only according to the terms of sale. + +10. MagnaChip acknowledged these revenue recognition criteria in its quarterly and +annual filings during the relevant period, each of which was signed by Sakai. It added that it +utilized these criteria to recognize revenue “upon shipment, upon delivery of the product at the +customer’s location or upon customer acceptance … when the risks and rewards of ownership have +passed to the customer” and that, outside of warranty obligations and contractual terms, its sales +contracts “do not include any other post-shipment obligations that could have an impact on +revenue recognition.” Those statements were later determined to have been materially false and +misleading because MagnaChip recognized substantial revenue even when the disclosed criteria +were not met. + +11. Contrary to the disclosures in its public filings, as well as to its written policies, +from late 2011 through the third quarter of 2013, certain MagnaChip employees engaged in what +they called a “pull-in” sales practice whereby they offered distributors undisclosed concessions via +side agreements to incentivize them to order products earlier than wanted or needed so that +MagnaChip would hit revenue targets. The concessions included payment term extensions, credit +limit increases, unlimited return and stock rotation rights on unsold inventory, and price protection. +As a result of the concessions, MagnaChip improperly recognized revenue on certain transactions +that did not meet the requirements of GAAP, including because the price was not fixed and +determinable, collectability was not reasonably assured, or the risk of loss had not yet transferred. + + 6 +12. Although the “pull-in” sales practice was known to numerous individuals +throughout MagnaChip’s Korean management structure, Sakai, as CFO of MagnaChip, approved +payment term extensions and credit limit increases for certain of the improper pull-in sales, failed +to correct the improper accounting treatment of other pull-in sales, and understood how they would +impact MagnaChip’s reported revenue. + +13. Sakai either knew or was reckless in not knowing that the concessions and side +agreements precluded revenue recognition under GAAP and violated MagnaChip’s disclosed +revenue recognition policy. Further, Sakai either knew or was reckless in not knowing that the +Company engaged in these practices solely to meet revenue targets. As CFO, she signed +MagnaChip’s financial statements disclosing the company’s revenue recognition policy and GAAP +requirements. She also represented to MagnaChip’s auditors in management representation letters +that MagnaChip had not entered into any side agreements, and certified MagnaChip’s public +filings stating that the Company recognized revenue in accordance with GAAP when in fact she +either knew or was reckless in not knowing about the improper accounting treatment of certain of +these transactions. + +14. In early 2014, in anticipation of employee interviews to be conducted after the +Audit Committee began investigating the Company’s revenue recognition practices, MagnaChip’s +Korea-based management circulated to their subordinates a list of words to avoid using during their +interviews. The words MagnaChip used to describe their pull-in sales practices were on that list. + +“Sun Ip Go” – Recognizing Revenue on Sales of Unfinished Products + +15. MagnaChip also improperly recognized revenue on “sales” of non-existent or +unfinished products in order to meet revenue targets. In 2011, some MagnaChip Korean sales +employees met with some manufacturing employees to express concern about their ability to meet +the sales targets set by senior management because manufacturing could not keep up. After that +meeting, certain of MagnaChip’s manufacturing employees in Korea began circumventing the +Company’s accounting controls and falsified books and records to create entries that made it +appear that products that had not yet begun production or were still in production had been +completed, shipped and billed to customers. MagnaChip then recognized revenue on the sales of +those unfinished products. In so doing, MagnaChip violated GAAP because it recognized revenue +on purported sales of products that had not yet completed manufacturing and therefore had not yet +shipped or been delivered, and the risk of loss had not transferred to the purchaser. + +16. Certain MagnaChip’s manufacturing employees knew that this practice, which they +referred to in Korean as “sun ip go,” was improper. MagnaChip’s written internal financial policy +at the time stated that billing invoices shall be issued only for actual goods shipped or delivered, +and required that those sales be timely recorded and revenue recognized only according to the sales +terms. By late 2011 however, based on their meetings with MagnaChip’s sales employees, these +manufacturing employees knew that MagnaChip could not hit its revenue targets if they complied +with the policy. These manufacturing employees therefore implemented the “sun ip go” practice to +allow the Company to report revenue on sales of these unfinished products so that it could claim +that it had met targets when, in truth, it had not. + 7 + +17. As described above, MagnaChip’s Korea-based management circulated to +subordinates a list of words not to use during interviews conducted in connection with the Audit +Committee’s investigation into MagnaChip’s revenue recognition practices. The words +MagnaChip used to describe the “sun ip go” practices were on that list. + +Other Improper Transactions to Recognize Revenue + +18. In addition to the deceptive business practices described above, MagnaChip +improperly recognized revenue on other transactions. In December 2011, for example, +MagnaChip accelerated $1.8 million of revenue into 2011 by altering a purchase order from a +customer to conceal language stating that the customer did not accept title or risk of loss on the +goods until January 1, 2012. + +19. Sakai either knew or was reckless in not knowing that MagnaChip improperly +recognized revenue on this transaction in 2011. She knew that the transaction was important to +hitting 2011 revenue targets, was kept apprised of the negotiations as they occurred, understood +that the customer would not accept title and risk of loss until 2012, and either understood or was +reckless in not understanding that, as a result, MagnaChip could not recognize the revenue until +2012. After the transaction was agreed upon, Sakai received a copy of the purchase order stating +that title and risk of loss transferred in 2012. She told the Korea-based sales employee who had +overseen the deal negotiations that revenue could not be recognized if the purchase order contained +that language. The sales employee then whited-out the relevant language in the purchase order and +provided it to the finance department. Sakai approved the recording of revenue in 2011, even +though she either knew or was reckless in not knowing that the customer had always insisted on +title and risk of loss transferring in 2012. MagnaChip then gave its auditor the altered purchase +order as support for recognizing the revenue. + +20. In 2013, MagnaChip improperly recognized revenue on a gross basis on certain +“turnkey” foundry services that it provided to a customer. In the “turnkey” sales, MagnaChip +purchased silicon wafers from the customer, performed some additional processing services on +them, and sold the finished product to a third party on behalf of its customer. Because MagnaChip +acted as its customer’s agent, it was required under GAAP to recognize revenue only on the +amount attributable to its processing services, net of the wafer costs. Initially, MagnaChip +accounted for the sales properly. In mid-2013, however, it switched to recognize the revenue on a +gross basis to boost MagnaChip’s reported revenue, overstating revenue on these “turnkey” sales +by approximately $5 million in the third quarter of 2013. Sakai either knew or was reckless in not +knowing that MagnaChip’s decision to recognize the revenue on a gross basis violated GAAP. + +21. MagnaChip also engaged in improper practices to avoid recording expenses or +revenue reductions in the appropriate period. In April 2013, for example, MagnaChip agreed to +settle a customer’s claim over certain product quality issues. As part of the settlement, MagnaChip +agreed to certain cash and in-kind payments that could total up to $18 million, which was a +significant contingent liability for the Company. Under GAAP, MagnaChip was required to record +the full amount of the contingent liability in its current period books and records (as well as + 8 +disclose the liability in its financial statements). Rather than record the full amount of the +obligation, however, MagnaChip recognized the expense and/or reduction of revenue as it paid out +the claim over time. MagnaChip’s Korea-based employees also failed to disclose the settlement +agreement to MagnaChip’s outside auditors in response to their requests in connection with the +2013 quarterly reviews. + +22. Sakai either knew or was reckless in not knowing that MagnaChip did not properly +record or disclose the contingent liability in the appropriate period books and records or the +appropriate period financial statements. Sakai knew about the product quality issue and the +settlement agreement but failed to record it on MagnaChip’s books and records even though she +understood that GAAP required MagnaChip to record the full amount of the contingent liability in +its current period books and records because it was probable and estimable. Despite this, Sakai +certified that MagnaChip’s Q2 and Q3 2013 financial statements complied with GAAP and signed +representations to that effect in letters to MagnaChip’s auditors. This certification was false. + +Roundtrip Transactions and Attempts to Conceal Rising Accounts Receivable + +23. MagnaChip’s written policies and procedures required customer payments to be +accurately recorded against those customers’ receivables in the proper period. MagnaChip’s +revenue practices, however, eventually caused increases to the amount of its accounts receivables +that were not paid in a timely manner. To make those receivables appear less aged, certain finance +employees in Korea under Sakai’s supervision engaged in a practice of applying payments on more +recent sales to receivables on older sales. As a result, receivables that had not yet been collected +were incorrectly reflected in MagnaChip’s books as collected. This violated GAAP because, +among other things, the Company concealed the diminishing likelihood of collection on these +aging receivables and did not appropriately consider that factor when analyzing its allowance for +uncollectible receivables or ongoing sales activities with those same customers. + +24. Sakai either knew or was reckless in not knowing about the practice, which violated +GAAP and MagnaChip’s written policies and procedures regarding customer payments. + +25. Finance employees in Korea, under Sakai’s responsibility, also engaged in a series +of improper transactions to make it appear as if MagnaChip had collected approximately $16 +million of uncollected receivables from distributors, when it had not. As part of this pattern of +conduct, MagnaChip repurchased its own, unsold products from Korea-based distributors and +disguised the transactions as purchases from certain vendors based in Korea. MagnaChip provided +cash to the vendors, which pretended to sell equipment and related supplies to MagnaChip. In +actuality, the vendors used the money to buy MagnaChip goods from distributors, which in turn +used that money to pay outstanding MagnaChip receivables. The payments were incorrectly +recorded as being for outsourcing supplies and capital expenditures. Certain internal emails and +documents that Sakai received referred to these transactions as “D-Project.” These improper +transactions violated GAAP, which required MagnaChip to reverse the previously booked revenue +associated with the cash payments it had made to those customers. + + 9 +26. Sakai either knew or was reckless in not knowing that the roundtrip transactions +took place and were improper and violated GAAP. Initially, she rejected the idea of roundtrips +proposed by her subordinates, but later assented when she learned that the auditors’ concerns about +the receivable balances and aging had become serious enough that they might not sign off on the +Company’s financial statements. MagnaChip’s management did not disclose these transactions to +MagnaChip’s Board and Audit Committee. + +B. MagnaChip Manipulated Gross Margin + +27. Sakai either knew or was reckless in not knowing that MagnaChip sometimes +engaged in efforts to manipulate its gross margins. For example, certain MagnaChip +manufacturing employees in Korea consulted certain finance employees under Sakai’s +responsibility before scrapping inventory, and the finance department delayed scrapping for some +obsolete inventory by several months or years. The delayed scrapping violated GAAP +requirements that MagnaChip record the scrap as an expense when the inventory became aged or +obsolete. By failing to do so, MagnaChip improperly inflated its gross margin and its books and +records did not accurately reflect inventory values. + +28. Certain MagnaChip finance employees in Korea engaged in other practices to +manipulate MagnaChip’s gross margins. For example, manufacturing employees in Korea, with +knowledge of certain finance employees, made improper entries in Company systems reflecting +that aged inventory had moved one step further along the manufacturing cycle so that it would not +appear to be aged and therefore included in the reserve, when in reality the manufacturing step had +not been completed. As a result, MagnaChip misstated gross margin and its assets were incorrectly +reflected in its books and records. The “one-step move” practice violated GAAP because it +allowed MagnaChip to increase the inventory value when no manufacturing process had in fact +occurred. MagnaChip also manipulated its gross margins by increasing certain reserves when the +Company exceeded its gross margin target and then using that “cushion” to reverse reserves in +later quarters when they were not otherwise able to meet the gross margin target. + +29. Sakai either knew or was reckless in not knowing about the improper gross margin +smoothing practices described above. Sakai was reckless in not knowing that the finance +employees engaged in the gross margin manipulations for the purpose of concealing the negative +impacts of the roundtrips and other revenue-related manipulations. Certain finance employees in +Korea tracked the gross margin manipulations in detailed spreadsheets identifying “action items” +that were discussed in various meetings within MagnaChip, some of which included Sakai. + + 10 +C. MagnaChip Failed to Maintain Effective Internal Controls During the +Relevant Period + +30. As a result of the improper practices, MagnaChip’s financial statements were +materially false and misleading every quarter for almost two years. The misstatements resulted in +part from material weaknesses in MagnaChip’s internal controls during the relevant period, which +the then-management team did not disclose to the Board and the Audit Committee. Specifically, as +acknowledged in its Form 10-K for 2013 issued in connection with the restatement, MagnaChip: + +a. did not maintain a control environment that effectively emphasized (i) an attitude of +integrity and ethics against the pressure to achieve sales, gross margin and other financial targets, +(ii) adherence to US GAAP, (iii) utilization of the whistleblower program, and (iv) prevention or +detection of undisclosed business practices involving the circumvention of internal controls under +the management team in place during the relevant period; + +b. did not maintain an appropriate level of accounting knowledge, experience and +training commensurate with its financial reporting requirements under US GAAP; and + +c. failed to maintain an effective internal audit function whereby the internal control +team exercised full authority to independently report to the Audit Committee in order to provide +adequate monitoring of control activities related to financial reporting. + +31. As a result, MagnaChip’s monitoring activities that should have detected errors or +internal control weaknesses were not effective, and the then-management team did not disclose +complete information to the Audit Committee, which limited the Audit Committee’s ability to +oversee the accounting and financial reporting process. + +32. Despite the above, in each of its quarterly and annual reports during the relevant +period, the Company falsely stated, and the then-CFO certified pursuant to Section 302 of the +Sarbanes-Oxley Act of 2002, that MagnaChip’s internal controls over financial reporting were +effective and provided reasonable assurance regarding the reliability of financial reporting, that +MagnaChip had prepared its financial statements in accordance with GAAP, and that the filings +did not contain any untrue statement of material fact or omit to state a material fact necessary to +make the statements made, in light of the circumstances in which they were made, not misleading. +This certification was false. + +D. MagnaChip’s Required Restatement Revealed the Scope of the Fraudulent +Accounting Practices + +33. As noted above, in late 2013, both MagnaChip’s outside auditors and members of +its Board and Audit Committee independently raised concerns about the Company’s rising +accounts receivable balances. MagnaChip’s Audit Committee postponed its fiscal 2013 earnings +announcement and initiated an independent internal investigation. + + 11 +34. On March 6, 2014, the Audit Committee determined that MagnaChip had +incorrectly recognized revenue on certain transactions and as a result would restate its financial +statements for the years 2011 and 2012 and the quarters in 2012 and 2013. On August 12, 2014, +MagnaChip announced that the scope of the Audit Committee’s investigation had expanded to +include errors and adjustments to costs of goods sold, inventory, and reserves and related business +practices. + +35. On February 12, 2015, MagnaChip filed its 2013 Form 10-K, which contained +restated financial statements for the years 2011 and 2012, and its Forms 10-Q for the first three +quarters of 2014, which contained restated financial statements for the first three quarters of 2013. +MagnaChip had also previously incorporated false financial statements for certain periods into its +Forms S-3, S-4 and S-8 filed between April 2012 and September 2013. + +Violations + +36. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in +connection with the purchase or sale of securities, (1) employing any device, scheme or artifice to +defraud; (2) making any material misrepresentation or omission; or (3) engaging in any transaction, +practice, or course of business that operates as a fraud or deceit upon any person. As a result of the +conduct described above, MagnaChip violated Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder, and Sakai willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder. + +37. Section 17(a)(1) of the Securities Act prohibits the use of a device, scheme or +artifice to defraud in the offer or sales of securities. Sections 17(a)(2) and 17(a)(3) make it +unlawful, in the offer or sale of securities, to (1) obtain money or property by means of any +material misrepresentation or omission or (2) engage in any transaction, practice or course of +business that operates as a fraud or deceit upon the purchaser. As a result of the conduct described +above, MagnaChip violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Securities Act, and +Sakai willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act. + +38. Section 13(a) of the Exchange Act requires issuers of securities registered pursuant +to Section 12 of the Exchange Act to file periodic and other reports with the Commission. With +exceptions not applicable here, Rules 13a-1, 13a-11 and 13a-13 of the Exchange Act require each +issuer to file annual, current, and quarterly reports respectively on the appropriate forms and within +the period specific on the form. Rule 12b-20 further requires that the required reports must contain +any material information necessary to make the required statements made in the reports not +misleading. Rule 13a-14 requires that the principal financial officer of an issuer sign a certification +that the issuer’s Forms 10-Q and 10-K fairly presented, in all material respects, the financial +condition and results of operations of the company. As a result of the conduct described above, +MagnaChip violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a- +13 thereunder, and Sakai was a cause of MagnaChip’s violations of these provisions and willfully +violated Rule 13a-14 under the Exchange Act. + + 12 +39. 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, MagnaChip violated Section 13(b)(2)(A) of the +Exchange Act, and Sakai was a cause of MagnaChip’s violations of this provision. + +40. 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, MagnaChip violated +Section 13(b)(2)(B) of the Exchange Act, and Sakai was a cause of MagnaChip’s violations of this +provision. + +41. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls or +knowingly falsifying books, records, or accounts described in Section 13(b)(2) of the Exchange +Act. As a result of the conduct described above, Sakai willfully violated Section 13(b)(5) of the +Exchange Act. + +42. Rule 13b2-1 promulgated under the Exchange Act prohibits any person from +directly or indirectly falsifying any books and records subject to Section 13(b)(2)(A) of the +Exchange Act. As a result of the conduct described above, Sakai willfully violated Exchange Act +Rule 13b2-1. + +43. Rule 13b2-2 promulgated under the Exchange Act prohibits any director or officer +of an issuer from directly or indirectly making, or causing to be made, or omitting to state or +causing another person to omit to state, a materially false or misleading statement or any material +fact necessary in order to make statements made, in light of the circumstances under which such +statements were made, not misleading, to an accountant in connection with any audit, review or +examination of the financial statements of the issuer, or the preparation or filing of any document +or report required to be filed with the Commission. As a result of the conduct described above, +Sakai willfully violated Exchange Act Rule 13b2-2. + +MagnaChip’s Remedial Efforts + + In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by MagnaChip and cooperation afforded by MagnaChip to the Commission staff. + +IV. + +Undertakings + + Respondent MagnaChip undertakes to: + + 13 +Cooperate fully with the Commission in any and all investigations, litigations or other +proceedings relating to or arising from the matters described in the Order. In connection with such +cooperation, MagnaChip shall: + +A. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject to any +restrictions under the law of any foreign jurisdiction; + +B. Use its best efforts to cause its officers, employees, and directors to be +interviewed by the Commission staff at such time as the staff reasonably may direct; + +C. Use its best efforts to cause its officers, employees, and directors to appear +and testify without service of a notice or subpoena in such investigations, depositions, +hearings or trials as may be requested by the Commission staff; and + +D. In connection with any testimony of MagnaChip’s officers, employees, and +directors to be conducted at deposition, hearing, or trial pursuant to a notice or subpoena, +MagnaChip: + +i. Agrees that any such notice or subpoena for MagnaChip’s officers’, +employees’, and directors’ appearance and testimony may be served by regular or +electronic mail on: Alex Young K. Oh, Esq., Paul Weiss Rifkind Wharton & +Garrison LLP, 2001 K Street, NW, Washington DC 20006-1047; +aoh@paulweiss.com. + +ii. Agrees that any such notice or subpoena for MagnaChip’s officers’, +employees’, and directors’ appearance and testimony in any action pending in a +United States District Court may be served, and may require testimony, beyond the +territorial limits imposed by the Federal Rules of Civil Procedure. + + In determining whether to accept the Offer, the Commission has considered this +undertaking. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED effective immediately that: + + A. Respondent MagnaChip cease and desist from committing or causing any violations +and any future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + 14 +B. Within 30 days of the entry of this Order, MagnaChip shall pay a civil money +penalty in the amount of $3,000,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +C. Respondent Sakai shall pay a civil money penalty in the amount of $135,000, to +the Securities and Exchange Commission. Payment shall be made in the following installments: +$70,000 within 14 days of the effectiveness of this Order, and the remainder in equal monthly +installments of $5,909.09 thereafter, with each installment due and payable on or before the 15th +day of each month and with the final payment of $5,909.09 paid within 350 days after the +effectiveness of this Order. If any payment is not made by the date 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. +D. Payment of the amounts described in paragraphs B and C 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 +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 E. Schneider, Division of Enforcement, +Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, CA +94104-4802. + + E. Respondent Sakai shall cease and desist from committing or causing any violations +and any future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), +13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, +13a-14, 13b2-1 and 13b2-2 thereunder. + + F. Respondent Sakai is denied the privilege of appearing or practicing before the +Commission as an accountant. + 15 + + G. Respondent Sakai is barred from acting as an officer or director of any issuer that +has a class of securities registered with the Commission pursuant to Section 12 of the Exchange +Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. + + H. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraphs C and D 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 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. + +I. Respondent MagnaChip acknowledges that the Commission is not imposing a +civil penalty in excess of $3,000,000 based upon its cooperation and undertaking to cooperate +fully with the Commission in any and all investigations, litigations or other proceedings relating +to or arising from the matters described in the Order. If at any time following the entry of the +Order, the Division of Enforcement (“Division”) obtains information indicating that MagnaChip +knowingly provided materially false or misleading information or materials to the Commission, +or in a related proceeding, or the Division determines that MagnaChip has not complied with its +undertaking to cooperate fully in any and all investigations, litigations or other proceedings +relating to or arising from the matters described in the Order, the Division may, at its sole +discretion and with prior notice to MagnaChip, petition the Commission to reopen this matter +and seek an order directing that MagnaChip pay an additional civil penalty not to exceed +$3,000,000. MagnaChip may contest by way of defense in any resulting administrative +proceeding whether it knowingly provided materially false or misleading information or failed to +comply with its undertaking to cooperate fully in any and all investigations, litigations or other +proceedings relating to or arising from the matters described in the Order, 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. + +J. 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 Sakai, 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 the proceeding, +is a debt for the violation by Respondent Sakai of the federal securities laws or any regulation or + 16 +order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 +U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3870.txt b/raw/aaer/2017/AAER-3870.txt new file mode 100644 index 0000000000000000000000000000000000000000..f9071ce352d6a2449832f6d3863e91e495755d26 --- /dev/null +++ b/raw/aaer/2017/AAER-3870.txt @@ -0,0 +1,452 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80749 / May 23, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3870 / May 23, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17996 + + +In the Matter of + +DANIEL MILLMANN, 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 Daniel Millmann (“Millmann” or +“Respondent”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or i ntegrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + + 2 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondent 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 + +Summary +1. This matter involves improper professional conduct by RSM US LLP (“RSM”) +engagement partner Millmann, while performing the 2011 audit of Madison Capital Energy +Income Fund I LP (“Fund I”), a fund formed for the general purpose of acquiring oil and gas +royalty interests to generate a return for its investors. During the course of the Fund I engagement, +Millmann repeatedly violated professional standards, including by failing to conduct the 2011 +Fund I audit (hereinafter “Fund I audit”) in conformity with Generally Accepted Auditing +Standards (“GAAS”). + +2. For example, Millmann failed to adequately plan and assess the risk of the Fund I +audit before audit field work commenced. Also, Millmann, who had never worked on an oil and +gas audit, was not approved to work on the Fund I audit before the work began. In addition, the +Fund I financial statements failed to separately report the fair value of the investment in each oil +and gas royalty interest held by Fund I, as required by Generally Accepted Accounting Principles +(“GAAP”). Lisa Hanmer (“Hanmer”), RSM engagement manager for the Fund I audit, knew that +adequate procedures had not been performed in auditing the fair value of the investment in the +underlying royalty interests and took steps to conceal this fact from RSM personnel, including +Millmann. Millmann also failed to complete the RSM required engagement report release +workpaper, which, in relevant part, mandated that Millmann satisfy himself that all review +comments for the audit were satisfactorily resolved before the audit report was released. Finally, + +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 and are not binding on any other person or +entity in this or any other proceeding. + + + 3 +Millmann also neglected to review many of the audit workpapers, and in essence improperly +delegated most of his engagement partner responsibilities to an engagement manager, Hanmer. +Respondent +3. Daniel Millmann (“Millmann”), age 54, currently resides in Madison, Wisconsin +and is a certified public accountant licensed to practice in Wisconsin. Millmann has worked at +RSM since 1990 and became a partner in 2005. Millmann served as the RSM engagement partner +for the Fund I audit. + +Other Relevant Parties +4. RSM US LLP, a limited liability partnership with its headquarters in Chicago, +Illinois, is a public accounting firm registered with the Public Company Accounting Oversight +Board (“PCAOB”). Founded in 1926, RSM has about 80 offices in the United States with annual +revenue totaling approximately $1.4 billion. Fund I engaged RSM, through its Madison, +Wisconsin office, to “perform an audit of [Fund I’s] statement of net assets, including the +schedules of investments as of December 31, 2011 and a review of the related statements of +operations, changes in partners’ capital and cash flows for the year then ended . . . in accordance +with auditing standards generally accepted in the United States of America” in May 2012. + +5. Lisa Hanmer, age 44, currently resides in Oregon, Wisconsin and is a certified +public accountant licensed to practice in Wisconsin. Hanmer began working at RSM in 1996, +became a partner in 2013, and resigned from the firm, effective March 31, 2015. Hanmer served +as the RSM manager for the Fund I audit and held the title of director at the time. + +6. Derik J. Todd (“Todd”), age 51, currently resides in Madison, Wisconsin. Since +2007, Todd has served as the President of Madison Capital Investments LLC (“MCI”). Todd has +organized private placements of equity interests in oil and gas limited partnerships through MCI +and other entities. Todd, on behalf of Fund I, retained RSM to perform the Fund I audit and served +as RSM’s primary contact with Fund I. +7. Madison Capital Investments LLC (“MCI”) is a Wisconsin limited liability +company, controlled by Todd, based in Madison, Wisconsin. MCI organized a number of private +placements of equity interests in oil and gas limited partnerships since 2009, including Fund I. +These private placements were marketed to accredited investors under Regulation D Rule 506 +through separate broker-dealers and investment advisers. +8. Madison Capital Energy Income Fund I LP (“Fund I”) is a Delaware limited +partnership, controlled by Todd, based in Madison, Wisconsin. Fund I was formed for the general +purpose of acquiring oil and gas royalty interests to generate a return for its investors. Fund I +raised almost $3 million from approximately 50 investors. + + + 4 +Background + Fund I Audit + +9. MCI pitched its funds to broker-dealers and investments advisers, and they in turn +introduced these funds to prospective investors. These broker-dealers and investment advisers +generally required certain information before they agreed to place these funds on their platforms, +including audited financial statements. Thus, MCI engaged RSM on May 16, 2012 to perform an +audit of Fund I’s statement of net assets as of December 31, 2011 and a review of the related +statements of operations, changes in partners’ capital and cash flows for the year then ended (the +“audit report”).4 RSM issued its final audit report to Fund I on May 30, 2012. This report +contained an unqualified opinion on Fund I’s statement of net assets and a review conclusion, +made in accordance with AICPA standards, on the other financial statements issued by Fund I. + +10. In the Fund I audit report, RSM opined that the Fund I statement of net assets +“presents fairly, in all material respects, the financial position of [Fund I] as of December 31, 2011, +in conformity with accounting principles generally accepted in the United States of America.” + +11. The Fund I audit report was subsequently distributed by MCI to broker-dealers and +investment advisers. These broker-dealers and investment advisers reviewed the Fund I audit +report in connection with their due diligence review for MCI’s later funds and placed MCI’s later +funds on their investment platforms with the impression that RSM properly and adequately audited +Fund I’s statement of net assets. RSM generally understood how MCI intended to utilize the final +Fund I audit report. Fund I’s only material assets were interests in oil and gas royalty properties. +As such, auditing the value of those assets was the primary purpose for MCI retaining RSM to +conduct the Fund I statement of net assets audit. + +12. Hanmer functioned in the role of engagement manager for the Fund I audit and +performed the most work on the audit, including performing or overseeing the field work and +testing for the audit (including its documentation in the workpapers) and drafting the Fund I audit +report. At the time of the Fund I audit, Hanmer was a director at RSM whose primary experience +was in auditing privately-held manufacturing companies. Fund I was the first oil and gas fund she +had audited in her career. + +13. Millmann was the engagement partner for the Fund I audit. At the time of the Fund +I audit, Millmann’s primary experience was in auditing privately-held manufacturing companies +and professional service organizations. Millmann had never worked on an oil and gas fund prior to +the Fund I audit. + + +4 This Order references the American Institute of Certified Public Accountants (“AICPA”) standards in +effect at the time of the Fund I audit. These standards are encompassed in GAAS. + + 5 +14. The Fund I audit fell under the auspices of RSM’s financial services group, which +specializes in audits of broker-dealers, futures commodities merchants, non-registered proprietary +trading firms, business development companies, commodity pools, hedge funds, mutual funds, +small business investment company funds, registered investment advisers, and private equity funds +(hereinafter “Financial Services Practice”). At the time of the Fund I audit, Millmann and Hanmer +were not on RSM’s preapproved list for Financial Services Practice audits. This list identifies +competent individuals to perform audits for the Financial Services Practice, the purpose of which is +to provide reasonable assurance that such audits are performed according to firm and professional +standards. Because Millmann and Hanmer were not on the preapproved list for Financial Services +Practice audits, the Regional Professional Practices Officer (“RPPO”) for the RSM Great Lakes +Region was required, according to RSM policy, to approve the staffing of Millmann and Hanmer +on the engagement, which the RPPO ultimately did, but only after audit field work had been +substantially completed. + +Relevant RSM Quality Control Policies and Procedures + +15. All RSM partners and other professionals are required to adhere to all applicable +provisions of the AICPA Code of Professional Conduct, as well as applicable ethics requirements +of the PCAOB and state boards of accountancy. + +16. RSM’s client acceptance and continuation policies and procedures require the +engagement partner to carefully evaluate the prospective client prior to acceptance by: (i) +evaluating the integrity and competence of top management and majority owners; (ii) evaluating +the prospective client’s financial condition; (iii) reviewing RSM’s independence requirements to +determine compliance with respect to the prospective client; (iv) ensuring that qualified +professional staff and other functional and industry specialists are available; and (v) +communicating directly with the predecessor auditor. Acceptance of all prospective clients must +be approved by the regional assurance leader or his or her designee. +17. RSM uses the RSM Risk Assessment Model (“MRAM”), an internally developed +electronic tool that assists engagement teams in performing consistent and comprehensive +evaluations of risk. In arriving at an engagement risk assessment, the MRAM considers several +risk-rating factors, such as industry, financial condition, governance, management, control +environment, size, complexity, and international reach. In addition to providing for the approval of +engagement acceptance or continuance and engagement staffing, the MRAM identifies potential +risks of material misstatement, the need for the involvement of subject matter experts, matters +requiring consultation, and other engagement risks, which allows RSM to plan and perform more +effective and efficient risk-based audits. RSM’s policies in this area are designed to provide +reasonable assurance that RSM will undertake or continue relationships and engagements only +where RSM: (i) has considered the integrity of the client and the risks associated with providing +professional services under the circumstances; (ii) is competent to perform the engagement and has +the capabilities and resources to do so; (iii) can comply with the applicable legal and ethical +requirements; and (iv) can reach an understanding with the client regarding the nature, scope, and +limitations of the services to be performed. + + 6 +18. RSM designed its policies and procedures to provide reasonable assurance that +RSM has sufficient professional personnel with the capabilities, competence, and commitment to +ethical principles necessary to perform RSM’s engagements in accordance with professional +standards and regulatory and legal requirements and to enable RSM to issue reports that are +appropriate under the circumstances. RSM’s National Office of Risk Management (“NORM”), in +consultation with the Regional Professional Practice Offices, approves a list of assurance partners, +directors, and other professionals who have designations within RSM’s quality control system. +This list identifies individuals by industry and engagement risk rating who are authorized to serve +as engagement partners and managers, engagement quality reviewers, industry specialists, +independent report reviewers, SEC compliance reviewers, and subject matter experts. RSM +assigns an individual to a specific engagement after considering the professional competence and +industry experience of the individual, together with the degree of knowledge, skills, and abilities +required under the circumstances. RSM’s RPPO has the ability to approve RSM staff, who are not +on the preapproved list, for a given audit. +19. To provide reasonable assurance that engagements are consistently performed +properly, RSM develops, maintains, and provides personnel with electronic manuals, software +tools, and subject matter guidance materials, which address: (i) audit methodology, (ii) engagement +supervision, (iii) appropriate documentation of work performed, and (iv) identifying matters for +consultation or consideration by more experienced professionals. RSM’s audit methodology +dictates that the engagement team plan the audit work so that an effective audit is performed, +designing procedures that are responsive to the risks of material misstatement identified in the +MRAM. +20. RSM has also implemented a Quality Control Inquiry Committee (“QCIC”), which +is charged with reviewing engagements selected based on certain triggering events such as +engagements identified in PCAOB or internal inspections. +Withdrawal of Fund I Audit Report +21. RSM informed the Commission staff in early 2015 that the Commission staff’s +investigation caused it to conduct its own internal review of the Fund I audit. In connection with +this internal review, the RSM QCIC convened on February 7, 2015 and concluded that: Hanmer’s +conduct on the Fund I audit departed from professional standards and firm policies to a degree that +warranted a recommendation to separate Hanmer from RSM. +22. Subsequently, Millmann, on behalf of RSM, in a February 23, 2015 letter to MCI, +withdrew its Fund I audit report based on “significant concerns that certain auditing procedures +[RSM] considered necessary in the circumstances existing at the time of the engagement were +omitted from the audit of the statement of assets, including Fund I’s schedule of investments, and +[RSM’s] review of the other financial statements.” The Fund I audit report was withdrawn after +Fund I’s offering period closed and after investors had already invested. + + + 7 +Fund I Audit Failures +23. Millmann failed to conduct the Fund I audit in conformity with GAAS. +24. Contrary to RSM’s client acceptance and engagement performance policies +described above, field work for the Fund I audit had begun before (i) RSM’s audit planning +documents were approved and (ii) RSM had cleared the Fund I engagement through the MRAM. +As a result, RSM and Millmann did not appropriately assess the risk for the Fund I engagement +and effectively plan procedures for the audit that would be responsive to the risks of material +misstatement identified in the MRAM, and consequently, the Fund I audit was conducted without +effective audit procedures that were expected to reduce the audit risk of material misstatement. +25. In addition, contrary to RSM’s engagement staffing policy described above, +Millmann and Hanmer, who were not included on the preapproved list for Financial Services +Practice audits, were not approved by the RPPO before they began working on the audit. +Consequently, RSM had no assurance that competent personnel were staffed on the audit before +substantive audit procedures were performed. +26. RSM issued an audit report containing an unqualified opinion on the Fund I +statement of net assets; however, the Fund I financial statements, including the statement of net +assets, were not in conformity with GAAP. Specifically, ASC 946-210-50-6 requires breaking out +and reporting the value of each individual fund asset on the schedule of investments that are more +than 5 percent of total net assets. Notwithstanding this GAAP disclosure requirement, the final +Fund I schedule of investments only reported the combined cost and fair values of all of the royalty +interests purchased by the fund. It did not report the values of Fund I’s individual royalty interests. +Hanmer knew that the Fund I financial statements were not in conformity with GAAP and took +steps to conceal this fact from RSM personnel, including Millmann. +27. Millmann failed to complete the RSM required engagement report release +workpaper, which, in relevant part, mandated that Millmann satisfy himself that all review +comments for the audit were satisfactorily resolved before the audit report was released. +28. Millmann neglected to review many investment workpapers (including Fund I’s +valuation summary report) and did not sign off on the investment audit program, which he was +required to do as engagement partner for the audit per the firm’s policies. As a result, Millmann +was unable to determine if the engagement team’s audit procedures for Fund I’s investments, +which represented a significant portion of Fund I’s assets, were adequate or even if they were all +completed. In short, Millmann did not fulfill his supervisory responsibility for the Fund I audit. +29. The Fund I audit had other significant deficiencies. For example, the required work +program for subsequent events was never completed and no tests were performed to determine +whether there were unrecorded liabilities that needed to be disclosed at year end. + + + 8 +Violations of Professional Standards + Failure to exercise due professional care (AU § 230) +30. AU Section 230 requires that an auditor exercise due professional care in the +performance of an audit and the preparation of an audit report. AU § 230.01. This standard +requires the auditor to plan and perform his work with due professional care. Id. § 230.02. Due +professional care imposes a responsibility upon each professional within an independent auditor’s +organization to conduct field work and reporting with reasonable care and diligence and to possess +the degree of skill commonly possessed by other auditors. Id. §§ 230.02-.05. Auditors should be +assigned to tasks and supervised commensurate with their level of knowledge, skill, and ability so +that they can evaluate the audit evidence they are examining. Id. § 230.06. Due professional care +requires the auditor to exercise professional skepticism, which is an attitude that includes a +questioning mind and a critical assessment of audit evidence. Id. § 230.07. +31. As a result of the conduct described above, Respondent failed to exercise due +professional care, as required by AU Section 230, when conducting the Fund I audit. +Failure to adequately plan the audit (AU § 311) +32. AICPA standards require that an auditor adequately plan field work for an audit. +AU § 311.01. Audit planning involves developing an overall audit strategy for the expected +conduct, organization, and staffing of the audit. Id. § 311.02. Obtaining an understanding of the +entity and its environment, including its internal control, is an essential part of planning and +performing an audit in accordance with GAAS. Id. § 311.03. The auditor must plan the audit so +that it is responsive to the assessment of the risk of material misstatement based on the auditor’s +understanding of the entity and its environment, including its internal control. Id. The auditor +must develop an audit plan in which the auditor documents the audit procedures to be used that, +when performed, are expected to reduce audit risk to an acceptably low level. Id. § 311.19. +33. As a result of the conduct described above, Respondent failed to adequately plan +the Fund I audit within the meaning of AU Section 311. +Failure to supervise the engagement team properly (AU § 311) +34. AICPA standards require that audit “assistants,” or firm personnel other than the +auditor with final responsibility for the audit, be properly supervised. AU §§ 311.01, .04. +Elements of supervision include instructing assistants, keeping informed of significant issues +encountered, reviewing the work performed, and dealing with differences of opinion among firm +personnel. Id. § 311.28. 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, including knowledge of the client’s business and industry. Id. +35. As a result of the conduct described above, Respondent did not properly supervise +the Fund I audit within the meaning of AU Section 311. + + 9 +Failure to consider audit risk and materiality in conducting the audit (AU § 312) +36. According to AICPA standards, the auditor must consider audit risk and must +determine a materiality level for the financial statements taken as a whole for the purpose of: (i) +determining the extent and nature of risk assessment procedures; (ii) identifying and assessing the +risks of material misstatement; (iii) determining the nature, timing, and extent of further audit +procedures; and (iv) evaluating whether the financial statements taken as a whole are presented +fairly, in all material respects, in conformity with GAAP. AU § 312.11. The auditor should +perform risk assessment procedures to assess the risks of material misstatement both at the +financial statement and the relevant assertion levels. Id. §312.12. +37. As a result of the conduct described above, Respondent did not properly consider +audit risk, as required by AU Section 312, when planning the Fund I audit. +Failure to obtain sufficient appropriate audit evidence (AU § 326) +38. AICPA standards require that: “[t]he auditor must obtain sufficient appropriate +audit evidence by performing audit procedures to afford reasonable basis for an opinion regarding +the financial statements under audit.” AU § 326.01. Sufficiency is the measure of the quantity of +audit evidence, and appropriateness is the measure of the quality of audit evidence. Id. § 326.06. +The quantity of audit evidence needed is affected by the risk of misstatement (the greater the risk, +the more audit evidence is likely to be required) and also by the quality of such audit evidence (the +higher the quality, the less the audit evidence that may be required). Id. +39. As a result of the conduct described above, Respondent did not obtain sufficient +appropriate audit evidence for the Fund I audit within the meaning of AU Section 326. +Failure to ascertain the occurrence of subsequent events (AU § 560) +40. The independent auditor should perform other auditing procedures with respect to +the period after the balance-sheet date for the purpose of ascertaining the occurrence of subsequent +events that may require adjustment or disclosure essential to a fair presentation of the financial +statements in conformity with GAAP. AU § 560.12. These procedures should be performed at or +near the date of the auditor's report. Id. +41. As a result of the conduct described above, Respondent did not comply with AU +Section 560. +Violations +42. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides that the +Commission may deny the privilege of appearing or practicing before the Commission to any +person who is found to have engaged in improper professional conduct. Respondent engaged in +improper professional conduct as defined in Rule 102(e)(1)(iv)(B)(2) (i.e., negligent conduct +consisting of repeated instances of unreasonable conduct, each resulting in a violation of applicable +professional standards, that indicate a lack of competence to practice before the Commission). + + 10 +Findings + +43. Based on the foregoing, the Commission finds that Respondent engaged in +improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Millmann is denied the privilege of appearing or practicing before the Commission +as an accountant. + +1. After two years from the date of this Order, Millmann may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed +with the Commission. Such an application must satisfy the +Commission that Millmann’s work in his practice before the +Commission will be reviewed either by the independent audit +committee of the public company for which he works or in some +other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + +b. an independent accountant. Such an application must satisfy the +Commission that: + + (1) Millmann, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + +(2) Millmann, 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 Millmann will +not receive appropriate supervision; + +(3) Millmann, has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions + + 11 +imposed by the PCAOB (other than reinstatement by the +Commission); and + +(4) Millmann acknowledges his responsibility, as long as Millmann +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and +the PCAOB, including, but not limited to, all requirements relating to +registration, inspections, engagement quality review, and quality +control standards. + +2. The Commission will consider an application by Millmann to resume +appearing or practicing before the Commission provided that his CPA license is current and +he has resolved all other disciplinary issues with the applicable boards of accountancy. +However, if CPA licensure is dependent on the 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 Millmann’s character, integrity, professional conduct, or qualifications to appear +or practice before the Commission. + + + By the Commission. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3873.txt b/raw/aaer/2017/AAER-3873.txt new file mode 100644 index 0000000000000000000000000000000000000000..f788a947b8e28bf262b3b5ebf63b3a279fea2cee --- /dev/null +++ b/raw/aaer/2017/AAER-3873.txt @@ -0,0 +1,302 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80872 / June 7, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3873 / June 7, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18013 + +In the Matter of + +DAN (“ALICE”) ZHANG, +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 Dan +(“Alice”) Zhang, CPA (“Zhang” or “Respondent”), pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + 2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceeding 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, 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: + +Summary + + 1. These proceedings involve insider trading by Zhang, a certified public accountant +(“CPA”), who was employed as a director by Deloitte & Touche, LLP (“D&T”). Zhang learned +material nonpublic information that D&T client Coherent, Inc. (“Coherent”) planned to acquire +Rofin-Sinar Technologies, Inc. (“Rofin-Sinar”). While in possession of this information, Zhang +purchased 1,110 shares of Rofin-Sinar stock in a brokerage account held in the name of a close +relative. On March 16, 2016 Coherent announced it would acquire Rofin-Sinar. The following +day Rofin-Sinar’s stock price increased 37% over the prior day’s closing price, resulting in Zhang +profiting from the trading by $7,451.05. + +Respondent + + 2. Zhang, age 42, resides in Sunnyvale, California, and since 2005 has been a CPA +licensed by the State of California. Until July 2016, Zhang was a director at D&T. From July +2013 to July 2016, Zhang served as a senior manager and client service managing director on the +Coherent audit team. + +Relevant Entities + + 3. Rofin-Sinar is a Delaware corporation headquartered in Plymouth, Michigan. +Rofin-Sinar’s common stock was registered with the Commission pursuant to Section 12(b) of the + + 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 +Exchange Act and traded on NASDAQ under the symbol “RSTI.” As a result of its acquisition by +Coherent, its listing on NASDAQ was discontinued. + + 4. Coherent is a Delaware corporation headquartered in Santa Clara, California. +Coherent’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trades on NASDAQ under the symbol “COHR.” During the relevant period, +Coherent was an audit client of D&T. + + 5. D&T is organized as a limited liability partnership under the laws of the State of +Delaware headquartered in New York, New York. Since 2003, D&T has been registered, +pursuant to the Sarbanes Oxley Act of 2002, with the Public Company Accounting Oversight +Board. + +Facts + + 6. Zhang owed a duty of trust and confidence to her employer, D&T, and her misuse +of information she learned in the course of her employment was a violation of that duty. She was +also subject to D&T’s code of ethics and professional conduct, which prohibited employees from +trading while in possession of confidential information of D&T clients. These policies defined +“confidential information” as “any information obtained from the client that is not available to the +public” and stated that such information could not be used for personal advantage. The policies +expressly directed that D&T employees could not seek to profit from inside information through +buying or selling securities or enabling others to do so. Zhang signed an acknowledgment +indicating that she read, understood, and agreed to comply with these policies. + + 7. Zhang, as a member of D&T’s Coherent audit team, learned material nonpublic +information that Coherent purchased shares of Rofin-Sinar and later that Coherent was in +negotiations to acquire Rofin-Sinar. + + 8. On January 29, 2016, while in possession of the material nonpublic information, +Zhang logged into a close relative’s online brokerage account and purchased 1,110 shares of +Rofin-Sinar stock at $24.74 per share. The relative had previously given her the logon credentials +for the account. + + 9. Zhang knew, or was reckless in not knowing, that this purchase was in breach of +her duty to her employer, D&T, and was in violation of D&T’s polices prohibiting insider trading. + + 10. On March 16, 2016, Coherent announced after market hours that it signed a +definitive agreement to acquire Rofin-Sinar for $32.50 per share in an all cash offer. + + 11. On March 17, 2016, Rofin-Sinar’s stock closed at $31.39 per share, an increase of +37% over the prior day’s closing price of $22.91 per share, and trading volume increased 5,613% +from the prior day’s trading. + + 4 + 12. On March 18, 2016, Zhang’s relative sold all 1,110 of the Rofin-Sinar shares at +$31.47 per share realizing profits of $7,451.05. Thereafter, Zhang received the trading profits. + + 13. On July 21, 2016, D&T forwarded to Zhang an inquiry from the Financial Industry +Regulatory Authority requesting that any person with prior knowledge of the Rofin-Sinar +acquisition identify any individuals included on a list of traders. Zhang saw her relative’s name on +the list. Zhang resigned from D&T and self-reported to D&T and the Commission staff her +purchase of Rofin-Sinar shares through her relative’s account. + +Zhang’s Cooperation + + 14. In determining to accept the Offer, the Commission considered the cooperation +afforded by Respondent to the Commission staff. + +Findings + + 15. As a result of the conduct described above, Zhang willfully violated Section 10(b) +of the Exchange Act and Rule 10b-5 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Zhang’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Zhang shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. + + B. Zhang is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After five (5) years from the date of this order, Zhang 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; + + 5 +2. a preparer or reviewer, or a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission as +a member of an audit committee, as that term is defined in Section 3(a)(58) of +the Securities Exchange Act of 1934. Such an application will be considered on +a facts and circumstances basis with respect to such membership, and the +applicant’s burden of demonstrating good cause for reinstatement will be +particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. Such an application must satisfy the Commission +that: + + (a) Respondent, or the public accounting firm with which 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 +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + + D. The Commission will consider an application by Zhang 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. Whether an application demonstrates good cause will be considered on a facts and +circumstances basis with due regard for protecting the integrity of the Commission’s processes. + + 6 + E. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$7,451.05, prejudgment interest of $200.43, and a civil money penalty in the amount of $7,451.05 +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 is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If timely payment of a +civil penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + F. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Zhang 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 Diana K. Tani, Division of Enforcement, +Securities and Exchange Commission, 444 S. Flower Street, Ninth Floor, Los Angeles, California +90071. + + 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, she shall not argue that she is entitled to, nor shall she 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 she shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + 7 + + V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3877.txt b/raw/aaer/2017/AAER-3877.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b46ac9edc74d31487b4f2d29b2dd6969226550c --- /dev/null +++ b/raw/aaer/2017/AAER-3877.txt @@ -0,0 +1,465 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80947 / June 15, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3877 / June 15, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18024 + + + +In the Matter of + +ERIC W. KIRCHNER and +RICHARD G. RODICK, + +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 Eric W. Kirchner and Richard G. Rodick +(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 a Cease-and-Desist Order +(“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +SUMMARY +1. These proceedings involve UTi Worldwide Inc.’s (“UTi’s”) disclosures regarding +serious risks to the company’s liquidity and capital resources in its Form 10-Q for the quarter +ending October 31, 2013, which were inadequate under the standards appearing in Item 303 of +Regulation S-K. Beginning in October 2013, UTi internally identified its United States rollout of +1View, a critical proprietary operating system, as a possible contributing factor to UTi’s lower than +historical cash flow volumes. Despite these significant issues, UTi’s Form 10-Q, which was +signed and certified by both then-Chief Executive Officer Eric W. Kirchner and then Chief +Financial Officer Richard G. Rodick, did not include adequate information in the Management’s +Discussion & Analysis (“MD&A”) section to allow investors and others to meaningfully assess +UTi’s financial condition and results of operations, particularly as to UTi’s future prospects. +2. As the Commission has repeatedly emphasized, the MD&A is intended to provide +investors with “an opportunity to look at the company through the eyes of management by +providing both a short- and long-term analysis of the business of the company.”2 Item 303(b) of +Regulation S-K requires issuers’ quarterly filings to discuss material changes in the items +enumerated in Item 303(a) which, in turn, requires that management discuss and analyze the +registrant’s financial condition, changes in financial condition, and results of operations, with a +specific focus on “material events and uncertainties known to management that would cause +reported financial information not to be necessarily indicative of future operating results or of +future financial condition.” 17 C.F.R. § 229.303(a), Instruction 3. Among other things, Item 303 +requires management to “[i]dentify any known trends or any known demands, commitments, +events or uncertainties that will result in or that are reasonably likely to result in the registrant’s +liquidity increasing or decreasing in any material way.” 17 C.F.R. § 229.303(a)(1), (3)(ii). In its +2003 interpretive guidance, the Commission explained that “disclosure of a trend, demand, +commitment, event or uncertainty is required unless a company is able to conclude either that it is +not reasonably likely that the trend, uncertainty or other event will occur or come to fruition, or that +a material effect on the company’s liquidity, capital resources or results of operations is not +reasonably likely to occur.”3 Release No. 33-8350, 2003 SEC LEXIS 3034 at*36 (Dec. 19, 2003) +(emphasis added). The 2003 guidance further instructed issuers to “evaluate separately their ability +to meet upcoming cash requirements over both the short and long-term,” defining short-term as +one year. Id. at *43 n.43. Item 303(b)(1) of Regulation S-K requires that “[i]f the interim +financial statements include an interim balance sheet as of the corresponding interim date of the + +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 See, e.g., Management’s Discussion and Analysis of Financial Condition and Results of Operations, Securities Act +Release No. 6835 (May 18, 1989). + +3 The Commission has explained that the “reasonably likely” standard for disclosures mandated by Item 303 is +lower than “more likely than not.” Commission Statement About Management’s Discussion and Analysis of +Financial Condition and Results of Operations, Release No. 33-8056 (Jan. 25, 2002). + +3 + +preceding fiscal year, any material changes in financial condition from that date to the date of the +most recent interim balance sheet provided also shall be discussed.” Finally, the Commission +cautioned issuers against relying on boilerplate. Release No. 33-8350, 2003 SEC LEXIS 3034, +at*46-47 (“companies should avoid generic or boilerplate disclosure”). +RESPONDENTS +3. Eric W. Kirchner resides in Palos Verdes Estates, California. He was UTi’s Chief +Executive Officer and a member of the board of directors from January 2009 to December 2014. +With respect to UTi’s periodic and other reports filed with the Commission, Kirchner reviewed the +company’s reports at the end of the drafting process and signed them as the principal officer of +UTi. +4. Richard G. Rodick resides in Huntington Beach, California. He was UTi’s Chief +Financial Officer from October 2012 to January 2016. At all relevant times, he was responsible for +UTi’s accounting, tax, treasury, internal audit, and investor relations. With respect to UTi’s +periodic and other reports filed with the Commission, Rodick reviewed the drafts as they became +available and then signed the final version. +RELATED ENTITY +5. UTi, a British Virgin Islands corporation, was based in Long Beach, California. +UTi’s operations spanned the world, having grown through several multinational acquisitions. +Until UTi was acquired by DSV A/S, a Danish logistics company traded on the Nasdaq OMX +exchange in Copenhagen, on January 22, 2016, UTi’s common stock was listed on the NASDAQ +Stock Market LLC. UTi is now a wholly-owned subsidiary of DSV and does not separately report +its financial results. +FACTS +6. UTi was a multinational freight forwarding and logistics company. In connection +with its freight forwarding business, UTi provided cash outlays for transportation costs, customs, +duties, taxes, and other expenses. These disbursements temporarily consumed cash as UTi +typically paid them in advance, and then obtained reimbursement from its customers through +invoicing. As a result, in times of growth in volume in its freight forwarding business, UTi +generally had weaker operating cash flows. In order to maintain the level of working capital +necessary to operate its business, UTi relied on continuing access to credit and robust collections. +7. In the first two quarters of fiscal year 2014 (beginning February 1, 2013), UTi had +to seek amendments or waivers of its debt covenants due to poor operating results. Each +successive amendment relaxed the covenant computations going forward. Nonetheless, UTi +continued to have difficulty meeting its debt covenants due to the continuing deterioration of UTi’s +financial performance. + +UTi’s Disclosures in its Form 10-Q for the Quarter Ending October 31, 2013 + +4 + +8. In order to streamline and harmonize its operations, in 2012 UTi began a phased +rollout of a proprietary freight forwarding operating system called 1View. 1View was a key +element of UTi’s multiyear transformation initiative, which also included the consolidation of +UTi’s regional finance operations into three shared service centers. UTi touted the transformation +initiative to the investor community as key to future cost savings. UTi initially deployed 1View in +smaller markets. On September 1, 2013, 1View was implemented in the United States, which was +UTi’s largest market by volume. +9. Following the United States rollout of 1View on September 1, 2013, UTi’s +challenges in issuing timely invoices in the United States began to manifest in early October 2013, +and the potential impact to cash flow in the United States was noted then. On October 11, 2013, +Rodick received an email chain that included comments from an employee responsible for UTi’s +daily cash management. At the time, Rodick understood the cash manager had been observing +UTi’s cash inflows were at volumes lower than historically seen. In the email, the cash manager +explained he had looked into causes of UTi’s cash shortages, and described circumstances in which +1View had properly recorded transactions but the system had not automatically printed out the +invoices. As a result, UTi issued late invoices to those customers, causing delays in receiving +payment. +10. Throughout the third quarter, UTi took steps to try to improve its liquidity position +in an effort to compensate for, among other things, the 1View-related invoicing delays. For +example, in late October 2013 UTi completed a sale of up to $75 million in receivables to a third +party. At the time UTi was already having difficulties meeting its debt covenants and the sale of +receivables would bring cash in faster to help UTi with its debt covenant compliance. +11. UTi’s monthly cash receipts continued to decline in November and UTi began +experiencing cash flow issues in the United States. The issues related to 1View’s ability to +transmit timely invoices, which led to higher than usual “unbilled” receivables. +12. After UTi discovered that the United States rollout of 1View resulted in invoicing +and liquidity problems, UTi took steps to remediate the invoicing issues that had occurred. By +November 7, 2013, Rodick noted UTi’s cash flows in October were “off approximately $16M. We +are really struggling with liquidity and we need to get our billing corrected immediately.” +13. UTi sought to manage its cash flow, in part, by delaying payments to vendors. +When UTi’s Controller inquired on November 15, 2013 about the status of certain aged invoices +from vendors, he was told that more than $5 million in vendor payments were on hold due to the +“cash crunch we have been experiencing since 10/31.” Both Kirchner and Rodick were aware that +UTi was delaying payments to vendors partly in an effort to conserve cash. In an attempt to +improve its cash inflows, UTi management, including Rodick, enlisted its sales and operations staff +to assist the finance department in focusing on collections and in correcting the invoicing issues. +14. Rodick also began preliminary inquiries regarding the possibility of a convertible +debt offering in late November 2013. This was because by that time, due to UTi’s overall liquidity +problems, Rodick was preparing a high-level internal report in which he planned to describe UTi’s +liquidity problems and offer some options for improving short-term and long-term liquidity. + +5 + +15. Starting late in the third quarter, Rodick repeatedly reported UTi’s liquidity +problems to Kirchner. Kirchner was able to monitor the backlog of unbilled shipments through “a +series of reports that showed unbilled shipments by location” and he was aware that UTi was +taking steps to address its liquidity issues. +16. Kirchner also received feedback on the impact of the 1View billing delays from the +sales team. On November 18, 2013, Kirchner sought information from UTi’s Senior Vice- +President of Sales to understand the impact of the 1View rollout from the sales perspective. +Among several bulleted items, the Senior Vice-President informed Kirchner that: “invoicing has +been consistently late;” “invoice corrections are being delayed as well;” and such delays result in +“cash flow . . . challenges.” Another item referenced the sales teams’ assistance in September on +non-sales activities, and reported that, as of this mid-November date, some sales team members in +several locations were still continuing to perform data entry and invoicing. Kirchner was told that +such efforts would create a “dampening impact on [the] sales pipeline and future sales.” Rodick +also received this feedback from the sales department. +17. On November 20, 2013, Kirchner and Rodick both received a retrospective +Monthly Performance Report for the Americas region that noted under the heading “1VIEW +implementation issues” the following bulleted items: “Service issues and lack of timely responses +impacting client relationships”; “[i]nvoicing accuracy and timeliness”; and “Area Sales still +providing assistance at desk level thus reducing sales capacity.” The report also stated that use of +overtime and temporary workers related to 1View in the United States resulted in higher-than- +budgeted staff costs. +18. Also on November 20, 2013, a cash manager advised UTi’s Treasurer in an email +that “USA [regional operations are] running out of cash tomorrow,” which was escalated to +Rodick. Rodick directed the Treasurer to reach out to one of UTi’s existing lenders to request an +increase in UTi’s credit facility. Rodick advised the Treasurer to tell the lender that “we need +access to the credit line immediately” because “we are experiencing a cash crunch due to increased +volumes and the transformation and we expect improved FCF [free cash flow] in the upcoming +weeks.” Rodick also directed the Treasurer to “[p]ull all the levers you can” to satisfy UTi’s cash +needs in the United States. + +19. On December 2, 2013 Kirchner told Rodick and other senior managers at UTi: +“We continue to have significant cash/covenant issues much of which arises from the collections +delay associated with unbilled shipments. . . . Getting accurate billing in the customers’ hands is +the only way to accelerate collections and get us back on an acceptable cycle.” + +20. In a December 3, 2013 email, Kirchner provided detailed comments on the draft +internal report Rodick was preparing on UTi’s cash flow and options for improving short-term and +long-term liquidity. In that December 3 email, Kirchner directed Rodick to quantify UTi’s +“reduction in available cash coupled with quarterly peril regarding covenants” and provide “a clear +path forward.” Kirchner also observed that UTi had $1 billion in outstanding receivables, 20% of +which was past due. Because Kirchner was concerned that UTi’s lenders might not approve an +amendment to its debt covenants in the fourth quarter, Kirchner instructed Rodick to describe “the +liquidity options and contingency plans to fund the company’s cash requirements.” + +6 + + +21. In early December, Rodick met with UTi’s leading lender to request an amendment +to UTi’s loan covenants. The lender agreed to an amendment for the third quarter but indicated +that it would not grant any further amendments. + +22. Rodick circulated his report on UTi’s cash flow problems internally on December +6, 2013. In that report, Rodick identified “1View go-lives” as one of three primary causes of UTi’s +declining cash position. On a slide entitled “How Long Do We Expect to Have Liquidity Issues,” +Rodick stated that “January is historically our best cash collection month,” but he estimated that +liquidity issues would persist for the next 9-12 months, and proposed several ideas for improving +liquidity both short-term and long-term. In detailing the issues with 1View go-lives, Rodick noted +that 1View implementation had caused billing delays and poor billing quality. To underscore his +assertion that “we will have liquidity issues for the next 9-12 months,” Rodick explained that he +did not anticipate a significant profit improvement during the first half of the upcoming fiscal year. + +23. In his internal report on UTi’s cash flow issues, Rodick stated that UTi had failed +its debt covenants for three successive quarters, and that UTi had been notified that it would not +receive any amendment to its debt covenants for the fourth quarter. Rodick noted that these issues +had affected UTi’s access to credit, citing as examples the elimination of UTi’s overdraft facility +by one bank and an $11 million reduction in UTi’s overdraft facility from another. Rodick +identified several liquidity options, including a mandatory convertible debt offering and an equity +offering. UTi ultimately decided not to pursue these options, and instead to pursue other financing +options which included additional receivable and/or inventory sales and new or increased credit +lines. + +24. On December 10, 2013, UTi filed its third quarter Form 10-Q (quarter ended +October 31, 2013). Kirchner and Rodick each signed and certified the report. In its Form 10-Q, +UTi’s financial statements reflected material fluctuations in certain line items relating to liquidity +from the beginning of the fiscal year and compared to the same period of the prior fiscal year. For +example, UTi reported that its cash and cash equivalents had decreased from $237,276,000 for the +period ending January 31, 2013 to $171,220,000 for the period ending October 31, 2013 – a -28% +change in nine months. The $171,220,000 in cash and cash equivalents also represented a 25% +decrease from the $226,993,000 in cash and cash equivalents UTi reported for the same period of +the prior fiscal year. + +25. UTi also reported a trade receivables balance of $1.084 billion third quarter. +Consistent with past practice, the Form 10-Q did not specify the amount of trade receivables that +was unbilled. However, in the monthly reports UTi provided its lenders as a condition of obtaining +amendments to its debt covenants for the second quarter, UTi detailed that the unbilled receivables +amounted to $210 million – nearly 20% of its publicly disclosed trade receivables balance – at the +end of October 2013. + +26. In the Liquidity and Capital Resources section of the MD&A, UTi disclosed that its +operating cash position had declined since the beginning of the fiscal year: “During the first nine +months of fiscal 2014, we used approximately $68.9 million in net cash from operating activities. +This resulted from usages from (i) a net loss of $21.7 million and (ii) an increase in trade + +7 + +receivables and other current assets of $232.4 million . . . .” UTi did not report any of the specific +known 1View billing problems that contributed to these changes. + +27. UTi did discuss the seasonal nature of its business and explained that historically +UTi’s liquidity improved in the second half of the third quarter and in the fourth quarter. + +Our primary sources of liquidity include cash generated from operating activities, which is +subject to seasonal fluctuations, particularly in our Freight Forwarding segment, and +available funds under our various credit facilities. We typically experience increased +activity associated with our peak season, generally during the second and third fiscal +quarters, requiring significant disbursements on behalf of clients. During the second +quarter and the first half of the third quarter, this seasonal growth in client receivables tends +to consume available cash. Historically, the latter portion of the third quarter and the fourth +quarter tend to generate cash recovery as cash collections usually exceed client cash +disbursements. + +Apart from this and other generic discussions of seasonal fluctuations in UTi’s business, no further +explanation was provided for why trade receivables had increased and liquidity had declined. + +28. The only other mention of the U.S. launch of 1View in the MD&A portion of its +Form 10-Q was an acknowledgement that 1View had been deployed in the United States on +September 1, 2013 and was considered “ready for its intended use” as of that date for purposes of +amortization. UTi described 1View as follows: + +Freight Forward Operating System. On September 1, 2013, we deployed our global +freight forwarding operating system in the United States. As of that date, based on a variety +of factors, including but not limited to operational acceptance testing and other operational +milestones having been achieved, we considered it ready for its intended use. Amortization +expense with respect to the system began effective September 2013, and accordingly, we +recorded amortization expense related to the new application of approximately $3.3 million +during the third quarter ended October 31, 2013. + +UTi also noted in the MD&A portion of its Form 10-Q that it had entered into a receivables +purchase agreement with a third party “as an alternative source of short term funding,” but omitted +any discussion of the 1View billing issues. + +UTi Experiences a Liquidity Crisis After Filing its Form 10-Q + +29. UTi obtained a $35 million increase in its credit line from one of its existing lenders +in December 2013. UTi used some of these funds to re-purchase the receivables it had sold in +October to a third party. Rodick was unable to execute his other ideas for improving liquidity, +such as inventory or receivables sales. + +30. Rodick began to observe improved cash receipts in December and January but the +cash inflows were not sufficient to enable UTi to meet its debt covenants at the end of January +because, among other things, UTi had fallen so far behind in its billings. + +8 + + +31. UTi’s management, including Kirchner and Rodick, described the backlog in +receivables as a “bubble.” By the end of January 2014, Rodick estimated that the size of the +“bubble” was $40 million. + +32. By late January, based on preliminary fourth quarter results, it became clear to +Rodick that UTi would again miss its debt covenants. Rodick contacted UTi’s leading lender to +seek an amendment of its debt covenants, but the lender wanted to be paid off and refused to grant +the requested amendment. Rodick immediately advised Kirchner of the lender’s position. Shortly +thereafter, Rodick notified UTi’s auditor that UTi would not meet its debt covenants for the fourth +quarter and would likely not be able to obtain an amendment of those covenants. + +33. In early February 2014, UTi engaged an investment bank to help it raise additional +capital. + +34. On February 26, 2014, UTi filed a Form 8-K which publicly disclosed, for the first +time, details regarding the extent and causes of its liquidity problems. Specifically, UTi disclosed +that the implementation of 1View in the United States caused significant billing issues, “which +have led to higher than normal receivables and weaker cash collections.” It further disclosed that, +due in part to these billing issues and in part to three other major factors including net losses, +capital expenditures and severance expenses, it was unlikely to be in compliance with its debt +covenants for the fourth quarter and had obtained a short-term waiver. UTi also announced an +offering of $350 million in Convertible Senior Notes and a $175 million private placement of +Convertible Preference Shares to address its liquidity and covenant compliance issues. Finally, +UTi reported that, in connection with the re-issuance of UTi’s financial statements as part of the +offering documents for this financing, its independent accountant had amended its audit opinion for +the fiscal year ending January 31, 2013 to include a statement expressing doubt about the +company’s ability to continue as a going concern under its existing capital structure. Following the +8-K filing, the price of UTi’s shares fell to $10.74, down nearly 30% from the prior day’s close of +$15.26. + +35. UTi’s auditor issued the going concern opinion primarily due to the company’s +impending covenant violation. Because UTi had cross default provisions across its debt +agreements, the debt would be immediately classified as current, and if the announced financing +was not completed on schedule, the company would not have sufficient liquidity to repay the debt +in the next 12 months. +VIOLATIONS +36. As a result of the conduct described above, Kirchner and Rodick caused UTi’s +violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13, 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. Additionally, Regulation S-K Item 303 requires +registrants to disclose in the MD&A sections of required periodic filings “any known trends or + +9 + +uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity +increasing or decreasing in any material way.” The MD&A’s failure to comply with Regulation +S-K constitutes a violation under Section 13(a) of the Exchange Act. + +37. Also as a result of the conduct above, Kirchner and Rodick violated Exchange Act +Rule 13a-14, which requires that every Form 10-Q 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, to their knowledge, the Form 10-Q 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. + +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 Kirchner cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-13, and 13a-14, thereunder. + +B. Pursuant to Section 21C of the Exchange Act, Respondent Rodick cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-13, and 13a-14, thereunder. + +C. Respondent Kirchner shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount 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). +Respondent Rodick shall, within 30 days of the entry of this Order, pay a civil money penalty in the +amount 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). 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: + + +10 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Eric W. +Kirchner and Richard G. Rodick as a Respondents in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to John W. +Berry, Associate Director, Division of Enforcement, Securities and Exchange Commission, 444 S. +Flower Street, Los Angeles, CA 90071. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondents agree that they shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Securities and Exchange Commission. Such a payment shall not be deemed an additional civil +penalty and shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a private damages +action brought against Respondents by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3878.pdf b/raw/aaer/2017/AAER-3878.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c6484da02a37374393452cbed1d370d2b4a3b11d Binary files /dev/null and b/raw/aaer/2017/AAER-3878.pdf differ diff --git a/raw/aaer/2017/AAER-3878.txt b/raw/aaer/2017/AAER-3878.txt new file mode 100644 index 0000000000000000000000000000000000000000..1fb3a7f4dc955e669d88f6fdb2ddc23cc6e3bd9c --- /dev/null +++ b/raw/aaer/2017/AAER-3878.txt @@ -0,0 +1,61 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80949 / June 15, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3878 / June 15, 2017 + +Admin. Proc. File No. 3-17228 + + +In the Matter of + +MICHELLE L. HELTERBRAN COCHRAN, CPA, and +SUSAN A. CISNEROS + + + + +NOTICE THAT INITIAL DECISION HAS BECOME FINAL + + The time for filing a petition for review of the initial decision in this proceeding has +expired. No such petition has been filed by Michelle L. Helterbran Cochran, CPA, or Susan A. +Cisneros and the Commission has not chosen to review the decision on its own initiative. + + Accordingly, notice is hereby given, pursuant to Rule 360(d) of the Commission's Rules +of Practice,1 that the initial decision of the administrative law judge has become the final +decision of the Commission with respect to Michelle L. Helterbran Cochran, CPA, and Susan A. +Cisneros.2 The orders contained in that decision are hereby declared effective. The initial +decision ordered: a) pursuant to Section 21C of the Securities Exchange Act of 1934, that Michelle +L. Helterbran Cochran, CPA, and Susan A. Cisneros shall cease and desist from causing any +violations or future violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules +13a-1 and 13a-13 thereunder, and of Rule 2-02(b)(1) of Regulation S-X; b) pursuant to Section 4C of +the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of +Practice, that Respondent Michelle L. Helterbran Cochran, CPA, is denied the privilege of appearing +or practicing before the Commission as an accountant; provided, however, that Respondent Michelle +L. Helterbran Cochran, CPA, may reapply to the Commission for permission to appear or practice +before it after five years; c) pursuant to Section 4C of the Securities Exchange Act of 1934, that +Respondent Susan A. Cisneros is denied the privilege of appearing or practicing before the +Commission as an accountant for one year; d) pursuant to Section 21B of the Securities Exchange + +1 17 C.F.R. § 201.360(d). +2 David S. Hall, P.C. d/b/a The Hall Group CPAs, David S. Hall, CPA, Michelle L. Helterbran +Cochran, CPA, and Susan A. Cisneros, Initial Decision Release No. 1114 (Mar. 7, 2017), 116 SEC +Docket 05, 2017 WL 894965. +2 + +Act of 1934, that Respondent Michelle L. Helterbran Cochran, CPA, shall pay a civil money penalty +of $22,500; and e) pursuant to Section 21B of the Securities Exchange Act of 1934, that Susan A. +Cisneros shall pay a civil money penalty of $10,000. + + For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3879.txt b/raw/aaer/2017/AAER-3879.txt new file mode 100644 index 0000000000000000000000000000000000000000..71c6455597439dd210757a43573778e8bfb02ebb --- /dev/null +++ b/raw/aaer/2017/AAER-3879.txt @@ -0,0 +1,111 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10371 / June 19, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80963 / June 19, 2017 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4717 / June 19, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3879 + +ADMINISTRATIVE PROCEEDING +File No. 3-18036 + +In the Matter of +MARK C. NORTHROP, CPA, +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Mark C. +Northrop (“Respondent” or “Northrop”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Respondent, age 67, has been a licensed certified public accountant since April 26, +1983. Respondent maintains and exercises ultimate authority over Kingdom Legacy General +Partner, LLC (“KLGP”). Since at least December 2010, Northrop and KLGP wer e unregistered +investment advisers to Kingdom Legacy Fund (“KLF”) and the various interests offered in KLF, +known as the “Kingdom Share Classes.” + +2. On June 6, 2017, a final judgment was entered by consent against Respondent, +permanently enjoining him from future violations of Sections 5(a), 5(c), and 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), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8(a) thereunder, in +the civil action entitled Securities and Exchange Commission v. Kingdom Legacy General +Partner, LLC, et al., Case No. 16-cv-00441-SPC-MRM, in the United States District Court for +the Middle District of Florida. Respondent was also ordered to pay $3,315,727.64 million in +disgorgement, $515,188.59 in prejudgment interest, and a $320,000 civil penalty, jointly and +severally with KLGP. + +3. The Commission’s Amended Complaint alleged that between December 2010 and +September 2015, Northrop and his alter-ego, KLGP, conducted an offering fraud in which +Northrop and KLGP secretly charged KLF investors undisclosed fees of either 40% or 50% of +the trading profits over-and-above the disclosed fees. As a result of this conduct, Northrop, +KLGP, and other Northrop-controlled entities obtained more than $3 million to which they were +not entitled. The Amended Complaint also alleges KLGP and Northrop made other material +misrepresentations to investors, falsely claiming that (a) Northrop had a long-standing successful +investing track record, (b) Northrop’s family was the largest investor in KLF, and (c) the +Northrop family only made money when investors made money. + +the violation of any provision of the Federal securities laws or of the rules and regulations +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 Northrop’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Northrop is suspended +from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3880.txt b/raw/aaer/2017/AAER-3880.txt new file mode 100644 index 0000000000000000000000000000000000000000..83d05424b9f534e9c2e1b9e86f46c3a762a8a802 --- /dev/null +++ b/raw/aaer/2017/AAER-3880.txt @@ -0,0 +1,123 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80991 / June 21, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3880 / June 21, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18039 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + CHRISTOPHER K. BRENNER, : 102(e) OF THE COMMISSION’S RULES OF + Esq. (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 +Christopher K. Brenner (“Respondent” or “Brenner”) 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 attorney [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 or aiding and abetting the violation of any provision of the +Federal securities laws or of the rules and regulations thereunder; or (B) Found by any +court of competent jurisdiction in an action brought by the Commission to which he or +she is a party to have violated (unless the violation was found not to have been willful) or +aided and abetted the violation of any provision of the Federal securities laws or of the +rules and regulations thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Brenner, age 57, is a resident of Katy, Texas. Brenner is an attorney licensed to +practice law in Texas and in Colorado and he maintains a law practice in both states. Brenner is +also a certified public accountant licensed to practice in Texas. From approximately November +2002 through October 2003, Brenner served as General Counsel and Chief Financial Officer for +Usurf America Inc., a public company that traded on the American Stock Exchange and later on +the OTC Bulletin Board. In June 2009, the Colorado Division of Securities enjoined Brenner for +violations of the registration requirements of the Colorado Securities Act in connection with his +involvement in a private offering of securities conducted by Equity Edge Companies LLC, an +investment company for whom Brenner served as outside counsel and Chief Financial Officer. + + 2. On May 13, 2016, the Commission filed a complaint against Brenner in SEC v. +Rust, et al. (Civil Action No. 1:16CV03573), in the United States District Court for the Southern +District of New York. On June 9, 2017, the court entered a judgment permanently enjoining +Brenner, by consent, from future violations of Section 10(b) of the Securities Exchange Act of 1934 +and Rule 10b-5 thereunder. + +3. The Commission’s complaint alleged, among other things, that from September +2011 through March 2012, Brenner knowingly made material misrepresentations and omissions to +individuals and businesses by misleading them about the use of their funds to purchase securities, +ostensibly for the purpose of obtaining commercial loans through an entity called Atlantic Rim +Funding Corp. (“Atlantic”). The Commission further alleged that Brenner claimed to these +individuals and businesses that Atlantic could arrange commercial loans for them if they deposited +cash amounting to 10% of the anticipated loans with him, in his capacity as escrow agent and +pursuant to written escrow agreements he authored. According to the Commission’s complaint, +Brenner knowingly misled these individuals and businesses into believing that he would use their +money to buy liquid, “government-backed” securities that Atlantic would leverage in order to fund +a loan. Brenner, the Commission alleged, assured them that if Atlantic did not procure the loans +within an agreed-upon time, they would receive their cash back promptly and, upon successful +closing of the loans, they would receive their cash back, together with the loan proceeds. The + 3 +Complaint alleged that the governing escrow agreements provided for only nominal compensation +to Brenner for transferring their funds as needed. However, the Commission alleged, Brenner’s +representations and assurances were knowingly false. The Commission alleged that Brenner did +not intend to use, and did not use, his clients’ funds to purchase liquid or “government-backed” +securities and to take only the nominal fees set out in the escrow agreements, but, rather: (1) +siphoned off escrow funds as payments to himself, Atlantic, and others; and (2) with the remainder, +purchased volatile, illiquid securities derivatives that lacked any meaningful government +guarantee. Atlantic, meanwhile, the Commission alleged, failed to arrange any loans for any of +these individuals and businesses, as Brenner knew during the relevant period. Nonetheless, the +Complaint alleged, between September 2011 and July 2012, Brenner diverted to himself at least +$105,000 of his escrow client funds to himself, and at least an additional $490,000 of those funds +to Atlantic and its associates. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Brenner’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + + Brenner is suspended from appearing or practicing before the Commission as an attorney +or accountant. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3881.txt b/raw/aaer/2017/AAER-3881.txt new file mode 100644 index 0000000000000000000000000000000000000000..e48c53cf82e17aa7145ffe2c1dc85a16d98c3b19 --- /dev/null +++ b/raw/aaer/2017/AAER-3881.txt @@ -0,0 +1,1377 @@ + + + + + + + + + + + + + + + + SEC.gov | Jay Mac Rust and Christopher K. Brenner + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/519826","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Brenner + + + + + + + + + + + + Jay Mac Rust and Christopher K. Brenner + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 23865 / June 21, 2017 + + Accounting and Auditing Enforcement Release No. 3881 / June 21, 2017 + + Securities and Exchange Commission v. Jay Mac Rust and Christopher K. Brenner, No. 16-cv-03573 (S.D.N.Y. filed May 13, 2016) + + SEC Obtains Judgment Against Attorney Who Defrauded Escrow Clients + + + + + The Securities and Exchange Commission obtained a partial judgment against Christopher K. Brenner, an attorney licensed to practice in Colorado and Texas. + + The partial judgment, entered on June 9, 2017 by the Honorable Edgardo Ramos of the U.S. District Court for the Southern District of New York, permanently enjoins Brenner from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, orders that disgorgement, pre-judgment interest and a civil money penalty be imposed, and defers the determination of the amounts of such relief until a later date. Brenner also has consented to the entry of an SEC order, based on the court's entry of judgment, permanently suspending him from appearing and practicing before the SEC as an attorney. The order prohibits Brenner from representing clients in SEC matters, including investigations, litigation, or examinations, and from advising clients about SEC filing obligations or content. Brenner consented to the judgment and order and neither admitted nor denied the allegations in the complaint or the findings in the order. + + The SEC charged Brenner and his co-defendant, Jay Mac Rust, with fraud for making undisclosed risky investments and in some instances outright stealing money they obtained in escrow accounts from small business owners seeking commercial loans. The SEC's litigation against Rust continues. + + The examination that uncovered the misconduct was conducted by broker-dealer examiners in the New York office. The ensuing investigation was conducted by Daphna A. Waxman, Tuongvy T. Le, and Valerie A. Szczepanik. The litigation is being led by Richard G. Primoff, and the case is being supervised by Lara S. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2017/AAER-3883.txt b/raw/aaer/2017/AAER-3883.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2843b352ed120563a9299d0395d117eb0bc75c7 --- /dev/null +++ b/raw/aaer/2017/AAER-3883.txt @@ -0,0 +1,635 @@ +1 + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81173 / July 19, 2017 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4731 / July 19, 2017 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 32737 / July 19, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3883 / July 19, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18071 + + + +In the Matter of + +ENVISO CAPITAL, LLC, +RYAN BOWERS, and +JEFFREY LaBERGE, CPA + +Respondents. + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS, +PURSUANT TO SECTIONS 4C AND 15(b) 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) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS AND +CEASE-AND-DESIST ORDERS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) against Enviso Capital, LLC (“Enviso Capital”); Section 15(b) of the Securities +Exchange Act of 1934 (“Exchange Act”), Sections 203(f) and 203(k) of the Advisers Act, and +Section 9(b) of the Investment Company Act of 1940 (“Investment Company Act”) against Ryan +Bowers (“Bowers”); and Sections 4C1 and 15(b) of the Exchange Act, Sections 203(f) and 203(k) + +1 Section 4C provides, in relevant part, that: + +2 + +of the Advisers Act, Section 9(b) of the Investment Company Act, and Rule 102(e)(1)(iii)2 of the +Commission’s Rules of Practice against Jeffrey LaBerge (“LaBerge,” and collectively with Enviso +Capital and Bowers, “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 +Respondents Bowers and LaBerge, Respondents consent to the entry of this Order Instituting +Administrative and Cease-and-Desist Proceedings, Pursuant to Sections 4C and 15(b) 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) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and +Cease-and-Desist Orders (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +Summary + +From 2012 through 2014 (the “Relevant Period”), Enviso Capital and two of its principals, +Bowers and LaBerge, materially overstated the value of two private funds advised by Enviso +Capital in financial statements sent to fund investors. In one case, Enviso Capital overvalued the +fund’s primary asset – private company Bluefin Renewable Energy, LLC (“Bluefin”), by failing to + + +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 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 + +use reasonable assumptions regarding projected revenues. In the other, Enviso Capital failed to +properly value a loan despite the fact that it was probable that the full outstanding amount would +never be collected. In addition, due to the problems with the Bluefin valuation and the failure to +properly value a loan from one of the private funds to the other, the funds’ financial statements +were not prepared in accordance with Generally Accepted Accounting Principles (“GAAP”), +which resulted in Enviso Capital violating the custody rule. Moreover, Enviso Capital made +several misrepresentations regarding Bluefin’s progress toward developing a renewable energy +project in management discussion and analyses (“MD&As”) sent to fund investors. LaBerge, a +Principal of Enviso Capital, had a primary role in formulating the valuations and disclosures, +which were then approved by Bowers,Enviso Capital’s Managing Principal. Enviso Capital also +falsely disclaimed having custody of client assets in Form ADV filings that Bowers executed. +Finally, Bowers failed to timely conduct annual reviews of Enviso Capital’s compliance program. + +Respondents + +1. Enviso Capital, LLC is a California limited liability company organized on +January 1, 2006, and headquartered in San Diego, California. It registered with the Commission as +an investment adviser on October 5, 2006, and had assets under management of $144 million as of +November 14, 2016. In the fourth quarter of 2016, Enviso Capital transitioned management of its +separately managed account business to an unaffiliated investment adviser and, on December 22, +2016, Enviso Capital withdrew its registration as an investment adviser with the Commission +because it no longer met eligibility requirements based on assets under management. Enviso +Capital currently files certain reports as an exempt reporting adviser under California law on Form +ADV. Enviso, LLC, a private company, wholly-owns Enviso Capital. In addition to managing +separate accounts, during the Relevant Period Enviso Capital served as the investment adviser to +three private funds, including two relevant here: the Heritage Opportunity Fund, LLC (“HOF”) and +the Heritage Dividend Fund, LLC (“HDF”). Enviso Equity, LLC, another wholly-owned +subsidiary of Enviso, LLC, served as the managing member of the private funds. Enviso Capital +assesses fees based on assets under management, and, depending on the managed fund, +performance-based fees or overhead fees. + +2. Ryan Bowers, age 42, is a resident of San Diego, California. Bowers has served as +Enviso Capital’s Managing Principal and Chief Compliance Officer since its inception; during the +Relevant Period, his responsibilities included portfolio management for Enviso Capital’s separately +managed account business and managed private funds. He previously held Series 7 and 66 +licenses and holds a CFP designation. During the Relevant Period, Bowers owned 55% of Enviso, +LLC, and served as a director of Bluefin. From 2009 through 2013, Bowers was a registered +representative associated with WFG Investments, Inc. (“WFG”), which was then a dually +registered broker-dealer and investment adviser. On September 10, 2015, without admitting the +charges against him, Bowers entered into a settlement with FINRA for violating FINRA Rule +2010. Bowers agreed to a $25,000 penalty and a five-month suspension from association with any +FINRA member firm in all capacities. + +4 + +3. Jeffrey LaBerge, age 37, is a resident of San Diego, California. LaBerge has +served as Enviso Capital’s Principal since 2007. During the Relevant Period, his responsibilities +included portfolio management for Enviso Capital’s separately managed account business and +managed private funds, as well as formulating valuations. He holds CFA and CFP designations, +held Series 7 and 66 licenses, and is a licensed CPA in California. LaBerge owns approximately +4% of Enviso, LLC and was a registered representative associated with WFG from 2009 through +2013. From 2010 to 2015, LaBerge also served as a director of Bluefin. + +Other Relevant Entities + +4. Heritage Opportunity Fund, LLC (“HOF”), a Delaware limited liability +company, was organized on April 5, 2007. Enviso Capital served as the investment adviser to +HOF, a private fund, that it sold to its individual clients from 2007 to 2011 with an investment +objective of long-term capital appreciation. HOF raised a total of $10 million of in-kind securities +and cash contributions from approximately 73 investors. HOF became insolvent in 2014 and +dissolved in 2015. + +5. Heritage Dividend Fund, LLC (“HDF”), a Delaware limited liability company, +was organized on December 17, 2007. Enviso Capital served as the investment adviser to HDF, a +private fund, that it sold to its individual clients primarily from 2008 through 2010 with an +investment objective of acquiring dividend-oriented and high-income generating investments, +raising a total of $15 million from approximately 98 investors. Enviso Capital is in the process of +winding down HDF. + +6. Bluefin Renewable Energy, LLC (“Bluefin”), a private California limited liability +company, was organized on May 10, 2013 to succeed to the business of BioGold Fuels +Corporation (collectively referred to herein as “Bluefin”), previously a public renewable energy +company. HOF and HDF each owned interests in Bluefin until December 2014 when Bluefin was +written down to zero. + +Background + +Bluefin’s Tecate Project and HDF’s Line of Credit Asset + +7. HOF and HDF each held interests in Bluefin. Bluefin accounted for the majority of +HOF’s total assets during the relevant period – between 51% and 88% – but was a smaller portion +of HDF’s holdings – between 11% and 17% of HDF’s total assets. Both Bowers and LaBerge +took an active role in Bluefin’s business and served as board members. Between 2011 and 2014, +Bluefin had only one asset: a renewable energy project under development in Tecate, Mexico (the +“Tecate Project”). Bluefin never reached certain milestones necessary to building the Tecate +Project, such as obtaining financing or potential customers. + +8. In addition to its ownership interest in Bluefin, HDF also issued a loan to HOF +through a line of credit that was secured by HOF’s assets, which were primarily HOF’s holdings in +5 + +Bluefin. The line of credit was issued in September 2008 for $1,500,000 with a maturity date of +December 31, 2010. The maximum loan amount was increased three times and the maturity date +was extended four times. As of December 31, 2014, HOF owed HDF $6,092,962 in principal and +accrued interest on the loan. HOF never made, and did not have liquid assets to make, any +payments on the loan. + +9. Enviso Capital, as investment adviser to HOF and HDF, determined Bluefin’s +valuation for purposes of (i) HOF’s and HDF’s financial statements, which were sent to fund +investors, and (ii) calculating its investment advisory fee, which was based on the net value of +assets under management. LaBerge calculated the valuations, and Bowers approved them. +Notwithstanding the fact that the Tecate Project had not yet started construction, obtained +financing or potential customers, the Respondents represented to fund investors in financial +statements for the years ending December 31, 2011 through December 31, 2013, that Bluefin was +worth between $10.8 and $12.7 million. As of December 31, 2014, the Bluefin investment was +written down to zero. Similarly, despite HOF’s inability to make payments on HDF’s outstanding +loan, from 2011 through December 31, 2014, Respondents never wrote down the value of the loan. +In 2015, Enviso Capital wrote off the entire value of the HDF loan as uncollectible while preparing +the 2014 financial statements. + +10. During the Relevant Period, Enviso Capital elected to accrue but not collect any +investment advisory fees from HOF or HDF. Subsequently, Enviso Capital wrote off all related +accrued investment advisory fees. + +Bluefin Valuations Used Unreasonable Assumptions + +11. Financial Accounting Standards Board Accounting Standards Codification Topic +820 (“ASC 820”) defines “fair value” and establishes a framework for measuring fair value in +accordance with GAAP. ASC 820-10-35-9A defines fair value as the price that would be received +to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most +advantageous) market at the measurement date under current market conditions (that is, an exit +price) regardless of whether that price is directly observable or estimated using another valuation +technique. ASC 820-10-05-1B 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. + +12. ASC 820-10-55-3A through G outline three broad approaches to measure fair value +– the market approach, income approach, and cost approach – and state that valuation techniques +consistent with these three approaches shall be used to measure fair value. 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 obtain the present value of future cash flows. Lastly, the cost +approach is based on the amount that currently would be required to replace the assets in service +(i.e., current replacement cost). + +6 + +13. Under each fund’s valuation policy, interests in fund portfolio companies without +readily available market quotations would be valued in good faith by the investment adviser. Both +funds issued audited financial statements describing that “Management is responsible for the +preparation and fair presentation of these financial statements in accordance with accounting +principles generally accepted in the United States of America . . . .” From 2011 through 2013, the +funds’ audited financial statements disclosed that the valuation of certain securities may be based +on discounted cash flows from projected income and Bluefin was specifically identified as valued +under this approach. + +14. The discounted cash flow method, which Enviso Capital applied to value Bluefin +from 2011 through 2013, is a recognized valuation technique under the income approach to value +an investment. The method entails projecting expected future economic benefits (net cash flow) +and discounting each expected benefit back to present value at an appropriate risk adjusted rate of +return. In using the discounted cash flow methodology – which at its core entails projecting cash +flow – reasonable assumptions and estimations of future cash flows must be used. + +15. Enviso Capital did not use reasonable assumptions or estimations of future cash +flows in calculating Bluefin’s valuation for years ending 2011 through 2013. The table below +illustrates some of the assumptions used and the resulting valuations. + +Valuation +Period +Year 1 Net +Income +Year 5 Net +Income +Energy +Sold +Operational Date Discount +Rate +Bluefin +Valuation +12/31/2011 $3,880,000 $2,334,000 68 MWs Mid-2014 30% $10,835,116 +12/31/2012 $713,000 $2,776,000 61 MWs Early to Mid-2015 22.5% $13,901,936 +12/31/2013 -$25,000 $2,946,500 65 MWs Early to Mid-2016 25% $12,738,260 + +16. Three primary facts made Enviso Capital’s assumptions unreasonable: (1) as +opposed to being in an operational state, no construction ever commenced for the Tecate Project, +(2) neither equity nor debt financing had been obtained to construct the more than $200 million +project, and (3) no contracts had been entered into with any potential purchasers of energy in order +to obtain revenue from the project. + +17. While Bluefin tried to obtain financing and enter into contracts for the sale of +energy, its efforts were ultimately unsuccessful. Despite this fact, LaBerge produced multiple +valuations that unreasonably assumed significant amounts of energy would be sold within 24 to 30 +months. Bowers then approved the valuations. At least as early as January 2012, Bowers and +LaBerge were aware that the Commission’s examination staff had concerns about the assumptions +underlying the discounted cash flow method used to value Bluefin. Specifically, the Commission’s +staff sent Bowers, as CEO of Enviso Capital, a deficiency letter on January 19, 2012 regarding the +results of an investment adviser examination. In the letter, the examination staff expressed +concerns regarding certain revenue assumptions underlying the discounted cash flow method to +7 + +value two alternative energy plants that preceded the Tecate Project. The letter further noted that +unreasonable assumptions regarding revenue projections may have been used in 2010.4 + +18. Bluefin’s valuation had a material impact on HOF’s reported net asset value, +comprising 81%, 155%, and 247% of its net assets (51%, 78%, and 88% of total assets) from 2011 +to 2013, respectively. Bluefin was a comparatively smaller holding for HDF, comprising +approximately 11%, 14%, and 17% of its net (and total) assets. The unreasonable assumptions +used by Respondents resulted in valuations inconsistent with ASC 820 and caused large +overstatements in HOF’s value and, to a lesser extent, HDF’s value. In addition, Bluefin’s +valuation did not reflect the current sales or exit prices of the investment at the times of the +valuations. These valuations were included in the funds’ audited financial statements and, in some +cases, in the MD&As that were sent to fund investors who were also separate clients of Enviso +Capital. Because Bluefin’s valuations were not conducted consistent with the applicable +accounting standards, the HOF financial statements were not prepared in accordance with GAAP. + +Failure to Properly Value HDF’s Loans to HOF + +19. Accounting Standards Codification Topic 946-310-45-1 (“ASC 946”) provides that +receivables, including receivables from related parties shall be listed at net realizable value. HDF +was an investment company as defined by ASC 946, and therefore should have carried its loan to +HOF at net realizable value. + +20. HDF’s loan to HOF, which was secured by HOF’s assets, was one of HDF’s largest +assets. Specifically, the loan comprised 28%, 36%, and 41% of HDF’s net assets (25%, 35%, and +40% of total assets) from 2011 to 2013. When combined with HDF’s holdings in Bluefin, the two +assets comprised 39%, 50%, and 58% of HDF’s net assets. + +21. During the Relevant Period, HOF’s financial position was sufficiently precarious +that it could not satisfy its management fee liabilities to Enviso Capital, its loan liabilities to HDF, +or HOF investor redemption requests. Several extensions to the line of credit were granted due to +the fact that HOF would not be able to repay the loan in accordance with the terms on the +agreements between the funds on the date it was due. Yet, despite the numerous draws on the line +of credit increasing the amounts due to HDF, and the several extensions granted, Enviso Capital +never recognized any impairments on the loan until it deemed the loan worthless subsequent to +December 31, 2014. LaBerge and Bowers were responsible for accounting for HDF’s loan. Given +the circumstances, it was probable that HDF would be unable to collect the monies owed pursuant +to the loan and, accordingly, Enviso Capital should have reduced its carrying amount of the loan to +its net realizable value. The stated value of the HDF loan was inconsistent with ASC 946, and +overstated HDF’s net asset value, which was disclosed in the 2011 through 2013 annual audited +financial statements sent to fund investors, who were also separate clients of Enviso Capital. + +4 Although Respondents continued to value Bluefin on their own using the discounted cash flow method, the +auditor chose to engage a valuation specialist. +8 + +Because the HDF loan was recorded in a manner inconsistent with the applicable accounting +standards, the HDF financial statements were not prepared in accordance with GAAP. + +Misrepresentations in Management Discussion and Analyses + +22. Enviso Capital sent MD&As and other communications to fund investors from +2012 to 2014. The MD&As for fiscal years ended 2011 and 2012 misrepresented the nature of +Bluefin’s relationship with a Mexican company as a partnership, even though the contractual +relationship that existed at the time was not a legal partnership. This relationship was important +because the Mexican company had acquired land and certain permits upon which the Tecate +Project was based. Without an actual legal partnership, Bluefin had no legal claim to these assets. +Yet, Enviso Capital touted the Mexican company’s land and permits when describing Bluefin’s +achievements. + +23. Enviso Capital also misrepresented Bluefin’s progress in securing debt financing +for the Tecate Project. In 2013, Enviso Capital disclosed that financing would be secured in the +next few quarters and that Bluefin anticipated beginning construction soon thereafter. In 2014, +Enviso Capital disclosed that Bluefin had obtained a letter of intent from a large development bank +to provide debt financing, which was not true. However, the Tecate Project was never near +securing debt or equity financing much less securing the funding within the time represented. +Bowers and LaBerge were responsible for the statements contained in the MD&As, and were both +aware of the state of Bluefin’s business. + +Failures to Timely Perform Annual Compliance Reviews + +24. Enviso Capital failed to timely perform annual reviews of its compliance program +for calendar years 2011 and 2013. Enviso Capital’s compliance policies tasked Bowers as +responsible for ensuring that the annual reviews were timely conducted. + +Custody Rule Violations + +25. In 2012 and 2013, Enviso Capital was a registered investment adviser subject to the +custody rule promulgated under Section 206(4) of the Advisers Act and set forth as Rule 206(4)-2 +thereunder. Paragraph (a)(4) of the custody rule requires investment advisers with custody of +client funds or securities to submit to surprise examinations conducted by an independent public +accountant at least once every calendar year. Enviso Capital did not comply with this requirement +in 2012 or 2013, because it intended to rely on paragraph (b)(4) of the custody rule which provides +an exception from the surprise examination requirement for pooled investment vehicles that, +among other things, distribute to their investors annual audited financial statements prepared in +accordance with GAAP. Because Enviso Capital distributed to HOF and HDF investors financial +statements that were not prepared in accordance with GAAP, this exception did not apply. + + + +9 + +Enviso Capital’s Forms ADV + +26. Enviso Capital disclosed in Forms ADV filed with the Commission that it did not +have custody of client funds or securities. This statement was false because a related party, Enviso +Equity, LLC, acted as the managing member of HOF and HDF. Item 9 of Enviso Capital’s Forms +ADV, Part 1 filed on February 1, 2010, March 17, 2010, March 29, 2011, June 1, 2011, June 23, +2011, March 30, 2012, May 16, 2012, and March 19, 2013, each included this false disclosure. +Bowers reviewed and executed each of the Forms ADV. + +Violations + +27. As a result of the conduct described above, Respondents willfully5 violated Section +206(2) of the Advisers Act, which prohibits fraudulent conduct by an investment adviser. + +28. As a result of the conduct described above, Respondents willfully violated Section +206(4) of the Advisers Act and Rule 206(4)-8 thereunder which makes it unlawful for any +investment adviser to a pooled investment vehicle to “[m]ake any untrue statement of a material +fact or omit to state a material fact necessary to make the statements made, in the light of the +circumstances under which they were made, not misleading, to any investor or prospective investor +in the pooled investment vehicle” or “engage in any act, practice, or course of business that is +fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the +pooled investment vehicle.” + +29. As a result of the conduct described above, Enviso Capital willfully violated, and +Bowers and LaBerge caused Enviso Capital’s violations of, Section 206(4) of the Advisers Act and +Rule 206(4)-2, the custody rule, promulgated thereunder. The custody rule imposes specific +requirements on registered advisers who have custody of client funds and securities. Enviso +Capital had custody of client funds and securities within the meaning of the rule. Among other +things, the custody rule generally requires that client assets be maintained with a qualified +custodian, who must provide account statements to the investors at least quarterly, and requires +client assets to be verified through an annual surprise examination by an independent public +accountant. Rule 206(4)-2(b)(4) provides an exception to these requirements with respect to +certain pooled investment vehicles. This exception, upon which Enviso Capital purported to rely, +requires audited financial statements prepared in accordance with GAAP to be distributed to +investors within 120 days of the end of the vehicle’s fiscal year. As a result of the conduct +described above, the financial statements of HOF and HDF for fiscal years 2012 through 2013 +were not prepared in accordance with GAAP. + + +5 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 + +30. As a result of the conduct described above, Enviso Capital willfully violated, and +Bowers caused its violation of, Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder +which require, among other things, that a registered investment adviser review, no less frequently +than annually, the adequacy of the policies and procedures. + +31. As a result of the conduct described above, Enviso Capital and Bowers willfully +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.” +Findings + +32. Based on the foregoing, the Commission finds that LaBerge (a) willfully violated +Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offers. + + Accordingly, pursuant to Sections 4C and 15(b)(6) of the Exchange Act, Sections 203(e), +203(f) and 203(k) of the Advisers Act, Section 9(b) of the Investment Company Act, and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice, it is hereby ORDERED that: + +A. Respondents Enviso Capital and Bowers cease and desist from committing or +causing any violations and any future violations of Sections 206(2), 206(4), and 207 of the Advisers +Act and Rules 206(4)-2, 206(4)-7, and 206(4)-8 promulgated thereunder. + +B. Respondent Enviso Capital is censured. + +C. Respondent LaBerge cease and desist from committing or causing any violations +and any future violations of Sections 206(2) and 206(4) of the Advisers Act and Rules 206(4)-2 and +206(4)-8 promulgated thereunder. + +D. Respondents Bowers and LaBerge shall be, and hereby are: + +barred from association with any broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization; and + +prohibited from serving or acting as an employee, officer, director, member +of an advisory board, investment adviser or depositor of, or principal +underwriter for, a registered investment company or affiliated person of +such investment adviser, depositor, or principal underwriter; +11 + + +with the right to reapply for reentry after two (2) years to the appropriate self- +regulatory organization, or if there is none, to the Commission. + +E. Any reapplication for association by Respondents Bowers or LaBerge 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 Respondents Bowers or LaBerge, 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 +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 served as the basis for the Commission order. + +F. Respondent LaBerge is denied the privilege of appearing or practicing before the +Commission as an accountant. + +G. After two (2) years from the date of this order, Respondent LaBerge may request +that the Commission consider his reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Exchange Act). Such an +application must satisfy the Commission that Respondent LaBerge’s work +in his practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + +12 + +(a) Respondent LaBerge, 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 LaBerge, 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 LaBerge will not receive appropriate supervision; +(c) Respondent LaBerge 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 LaBerge acknowledges his responsibility, as long as +he appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and the +Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control +standards. + +H. The Commission will consider an application by Respondent LaBerge 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 LaBerge’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates good +cause will be considered on a facts and circumstances basis with due regard for protecting the +integrity of the Commission’s processes. + +I. Respondents Enviso Capital, Bowers, and LaBerge shall each, within 30 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. + +J. Payments must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +13 + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to C. Dabney O’Riordan, Co-Chief, Asset +Management Unit, Division of Enforcement, Securities and Exchange Commission, 444 S. Flower +Street, 9th Floor, Los Angeles, California 90071. + +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 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 +Respondents Bowers and LaBerge, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondents Bowers or LaBerge 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 Bowers or LaBerge of the federal +securities laws or any regulation or order issued under such laws, as set forth in Section 523(a)(19) +of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3885.txt b/raw/aaer/2017/AAER-3885.txt new file mode 100644 index 0000000000000000000000000000000000000000..af0fd7573a5878a8250b10712d9fd4ccd863c98f --- /dev/null +++ b/raw/aaer/2017/AAER-3885.txt @@ -0,0 +1,130 @@ + + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4735 / July 28, 2017 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 32765 / July 28, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3885 / July 28, 2017 + +Admin. Proc. File No. 3-16462 + + +In the Matter of + +LYNN TILTON; PATRIARCH PARTNERS, LLC; +PATRIARCH PARTNERS VIII, LLC; +PATRIARCH PARTNERS XIV, LLC; AND +PATRIARCH PARTNERS XV, LLC + + + + + + + + + +ORDER DENYING MOTION TO STAY ADMINISTRATIVE PROCEEDING +Lynn Tilton, Patriarch Partners, LLC, Patriarch Partners VIII, LLC, Patriarch Partners +XIV, LLC, and Patriarch Partners XV, LLC (“Respondents”) seek a stay of this administrative +proceeding pending the resolution by the federal courts of the question of whether Commission +administrative law judges are inferior officers rather than employees for the purposes of the +Appointments Clause of Article II of the U.S. Constitution. In Bandimere v. SEC, the Tenth +Circuit granted a petition for review on the ground that Commission administrative law judges +are inferior officers subject to the Appointments Clause.1 In Raymond J. Lucia Co., Inc. v. SEC, +the D.C. Circuit dismissed a petition for review that raised the same question.2 Respondents +predicate their claim for a stay on the ground that “it appears inevitable that the U.S. Supreme +Court will now grant certiorari in Lucia or Bandimere” given these inconsistent decisions. The +Division of Enforcement opposes Respondents’ request. Respondents’ motion is denied. + +1 844 F.3d 1168, 1181 (10th Cir. 2017). +2 No. 15-1345, 2017 WL 2727019, at *1 (D.C. Cir. June 26, 2017) (en banc) (per curiam). +2 + +Analysis +We construe Respondents’ motion as a request for a postponement or adjournment under +Rule of Practice 161, which governs “all motions or requests” for extensions of time limits or +postponements.3 We “strongly disfavor[]”requests for postponement of an administrative +proceeding unless the “requesting party makes a strong showing” that denial would +“substantially prejudice [his] case.”4 A pending judicial appeal—particularly an appeal to which +the Respondents are not a party—is generally “an insufficient basis upon which to prolong a +Commission proceeding.”5 Here, the hearing has already taken place, and the parties are +awaiting an initial decision. Respondents have not made the requisite showing under Rule 161. +We disagree with Respondents that it would be “unfair and inefficient for this +administrative proceeding . . . to proceed to an initial decision” before the Lucia and Bandimere +appeals are resolved. En banc review in both cases has concluded. And Respondents’ claims of +Supreme Court review are purely speculative at this time. +Although we recently stayed, sua sponte, all administrative proceedings in which a +respondent had the option of appealing to the Court of Appeals for the Tenth Circuit in light of +that circuit’s denial of rehearing in Bandimere,6 that order does not apply to Respondents +because, as they concede, they cannot appeal any potentially adverse Commission order to the +Tenth Circuit. And, as explained in the government’s April 24, 2017 brief in Lucia,7 we +respectfully disagree with the Bandimere panel decision, including its reading of Freytag v. +Commissioner,8 and accordingly decline to follow the Bandimere decision here.9 +In support of their motion, Respondents cite Michael S. Steinberg,10 where we +“postponed” briefing by the parties under what Respondents claim were similar “circumstances +. . . pending final resolution of a significant legal issue in the federal courts that would ‘likely +impact’” the case. But in Steinberg, Steinberg’s criminal conviction formed the basis for the +administrative proceeding, that conviction was appealable to the Second Circuit, and the Second +Circuit had issued a panel decision in another case that if not vacated or modified would entitle + +3 17 C.F.R. § 201.161(b)(1); Christopher M. Gibson, Exchange Act Release No. 80509, +2017 WL 1425432, at *1 (Apr. 21, 2017). +4 17 C.F.R. § 201.161(b)(1). +5 Paul Free, Exchange Act Release No. 66260, 2012 WL 266986, at *2 (Jan. 26, 2012). +6 Pending Administrative Proceedings, Exchange Act Release No. 80741, 2017 WL +2224348 (May 22, 2017). +7 See Doc. No. 1672334, Lucia, No. 15-1345 (D.C. Cir. Apr. 24, 2017). +8 501 U.S. 868 (1991). +9 See, e.g., United States v. Mendoza, 464 U.S. 154, 160–61 (1984); Indep. Petroleum +Ass’n v. Babbitt, 92 F.3d 1248, 1261 (D.C. Cir. 1996). +10 Investment Advisers Act Release No. 4008, 2015 WL 331125 (Jan. 27, 2015). +3 + +Steinberg to reversal of his conviction.11 Under these circumstances, and the Division’s consent, +we granted Steinberg’s motion for a postponement.12 Respondents, however, cannot appeal to +the Tenth Circuit. Bandimere would therefore not entitle them to any relief. +As discussed above, the hearing in this proceeding has already occurred. The +postponement that Respondents seek could delay significantly the outcome of this proceeding, +and Respondents’ concern about inefficiency does not override the strong public interest in the +prompt enforcement of the federal securities laws.13 +Finally, Respondents contend that “it would be inequitable for [them] to suffer the +reputational consequences of an adverse decision that may well be nullified.” But “the ‘burden +of being haled’ into an allegedly improper forum does not constitute an irreparable injury +warranting interruption of an ongoing proceeding.”14 And, as we have said previously, we do +not discern how Respondents would otherwise be substantially prejudiced by the completion of +the proceedings given that if a final Commission decision were adverse to Respondents, it would +be subject to judicial review under Section 25(a)(1) of the Securities Exchange Act of 1934.15 +Accordingly, it is ORDERED that Respondents request for a stay of these proceedings is +denied. 16 + By the Commission. + + + Brent J. Fields + Secretary + +11 Id. at *1–2. +12 Id. at *2. +13 See Free, 2012 WL 266986, at *2. +14 John Thomas Capital Mgmt. Grp. LLC, Exchange Act Release No. 74345, 2015 WL +728006, at *4 (Feb. 20, 2015) (quoting Deaver v. Seymour, 822 F.2d 66, 69–70 (2d Cir. 1987)). +15 Gibson, 2017 WL 1425432, at *1 (citing 15 U.S.C. § 78y(a)(1) (stating that any person +aggrieved by a final order of the Commission may obtain review of the order in the appropriate +United States Court of Appeals)); Jarkesy v. SEC, 803 F.3d 9, 28–30 (D.C. Cir. 2015)). +16 Respondents also petition, “[t]o the extent necessary,” for interlocutory review of the law +judge’s order denying their requests for a stay and for certification of that issue for interlocutory +review. See 17 C.F.R. § 201.400(c) (requiring that “[a] ruling submitted to the Commission for +interlocutory review must by certified” by the law judge). But Rule 161 specifies that the +Commission may, for good cause shown, grant a postponement at any time. We therefore +dismiss Respondent’s petition for interlocutory review as moot, but emphasize that our decision +should not encourage parties to avoid first seeking a postponement or stay from a law judge. Cf. +Gary L. McDuff, Exchange Act Release No. 78066, 2016 WL 3254513, at *6 (June 14, 2016) +(observing that a law judge’s evaluation of the Rule 400(c) factors will aid the Commission’s +determination as to whether interlocutory review is appropriate). \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3886.txt b/raw/aaer/2017/AAER-3886.txt new file mode 100644 index 0000000000000000000000000000000000000000..845cb3d25c8a8f51ec32b88505f7a907bbb1292c --- /dev/null +++ b/raw/aaer/2017/AAER-3886.txt @@ -0,0 +1,169 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10396 / August 1, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81277 / August 1, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3886 / August 1, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18089 + + : + : +In the Matter of : ORDER INSTITUTING PUBLIC +Michael S. Shore : ADMINISTRATIVE PROCEEDINGS + : PURSUANT TO RULE 102(e) OF THE + Respondent. : COMMISSION’S RULES OF PRACTICE, + : MAKING FINDINGS, AND IMPOSING + : REMEDIAL SANCTIONS +____________________________________ : + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Michael +S. Shore (“Respondent” or “Shore”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Shore, age 48, is a resident of Miami, Florida and served as a Senior Vice +President and CFO of SMF Energy Corp. (“SMF”) from approximately 2002 until approximately +April 2012. Shore was a previously licensed Certified Public Account (“CPA”) in the state of +Florida, but allowed the license to lapse as of December 31, 2000. + + 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 small cap market under the symbol “FUEL”. + + 3. On July 27, 2017, by consent, a Final Judgment was entered against Shore, +permanently enjoining him from future violations of Section 17(a)(2) of the Securities Act of 1933 +(“Securities Act”) and Section 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) +and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and from aiding and abetting violations of +Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, +and 13a-13 thereunder, in the civil action entitled Securities and Exchange Commission v. Michael +S. Shore, et al., Civil Action Number 15-62028-CIV in the United States District Court for the +Southern District of Florida. Shore was also barred from serving as an officer or director for a +period of three-years from entry of the Final Judgment; ordered to pay disgorgement of $20,447 +and $3,292 of prejudgment interest thereon; and ordered to pay a $70,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Shore, and +the other defendants, participated in, among other things, omissions from disclosure involving +SMF. The Commission further alleged that from approximately June 2010 through mid-March +2012 these omissions mislead investors by materially overstating SMF’s financial performance. +Additionally, the Commission alleged that the defendants caused SMF to provide financial + 3 +statements to the investing public that were not in compliance with Generally Accepted +Accounting Principles. + + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Shore’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Shore is suspended from appearing or practicing before the Commission as an +accountant. + +B. After three years from the date of this order, Shore may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company's financial statements that are filed with the Commission (other than as +a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission +that Shore's work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company for which +he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company's financial statements that are filed with the Commission as a member +of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis +with respect to such membership, and the applicant's burden of demonstrating good +cause for reinstatement will be particularly high given the role of the audit committee in +financial and accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) Shore 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; + + 4 +(b) Shore 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 Shore's or the firm's quality control system that would indicate that +the Respondent will not receive appropriate supervision; + +(c) Shore 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) Shore acknowledges his responsibility, as long as he appears or practices +before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Shore 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 Shore's character, integrity, professional +conduct, or qualifications to appear or practice before the Commission as an +accountant. Whether an application demonstrates good cause will be considered on a +facts and circumstances basis with due regard for protecting the integrity of the +Commission's processes. + + By the Commission. + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3887.txt b/raw/aaer/2017/AAER-3887.txt new file mode 100644 index 0000000000000000000000000000000000000000..3739ff498c92c3935e98b02eef49b619d356e86a --- /dev/null +++ b/raw/aaer/2017/AAER-3887.txt @@ -0,0 +1,50 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +August 8, 2017 + +SECURITIES ACT OF 1934 +Release No. 81349 /August 8, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT ACT +Release No. 3887 / August 8, 2017 + +Admin. Proc. File No. 3-17228 + + +In the Matter of + +Michelle L. Helterbran Cochran, CPA + + + +ORDER SCHEDULING BRIEFS +On March 7, 2017, an administrative law judge issued an initial decision as to Michelle +L. Helterbran Cochran, CPA. The initial decision stated that “a party may file a petition for +review of this initial decision within twenty-one days after service of the initial decision.” On +June 15, 2017, the Commission issued a Notice That Initial Decision Has Become Final. The +Notice stated that the “time for filing a petition for review of the initial decision in this +proceeding has expired,” that Helterbran has not filed a petition, and that the initial decision has +become the final decision of the Commission as to Helterbran. On July 25, 2017, Helterbran +filed a request stating that she “would like the opportunity to respond, and for the Commission to +review the [initial] decision,” but that she has not “been served with the” initial decision. On +August 7, 2017, the Division of Enforcement filed an objection to Helterbran’s request. +At this time, the Commission requests the views of the parties as to whether the +Commission should deny as untimely Helterbran’s request that the Commission review the initial +decision. +Accordingly, IT IS ORDERED that Helterbran file a brief in support of her request not to +exceed 7,000 words by August 22, 2017, the Division of Enforcement file a brief in opposition +not to exceed 7,000 words by August 29, 2017, and Helterbran file a reply brief not to exceed +7,000 words by September 5, 2017.1 The briefs should be limited to the issue of the timeliness +of Helterbran’s request that the Commission review the initial decision. + + +1 We call attention to the form and service requirements of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.150 – 154. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3889.txt b/raw/aaer/2017/AAER-3889.txt new file mode 100644 index 0000000000000000000000000000000000000000..e923a19a6d486e074c6f153594c0a072019d60cd --- /dev/null +++ b/raw/aaer/2017/AAER-3889.txt @@ -0,0 +1,103 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81397 / August 15, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3889 / August 15, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18111 + +In the Matter of + +LISA PAVELKA MCALISTER, +CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Lisa +Pavelka McAlister (“Respondent” or “McAlister”) 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, Respondent admits the Commission’s +jurisdiction over her and the subject matter of these proceedings, and the findings contained +Section III.B.3 and B.5 below, and 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. McAlister, age 53, is and has been a certified public accountant licensed to +practice in the State of New York. She served as Chief Accounting Officer and Vice President +of American Realty Capital Properties Inc. (“ARCP”) from November 2013 until her resignation +in October 2014. From May 29, 2014, until her resignation in October 2014, she also served as +an executive officer and Principal Accounting Officer of ARCP. +2. ARCP was, at all relevant times, a Maryland corporation with its principal +place of business in New York, NY . At all relevant times, ARCP was in the business of real +estate investment. At all relevant times, ARCP’s common stock was registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange +Act”), and traded on the NASDAQ Stock Market. ARCP is now known as VEREIT, Inc., and its +common stock trades on the New York Stock Exchange. +3. On September 8, 2016, the Commission filed a complaint against +McAlister in SEC v. Brian S. Block, et al., 16-CV-7003 (LGS) (S.D.N.Y.). On August 7, 2017, +the court entered an order permanently enjoining McAlister, by consent, from future violations +of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. +§ 240.10b-5], and from aiding and abetting violations of Section 13(a) of the Exchange Act [15 +U.S.C. § 78m(a)] and Rules 12b-20, 13a-11 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, +240.13a-11 and 240.13a-13]. +4. The Commission’s Complaint alleged, among other things, that McAlister, +together with the former Chief Financial Officer of ARCP, engaged in a fraudulent scheme to +manipulate and falsely report ARCP’s Adjusted Funds From Operations (“AFFO”), a key non- +GAAP financial metric, in its public reports for the fiscal quarter ended June 30, 2014. The +Complaint alleged that the inflated figures, among other things, made it appear that ARCP had +met analysts’ consensus AFFO estimates for the quarter and concealed the fact that ARCP had +overstated its AFFO for the previous quarter. +5. On June 29, 2016, McAlister pleaded guilty to related criminal conduct in +United States v. McAlister, Crim. No. 16 Cr. 653 (AKH) (S.D.N.Y.). Specifically, McAlister +pleaded guilty to violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and + 3 +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder, as well as +violations of 18 U.S.C. § 371 (conspiracy) and 18 U.S.C. §1001 (false statements). +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent McAlister’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that McAlister is suspended +from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3890.txt b/raw/aaer/2017/AAER-3890.txt new file mode 100644 index 0000000000000000000000000000000000000000..9087563db17000c1c83a4a6ae68d90ed381d3e87 --- /dev/null +++ b/raw/aaer/2017/AAER-3890.txt @@ -0,0 +1,157 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81451 / August 22, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3890 / August 22, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18122 + +In the Matter of +EDWARD DIMARIA +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Edward +DiMaria (“Respondent” or “DiMaria”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. DiMaria, age 51, has been a certified public accountant licensed to practice in the +State of New York. He served as Senior Vice President and Chief Financial Officer of Bankrate, +Inc. from 2006 until his resignation as Chief Financial Officer in September 2014, and served as +Senior Vice President until his termination in October 2014. +2. Bankrate, Inc. (“Bankrate”) is and was, at all relevant times, a Delaware corporation +with its principal place of business in North Palm Beach, Florida. Bankrate is an online publisher, +aggregator and distributor of personal finance content that enables users to compare rates for +financial products. At all relevant times, Bankrate’s common stock was registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), +and was listed on the New York Stock Exchange. +3. On January 22, 2016, the Commission filed an amended complaint against DiMaria +in SEC v. Edward DiMaria, et al. (Civil Action No. 1:15-cv-07035, S.D.N.Y.). On August 16, +2017, the court entered an order permanently enjoining DiMaria, by consent, from future violations +of Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules +10b-5, 13b2-1, 13b2-2 and 13a-14 thereunder and Section 17(a) of the Securities Act of 1933 +(“Securities Act”), and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and +(B) of the Exchange Act and Rules 12b-20, 13a-11, 13a-13 thereunder. DiMaria was also ordered +to pay $37,472 in disgorgement, $6,214.56 in prejudgment interest, and an $187,472 civil money +penalty. +4. The Commission’s amended complaint alleged, among other things, that DiMaria +engaged in a scheme to artificially inflate revenues and understate expenses in order to meet +Bankrate’s financial targets, which had the effect of materially overstating Bankrate’s financial +results for the second quarter of 2012. The amended complaint also alleged that during the two +week period following the issuance of Bankrate’s second quarter 2012 earnings release, DiMaria +sold Bankrate stock at a price that was artificially inflated. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + 3 + A. DiMaria is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five (5) years from the date of this order, DiMaria may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +DiMaria’s work in his practice before the Commission as an accountant will be reviewed either +by the independent audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) DiMaria, 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) DiMaria, 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 DiMaria’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + (c) DiMaria 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) DiMaria acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + + 4 +C. The Commission will consider an application by DiMaria 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 DiMaria’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis +with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3891.txt b/raw/aaer/2017/AAER-3891.txt new file mode 100644 index 0000000000000000000000000000000000000000..e93a5e01844a0eeb7b57ff32bef2d449c3d72ab6 --- /dev/null +++ b/raw/aaer/2017/AAER-3891.txt @@ -0,0 +1,159 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81452 / August 22, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3891 / August 22, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18123 + +In the Matter of +MATTHEW GAMSEY, CPA, +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against +Matthew Gamsey (“Respondent” or “Gamsey”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + 2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Gamsey, age 40, is a certified public accountant licensed to practice in the State of +New York. He served as a Vice President and Director of Accounting of Bankrate, Inc. from +February 2012 until January 2015. +2. Bankrate, Inc. (“Bankrate”) is and was, at all relevant times, a Delaware corporation +with its principal place of business in North Palm Beach, Florida. Bankrate is an online publisher, +aggregator and distributor of personal finance content that enables users to compare rates for +financial products. At all relevant times, Bankrate’s common stock was registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), +and was listed on the New York Stock Exchange. +3. On January 22, 2016, the Commission filed an amended complaint against Gamsey +in SEC v. Edward DiMaria and Matthew Gamsey, (Civil Action No. 1:15-cv-07035, S.D.N.Y.). +On August 16, 2017, the court entered an order permanently enjoining Gamsey, by consent, from +future violations of Sections Section 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and +Rules 13b2-1 and 13b2-2 of the Securities Exchange Act of 1934 (“Exchange Act”), and from +aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and +Rules 12b-20, 13a-11, 13a-13 thereunder. Gamsey was also ordered to pay a $60,000 money +penalty. +4. The Commission’s amended complaint alleged, among other things, that Gamsey +negligently violated the federal securities laws, including Section 17(a)(3) of the Securities Act, +by participating in a course of business to artificially inflate revenues and understate expenses in +order to meet Bankrate’s financial targets, which had the effect of materially overstating +Bankrate’s financial results for the second quarter of 2012. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + + 3 + A. Gamsey is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three (3) years from the date of this order, Gamsey may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Gamsey’s work in his practice before the Commission as an accountant will be reviewed either +by the independent audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Gamsey, 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) Gamsey, 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 Gamsey’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + (c) Gamsey 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) Gamsey acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + + + 4 +C. The Commission will consider an application by Gamsey 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 Gamsey’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis +with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3893.txt b/raw/aaer/2017/AAER-3893.txt new file mode 100644 index 0000000000000000000000000000000000000000..70be40787177c05c42ccf97e4e53b2c8ac0dfa7e --- /dev/null +++ b/raw/aaer/2017/AAER-3893.txt @@ -0,0 +1,105 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81544 / September 7, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3893 / September 7, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18161 + +In the Matter of +WALDEMAR GRAB, +Respondent. + + ORDER INSTITUTING PUBLIC + ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest that public administrative proceedings be, and hereby are, instituted against +Waldemar Grab (“Respondent” or “Grab”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + + II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on be half of the +Commission, or to which the Commission is a party, and without admitting or denying the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + +2 + + findings herein, except as to the Commission’s jurisdiction over 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. Respondent Grab is a resident of Carstairs, Alberta, Canada. Grab held various +accounting positions at Penn West Petroleum Ltd. (“Penn West”) between 1994 and 2005, when he +was named Operations Controller and assumed management over the accounting for operating +expenses, capital expenditures, acquisitions and divestitures, and accounts receivable. Grab +remained Operations Controller at Penn West until his termination from Penn West in June 2014. +2. Penn West is a n Alberta, Canada corporation in the business of oil and gas +exploration and production in the western provinces of Canada . Its headquarters are in Calgary, +Alberta, Canada. Penn West’s common stock is registered with the Commission pursuant to +Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and traded on the New +York Stock Exchange under the trading symbol “PWE” and on the Toronto Stock Exchange under +the symbol “PWT.” +3. On July 25, 2017, the U.S. District Court for the Southern District of New York +entered a Final Judgment Imposing Permanent Injunction by consent against Grab, permanently +enjoining him from violations of Section 17(a) of the Securities Act of 1933, Sections 10(b ) and +13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1, and aiding and abetting +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act +Rules 12b-20, 13a-1, and 13a-16. SEC v. Penn West Petroleum Ltd., et al., 17-CV-4866-GHW +(S.D.N.Y.). +4. Among other things, the Commission’s Complaint alleged that Grab participated in +a fraudulent scheme, which resulted in Penn West filing materially false and misleading financial +statements in the company’s annual reports on Form 40-F for the fiscal years ended December 31, +2012 and December 31, 2013, and in the company’s quarterly report for the period ended March +31, 2014, filed under Form 6 -K. The Complaint alleged that Grab engaged in a number of +improper accounting practices to manage and materially u nderreport the company’s operating +expenses, including improperly moving or directing others to move costs out of operating expense +accounts into capital accounts using false and unsupported journal entries. By doing so, as the +Complaint alleged, Grab als o circumvented Penn West’s internal accounting controls and aided +and abetted the company’s books and records violations. + + + +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 Grab’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Waldemar Grab is suspended from appearing or practicing before the Commission +as an accountant. + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3894.txt b/raw/aaer/2017/AAER-3894.txt new file mode 100644 index 0000000000000000000000000000000000000000..dd9f81eae37513f850a503479794204d5abe979b --- /dev/null +++ b/raw/aaer/2017/AAER-3894.txt @@ -0,0 +1,112 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81546 / September 7, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3894 / September 7, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-13832 + +In the Matter of +Brian K. Rabinovitz, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On March 24, 2010, Brian K. Rabinovitz, CPA (“Rabinovitz”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Rabinovitz pursuant to Rule +102(e)(3)(i) of the Commission’s Rules of Practice.1 This order is issued in response to +Rabinovitz’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. +The Commission found that Rabinovitz had been permanently enjoined by a United +States District Court from future violations of Rule 2-02 of Regulation S-X. In a complaint filed +on April 25, 2005, the Commission alleged, among other things, that Rabinovitz and others +participated in a scheme that resulted in Exotics.com, Inc. (“Exotics.com”) filing materially false +and misleading financial statements in its Commission filings, including an amended current +report on Form 8-K filed on September 24, 2001, a quarterly report on Form 10-QSB for the +quarter ended September 30, 2001, and an annual report on Form 10-KSB for the fiscal year +ended December 31, 2001. The complaint further alleged that Rabinovitz and audit staff under +his supervision committed acts and omissions that caused them to become non-independent +during audits of Exotics.com and that Rabinovitz approved the issuance of audit reports which, +among other things, falsely stated that the audits had been conducted by an independent auditor +and in accordance with generally accepted auditing standards. The complaint also alleged that + +1 See Accounting and Auditing Enforcement Release No. 3122 dated March 24, 2010. Rabinovitz was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + 2 +Rabinovitz and audit staff under his supervision engaged in a number of improper accounting +practices that caused Exotics.com’s financial statements to depart from generally accepted +accounting principles. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Rabinovitz +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Rabinovitz is not, at this time, seeking to +appear or practice before the Commission as an independent accountant. If he should wish to +resume appearing and practicing before the Commission as an independent accountant, he will +be required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Rabinovitz’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rabinovitz is currently subject to probation under the California Board of Accountancy +that is scheduled to end in February 2018. Failure to abide by the terms of his probation could +result in the revocation of Rabinovitz’s CPA license pending notice and an opportunity to be +heard by the California Board of Accountancy. Rabinovitz has attested that he will notify the +Commission if he is found to have violated the terms of the probation. He also has attested that +he understands that the revocation of his CPA license could result in the revocation of his +reinstatement to appear and practice before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Rabinovitz, it appears that he has complied with the terms of the March 24, 2010 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Rabinovitz, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, has shown good cause for reinstatement. +Therefore, it is accordingly, + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commis sion’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + 3 + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Brian K. Rabinovitz, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3895.txt b/raw/aaer/2017/AAER-3895.txt new file mode 100644 index 0000000000000000000000000000000000000000..77111db14c88baacb7d7fb388857c47c731bb8e5 --- /dev/null +++ b/raw/aaer/2017/AAER-3895.txt @@ -0,0 +1,112 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81559 / September 8, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3895 / September 8, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-12818 + +In the Matter of +John R. Holtzhauser, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On September 20, 2007, John R. Holtzhauser, CPA (“Holtzhauser”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Holtzhauser pursuant to Rule +102(e)(3)(i) of the Commission’s Rules of Practice.1 This order is issued in response to +Holtzhauser’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. +The Commission found that Holtzhauser had been permanently enjoined by a United +States District Court from future violations of Section 17(a) of the Securities Act of 1933 and +Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules +10b-5, 13b2-1, and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 +thereunder. In its complaint in the injunctive action, the Commission alleged, among other +things, that Holtzhauser, as the company’s controller, engaged in fraudulent accounting practices +which resulted in OM Group, Inc. (“OM”) filing materially false and misleading financial +statements in the company’s annual reports on Form 10-K for the fiscal years ended December +31, 2001 and December 31, 2002, and in the company’s quarterly reports on Form 10-Q for all +quarters in 2002 and 2003. The materially false and misleading financial statements were also +included in a Form S-1 that became effective on January 16, 2002. Holtzhauser recorded and + +1 See Accounting and Auditing Enforcement Release No. 2723 dated September 20, 2007. Holtzhauser was +permitted, pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +directed numerous erroneous and unsupported accounting entries, estimates, and top side +adjustments to OM’s books and records that materially increased OM’s annual and quarterly net +income in a departure from generally accepted accounting principles. These accounting +practices allegedly included, among other things, overcapitalizing overhead costs, improperly +recording supplier receivables, recording inflated inventory recovery yields, recording inaccurate +inventory estimates, and duplicating entries made at the operating unit level. In addition, the +complaint alleged that Holtzhauser failed to provide sufficient information to OM’s independent +auditor about the accounting entries, estimates, and top side adjustments. Holtzhauser consented +to the Court’s entry of the permanent injunction. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, +Holtzhauser attests that he will undertake to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. Holtzhauser is not, at this +time, seeking to appear or practice before the Commission as an independent accountant. If he +should wish to resume appearing and practicing before the Commission as an independent +accountant, he will be required to submit an application to the Commission showing that he has +complied and will comply with the terms of the original suspension order in this regard. +Therefore, Holtzhauser’s suspension from practice before the Commission as an independent +accountant continues in effect until the Commission determines that a sufficient showing has +been made in this regard in accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Holtzhauser, it appears that he has complied with the terms of the September 20, 2007 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Holtzhauser, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, has shown good cause for reinstatement. +Therefore, it is accordingly, + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +John Holtzhauser, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3897.txt b/raw/aaer/2017/AAER-3897.txt new file mode 100644 index 0000000000000000000000000000000000000000..a4050b21be9754ca07b6c682797b449538a7d7eb --- /dev/null +++ b/raw/aaer/2017/AAER-3897.txt @@ -0,0 +1,164 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81664 / September 20, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3897 / September 20, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18192 + +In the Matter of + +JOSEPH H. CRAFT, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Joseph +H. Craft (“Respondent” or “Craft”) 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. + + + 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. Craft, age 53, is and has been a certified public accountant licensed to +practice in the States of Indiana and Kentucky. He was hired as TelexFree’s accountant in June +2012, and he was sometimes held out as the company’s CFO. + + 2. TelexFree, Inc. was, at all relevant times, a Massachusetts corporation with +its principal place of business in Marlborough, Massachusetts. TelexFree, LLC was a Nevada +corporation with the same principal place of business in Marlborough, Massachusetts. TelexFree +was a multi-level marketing company that purported to be in the business of selling telephone +service plans that use “voice over internet” (“VoIP”) technology. + + 3. On September 12, a final judgment was entered against Craft, permanently +enjoining him from future violations of Sections 17(a) and 5(a) and (c) of the Securities Act and +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in the civil action entitled Securities +and Exchange Commission v. TelexFree, Inc. et al., Civil Action Number 1:14-CV-11858, in the +United States District Court for the District of Massachusetts. Craft was also ordered to pay +$272,812 in disgorgement of ill-gotten gains while participating in the fraud, and $25,896 in +prejudgment interest, and a $50,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Craft, +assisted TelexFree in engaging in a multi-million fraudulent Ponzi and pyramid scheme. Prior to +March 9, 2014, the company did not require that investors sell the VoIP service in order to +qualify for weekly payments, which resulted in very little money obtained from the sale of an +actual product. Instead, TelexFree paid its earlier investors not with revenues from selling the +VoIP service, but with money received from prior investors. + + + +IV. + + + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Craft’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Craft is suspended from appearing or practicing before the Commission as an +accountant. + B. After five years from the date of this order, Craft may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that Craft’s +work in his practice before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Craft, 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) Craft, 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 Craft’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + (c) Craft 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) Craft acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Craft 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 Craft’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates +good cause will be considered on a facts and circumstances basis with due regard for +protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3898.txt b/raw/aaer/2017/AAER-3898.txt new file mode 100644 index 0000000000000000000000000000000000000000..42472551ebd5012ee3a581268ed3a2566b8c3a54 --- /dev/null +++ b/raw/aaer/2017/AAER-3898.txt @@ -0,0 +1,404 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81669 / September 21, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3898 / September 21, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18195 + + +In the Matter of + +Telia Company AB + +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 Telia Company AB (“Telia” 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 proceed ings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease -and-Desist Proceedings, Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1. These proceedings arise out of violations of the anti-bribery and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) [15 U.S.C. §§ 78dd-1, +78m(b)(2)(B)] by Telia. + +2. From 2007 to at least 2010, Telia paid bribes to a government official in Uzbekistan +in order to obtain and retain business that generated more than $2.5 billion in revenues for Telia. +During the course of the bribery scheme, Telia made at least $330 million in illicit payments. +These bribe payments were made to the Uzbek official (“Government Official A”) to enable Telia +to acquire a United States-based telecommunications company with operations in Uzbekistan and +enter the telecommunications market in Uzbekistan. The bribe payments were funneled through +payments for sham lobbying and consulting services to a front company controlled by the official. + +3. Over the course of the relevant period, Telia paid Government Official A at least +$330 million in bribes through a series of transactions that were designed to obfuscate their true +purpose. Most of the transactions with Government Official A were denominated in United States +dollars, and communications concerning Government Official A were conducted, in part, using +electronic mail accounts on United States-based servers. + +4. As a result of this conduct, Telia violated Section 30A of the Exchange Act by +agreeing to make corrupt payments to government officials in Uzbekistan to obtain business. +Additionally, Telia violated Section 13(b)(2)(B) of the Exchange Act, as it failed to devise and +maintain a reasonable system of internal accounting controls. + +Respondent + + 5. Telia Company AB (“Telia”) is a corporation organized under the laws of Sweden. +Telia registered as a United States issuer in 2002 upon the merger between Telia and Sonera +Corporation. At that time, Telia issued and maintained a class of publicly traded securities +registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, which were traded on +the NASDAQ prior to 2005. Telia was a United States issuer until September 5, 2007, when its +application to deregister its shares with the Commission became effective. At all relevant times, +Telia was a provider of telecommunications services and operated through subsidiaries and affiliates +in Europe and Asia. Telia manages its operations through separate business units, which are each +overseen by an officer of Telia. + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + +Other Relevant Entities + +6. COSCOM LLC (“COSCOM”) is a majority-owned subsidiary of Telia and +provides mobile telecommunications services in Uzbekistan. COSCOM was formed in Uzbekistan +and purchased by Telia in 2007. COSCOM was part of Telia’s Eurasia business unit and was +managed by local managers as well as senior members of Fintur Holdings B.V., Telia’s majority- +owned Eurasian holding company (“Fintur”). The brand name for COSCOM is Ucell. + +7. Fintur Holdings B.V. (“Fintur”) is a majority-owned subsidiary of Telia and acts as +a manager and holding company for many of the Telia’s operating companies in the Eurasia +business unit. Fintur was formed in the Netherlands but operates from Istanbul, Turkey. Fintur is +headed by an officer of Telia and a board of directors of which Telia senior officers comprise the +majority of directors. + +8. TeliaSonera UTA Holding B.V. (“UTA”) is a wholly-owned subsidiary of Telia +and acts as one of two intermediate holding companies of COSCOM. UTA was formed in the +Netherlands as part of the acquisition of COSCOM in 2007. UTA has no operations and acts as one +of two intermediate holding companies of COSCOM. + +9. TeliaSonera Uzbek Telecom Holding B.V. (“Uzbek Holding”) is a wholly-owned +subsidiary of Telia and acts as one of two intermediate holding companies of COSCOM. Uzbek +Holding was formed in the Netherlands as part of the acquisition of COSCOM in 2007. Uzbek +Holding has no operations and no holdings other than COSCOM. + +10. Government Official A was an Uzbek government official at all relevant times. +Government Official A was also a family member of the then President of Uzbekistan and had +significant influence over other Uzbek government officials. Government Official A operated +through numerous shell companies, including Takilant Ltd. + +11. Takilant Ltd is a company beneficially owned and operated by Government +Official A at all relevant times. Takilant was formed in Gibraltar and was the entity through which +Telia made payments to Government Official A. + +Background + +12. Telia is a telecommunications company operating through a network of subsidiaries +and joint venture entities. During the relevant time period, Telia was organized in part by +geographic business units, each of which is directly supervised by a senior officer of Telia. The +senior officer for the Eurasia business unit reported directly to Telia’s chief executive officer. + +13. In 2006, Telia sought to expand into the Eurasia telecommunications market, +including in Uzbekistan. Telia identified COSCOM, an existing Uzbek telecommunications +operator owned by a United States telecommunications company, as an acquisition target in +4 + +Uzbekistan. Telia acquired COSCOM in 2007, and COSCOM became part of the Eurasia business +unit of Telia, which was supervised by a then-senior officer of Telia. + +14. Throughout the relevant period, the telecommunication industry in Uzbekistan was +highly regulated by the government. Telecommunication operators in the country were regulated +by the Communications and Information Agency of Uzbekistan (“ACI”), now called the State +Committee for Communication, Information and Telecommunication Technologies. ACI issued +the licenses, frequencies, channels, and number blocks necessary for Telia to operate in that +country. Throughout the relevant period, private parties could not sell or purchase licenses, +frequencies, channels, or number blocks in Uzbekistan. + +15. From at least 2007 to 2012, Telia maintained a relationship with Government +Official A, who was an Uzbek government official and family member of the President of +Uzbekistan. Government Official A was able to exert significant influence over other Uzbek +officials to cause them to take official action that would benefit Telia’s business in Uzbekistan. + +The July 2007 Agreement + +16. Then-senior Telia managers understood that they needed to negotiate with +Government Official A in order to acquire and operate COSCOM within the Uzbek +telecommunications market. Then-senior Telia managers also understood that corrupt payments to +Government Official A were required in order to enter and operate in the Uzbek market. Telia +retained the services of and communicated with United States-based consultants to facilitate the +corrupt relationship with Government Official A and the acquisition of COSCOM. + +17. Government Official A was represented in the negotiations by the country manager +of another telecommunications company in Uzbekistan that would be their primary competitor if +Telia entered the market. On the recommendation of then-senior Telia managers, on June 11, +2007, Telia’s Board approved a binding offer to acquire COSCOM, and a few other operators, + +at a total deal cost not exceeding USD 410 million, through a merger structure with +a Delaware corporation (United States), subject to (a) the conditions +precedent…and to (b) that a partnership agreement is signed with a suitable partner +in Uzbekistan no later that simultaneously with the transaction documents in the +…acquisition. + +18. Telia then-senior managers understood the terms of the deal and knew that they +were agreeing to provide Government Official A an ownership stake in the acquired company and +other guaranteed payout in return for Government Official A contributing regulated assets that, +under Uzbek law, should have only been able to come from the government. As noted in an +internal company memo dated May 17, 2007 discussing the deal: + +We have made several trips to Tashkent over the 6 weeks and now have a +preliminary hand-shake for principles of a potential partnership with [Government +Official A’s] investment team. We are expecting to sign a non-binding Term Sheet +5 + +with them within the next 10-15 days. According to the proposed deal, our +proposed Uzbekh partners will bring in new 1800 frequencies, 3G-frequencies as +well as some technically value-adding assets for the company, such as number +blocks, in exchange for 26% of the Uzbekh venture plus USD 32.5 millions. + +19. On July 4, 2007, Sonera Hungary Holding B.V., another wholly-owned subsidiary +of Telia, entered into an agreement with Government Official A’s entity to acquire certain +regulated assets and to assist with regulatory matters by providing consulting services (“July 2007 +Agreement”). The agreement called for Government Official A to contribute assets and services +valued at approximately $80 million in exchange for Telia giving Government Official A an equity +interest in COSCOM’s operations valued at $50 million and additional unspecified payments from +Telia. The assets to be contributed by Government Official A were licenses, frequencies, and +number blocks that Government Official A would cause other government officials to authorize on +Telia’s behalf. + +20. In December 2007, Telia and Government Official A executed a series of +agreements effectuating the promises and obligations made in the July 2007 Agreement. + +The December 2007 Agreements + +21. In December 2007, Telia fulfilled its obligations under the July 2007 Agreement by +providing Government Official A through Takilant with a 26 percent ownership stake in Uzbek +Holding, the holding company of COSCOM. The purchase price was $50 million, and Takilant +was also given a put option to sell the interest back to Telia in 2010 for a minimum price of $85 +million (providing Takilant at least a $35 million profit). The ownership stake was conditioned +upon Government Official A acquiring regulatory assets for COSCOM through a Takilant wholly +owned subsidiary, including 3G licenses, 50 1800 MHz frequencies, an internet services license, +and number blocks. + +22. At the time, COSCOM did not have the necessary licenses and permission from +ACI to operate a 3G network, Government Official A and Telia agreed that ACI would issue the +3G licenses to a Takilant subsidiary, which then would repudiate the licenses so they would instead +be issued to COSCOM. This repudiation of the 3G licenses was done to circumvent the +prohibition under Uzbek law on private parties directly buying and selling telecommunications +licenses, and should have raised red flags at Telia. Telia managers also knew a 3G license could be +obtained directly from ACI and that licenses did not require up-front payment. + +23. Other red flags included the fact that (i) Government Official A’s company should +not have received a 3G license from ACI since it was not a telecommunications operator; (ii) the +timing of the award of licenses to Takilant only months in advance of Takilant repudiating the +licenses in favor of COSCOM; (iii) the participation of the country manager of COSCOM’s +primary competitor in the transaction; (iv) and the fact that the company should not have had to +pay to obtain a 3G license from the government. + +6 + +24. Telia’s then-senior managers, including its then-chief executive officer, approved +the agreements with Government Official A through Takilant. Telia paid Government Official A +through Takilant $80 million in connection with acquiring the 3G regulated assets, and +Government Official A used a portion of those funds to pay Telia through Takilant for the 26 +percent ownership stake in COSCOM. In this way, Government Official A simply used a portion +of the 3G bribe payments to “buy” an interest in COSCOM. + +Telia Acquires Number Blocks from Government Official A +25. In 2008, COSCOM required additional telephone numbers to issue to its +subscribers in order to expand its network. As with the 3G licenses, and consistent with the +original July 2007 agreement, Government Official A improperly influenced ACI officials to issue +number blocks for COSCOM’s benefit and Telia paid to Government Official A through Takilant +$9.2 million to acquire the number blocks. + +Telia Buys Back Part of Government Official A’s Ownership Stake +26. As discussed above, the December 2007 transaction in which Telia sold 26 percent +of COSCOM to Government Official A through Takilant in exchange for $50 million, also gave +Government Official A through Takilant a put option to sell the interest back to Telia in 2010 for a +minimum price of $85 million. In January 2010, Government Official A caused Takilant to +partially exercise the put option and sold Telia most of its 26 percent of COSCOM. Telia paid +Government Official A through Takilant $220 million for this interest, a 340 percent increase over +the approximately $50 million Government Official A paid through Takilant to acquire the interest +in 2007 and far more than the minimum $85 million option exercise price in December 2007. +Telia also agreed to adjust the put option for Takilant’s remaining 6 percent interest in COSCOM +to a minimum price of $50 million, which was later increased to $75 million. + +4G Market Expansion +27. In 2010, Telia sought to expand its Uzbek operations by offering 4G services. +Consistent with the original July 2007 agreement, Telia turned to Government Official A to obtain +the needed licenses. Rather than pay Government Official A directly through a sham consulting +agreement with Takilant as had been done with the 3G licenses, Telia agreed to pay Takilant’s debt +to a third party via a sham consulting services agreement. Under the terms of the agreement, +Government Official A was to assist COSCOM in acquiring certain 4G/LTE licenses/frequencies +in the 2500-2700 MHz bandwidths. + +28. The structure of the 4G license transaction raised many of the same red flags +identified as the 3G license transaction. Telia executives knew a 4G license could be obtained +directly from ACI and that licenses did not require upfront payment. Moreover, the 4G license that +COSCOM was issued was repudiated by Telia’s primary competitor in Uzbekistan and whose +Uzbek country manager again negotiated for Government Official A. Telia did not receive any +7 + +evidence of the consulting services provided by Government Official A through Takilant, though +the frequencies repudiated by its competitor were ultimately awarded to COSCOM. + +29. In November 2010, Telia sought to further expand its Uzbek operations and turned +to Government Official A to obtain 4G licenses/frequencies in the 700 MHz bandwidth. As +before, Takilant was engaged to provide sham consulting services and Government Official A +exerted the same improper influence to obtain the licenses. The sham consulting services were +used as a guise to overcome the prohibition on private parties buying and selling regulatory assets. +Telia paid $55 million to Government Official A through Takilant to obtain these additional +licenses and a fiber-optic lease agreement. As with the previous 3G license transaction and 4G +license transaction, the same red flags existed. In total , Telia paid to Government Official A +through Takilant $70 million for 4G licenses and the acquisition of a fiber-optic lease agreement. + +30. As a result of the conduct described above, Respondent violated Sections 30A and +13(b)(2)(B) of the Securities Exchange Act of 1934[15 U.S.C. §§ 78dd-1 and 78m(b)(2)(B)]. + +Telia’s Remedial Efforts +31. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent, both before and during the Commission’s investigation, +including replacing all relevant members of its board and senior management and implementing +a new comprehensive compliance program, and the thorough cooperation afforded the +Commission staff. +Undertakings + 32. Respondent has undertaken to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described in +this Order. In connection with such cooperation, Respondent shall: + a. produce, without service of a notice or subpoena, any and all nonprivileged +documents and other information requested by the Commission staff subject to any restrictions +under the law of any foreign jurisdiction; + + b. use its best efforts to cause its current or former officers, +employees, agents, and directors to be interviewed by Commission staff at such times and +places as the staff reasonably may direct; and + + c. use its best efforts to cause its current or former officers, +employees, agents, and directors to appear and testify without service of a notice or +subpoena in such investigations, depositions, hearings, or trials as may be +requested by the Commission staff. +In determining whether to accept the Offer, the Commission has considered these undertakings. +8 + +IV. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + +A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 30A and 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 +U.S.C. §§ 78dd-1 and 78m(b)(2)(B)]. + +B. Respondent shall pay disgorgement of $457,000,000, which represents profits +gained as a result of the conduct described herein. Payment of disgorgement shall be made as +follows: + +1. Within ten (10) days of the entry of the Order, $208,500,000 to be paid 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); +2. Respondent’s disgorgement obligation shall be deemed satisfied in part by +Respondent’s forfeiture payment of up to $40,000,000 within ten (10) days of +its sentencing hearing as part of Respondent’s resolution with the United States +Department of Justice; +3. Respondent’s disgorgement obligation shall be deemed satisfied in part by any +confiscation or forfeiture payment of up to $208,500,000 made by Respondent +within five hundred forty (540) days of the Order as part of any related +proceedings between Respondent and the Swedish Åklagarmyndigheten or +within five hundred fifty (550) days as part of Respondent’s related resolution +with the Dutch Openbaar Ministerie; +4. In the event that any confiscation or forfeiture payments made by Respondent in +related proceedings with the Swedish Åklagarmyndigheten or Dutch Openbaar +Ministerie are less than $208,500,000, or with the Department of Justice are less +than $40,000,000, Respondent shall pay the remaining disgorgement amounts +to the Securities and Exchange Commission within ten (10) days of such event +for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3); +5. Should any amount of the payment made in connection with Respondent’s +resolution with the Dutch Openbaar Ministerie be returned to the Respondent or +any affiliated entity for any reason, that amount will not be credited as an offset +and Respondent shall pay such amount to the Securities and Exchange +Commission within ten (10) days of such event for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). + +If timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +9 + + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Telia as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Charles Cain, Division of Enforcement, Securities +and Exchange Commission, 100 F St., NE, Mailstop 5631, Washington, DC 20549. + + C. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the Division +may, at its sole discretion and with prior notice to the Respondent, petition the Commission to +reopen this matter and seek an administrative cease-and-desist order against the Respondent. +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, +any statute of limitations defense. + + + By the Commission. + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3901.txt b/raw/aaer/2017/AAER-3901.txt new file mode 100644 index 0000000000000000000000000000000000000000..0c0d8f6036c2969331f62016471ce9b0b37f2209 --- /dev/null +++ b/raw/aaer/2017/AAER-3901.txt @@ -0,0 +1,172 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81908 / October 19, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3901 / October 19, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18258 + +In the Matter of + +Jeffrey W. Tomz, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Jeffrey +W. Tomz (“Respondent” or “Tomz”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Tomz, age 46, is a resident of The Woodlands, Texas, and is a Certified Public +Accountant licensed in Texas. He served as Uni-Pixel, Inc.’s (“Uni-Pixel”) Chief Financial Officer +and Corporate Secretary from July 1, 2010 through May 27, 2015. Tomz served as Uni-Pixel’s +Vice President of Finance from June 2005 until May 27, 2015. + +2. Uni-Pixel was, at all relevant times, a Delaware corporation with its principal place +of business in The Woodlands, Texas. During the relevant time period, Uni-Pixel was engaged in +the business of developing display and touch-screen technologies and was focusing its efforts on a +touch-screen product called “UniBoss.” At all relevant times, Uni-Pixel’s common stock was +registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”), and the Company was subject to the reporting requirements of the Exchange +Act, and was traded on the NASDAQ exchange under the ticker symbol “UNXL.” + +3. On October 17, 2017, a final judgment was entered against Tomz, permanently +enjoining him from future violations of Section 17(a)(2) of the Securities Act of 1933 (“Securities +Act”) and aiding and abetting violations of Section 17(a)(2) of the Securities Act and Sections +13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a- +13 thereunder, in the civil action entitled Securities and Exchange Commission v. Reed J. Killion +et al., Civil Action Number 4:16-cv-621, in the United States District Court for the Southern +District of Texas. Tomz was also ordered to pay a $50,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Uni-Pixel made +materially false and misleading statements and omissions about the company’s material business +agreements and a purchase order with a major computer manufacture. The complaint alleged, +among other things, that Tomz made misleading disclosures about certain of Uni-Pixel’s material +agreements, including a license agreement between Uni-Pixel and a major computer manufacturer +to introduce UniBoss touch-sensor products to the market, by failing to disclose the contract +milestones and other material terms and conditions of the agreement as required under Generally +Accepted Accounting Principles (“GAAP”) and the securities laws. The complaint further alleged + 3 +that Tomz made, participated in, and/or aided and abetted the misstatements and omissions at +issue, and that his conduct resulted in Uni-Pixel filing materially false and misleading statements +and disclosures in the company’s annual report on Form 10-K for the fiscal years ended December +31, 2012 and 2013, and in the company’s quarterly reports on Form 10-Q for the first three +quarters of fiscal year 2013. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Tomz’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Tomz is suspended from appearing or practicing before the Commission as an +accountant. + + B. After 4 years from the date of this order, Tomz may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Respondent’s work in his practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for which he works or in some +other acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + 4 + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the Respondent’s or the firm’s quality control system that would +indicate that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his/her responsibility, as long as he +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission as an accountant. Whether +an application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3903.txt b/raw/aaer/2017/AAER-3903.txt new file mode 100644 index 0000000000000000000000000000000000000000..35b1c4b58ae97abceef67f6ae4f5ed33b9d34fb6 --- /dev/null +++ b/raw/aaer/2017/AAER-3903.txt @@ -0,0 +1,113 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81954 / October 26, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3903 / October 26, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18264 + + + +In the Matter of + +HAROLD J. SWART, JR., +CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Harold +J. Swart, Jr. CPA (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + + + +1 Rule 102(e)(3)(i) provides, in pertinent part, that: + + The Commission, with due regard to the public interest and without preliminary +hearing, may, by order, . . . suspend from appearing or practicing before it any . . . +accountant . . . who has been by name . . . permanently enjoined by any court of +competent jurisdiction, by reason of his or her misconduct in an action brought by +the Commission, from violating or aiding and abetting the violation of any +provision of the Federal securities laws or of the rules and regulations thereunder. + +2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in paragraph 2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Swart, age 71, is and has been a certified public accountant licensed to practice in +the State of Florida. In 2001, Swart was ordered to cease and desist from committing or causing +certain violations under the federal securities laws, was suspended from appearing or practicing +before the Commission as an accountant, and was ordered liable for $32,750 in disgorgement and +$9,231 in prejudgment interest. SEC v. Swart, Baumruk & Co., LLP and Harry J. Swart, CPA, +Securities Exchange Act Release No. 43883 (Jan. 25, 2001) (the “Commission Order”). + +2. On July 27, 2017, the Commission filed a complaint against Swart in Securities and +Exchange Commission v. Harold J. Swart, Jr. et al. (Civil Action No. 17-01386) in the United +States District Court for the Middle District of Florida. On October 17, 2017, the court entered an +order permanently enjoining Swart, by consent, from future violations of Sections 5(a), 5(c), and +17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and +Rule 10b-5 thereunder, and directing Swart to comply with the Commission Order. Respondent +was also ordered to pay $41,945.56 in disgorgement of ill-gotten gains and $5,491.07 in +prejudgment interest jointly and severally with Mind Your Own Business, Inc., and a $41,945.56 +civil money penalty. + +3. The Commission’s complaint alleged, among other things, that Swart requested that +the control person of Mainstream Entertainment, Inc. (“Mainstream”) retire a personal debt to +Swart by transferring “free trading” Mainstream shares to an entity controlled by Swart. On or +about May 3, 2012, Swart agreed with the control person to sign a stock purchase agreement that +he knew falsely identified the seller of the shares and the consideration paid for the shares. On or +about January 30, 2013, Swart prepared and submitted securities deposit forms to a broker-dealer +for these Mainstream shares that he had received from the control person. Swart made a number of +misrepresentations in these forms, including the name of the seller of the shares (whom Swart +knew to be the control person) and “affiliate” status of the seller. The broker-dealer accepted the +deposit of these shares based on these representations, and Swart executed the sales of all of the +shares in the open market in March 2013. +3 + +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 Respondent is suspended +from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3904.txt b/raw/aaer/2017/AAER-3904.txt new file mode 100644 index 0000000000000000000000000000000000000000..4b055707ab4562265f39a27c01844d1aebabc95f --- /dev/null +++ b/raw/aaer/2017/AAER-3904.txt @@ -0,0 +1,555 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 4800 / October 26, 2017 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 32883 / October 26, 2017 + +SECURITIES AND EXCHANGE ACT OF 1934 +Release No. 81951 / October 26, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3904 / October 26, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17740 + + +In the Matter of + +AUGUSTINE CAPITAL +MANAGEMENT, LLC (F/K/A +AUGUSTINE CAPITAL +MANAGEMENT, INC.), JOHN T. +PORTER, and THOMAS F. +DUSZYNSKI, CPA, + + Respondents. + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS AND +A CEASE-AND-DESIST ORDER +PURSUANT TO SECTIONS 203(e), 203(f) +AND 203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, AND SECTION +9(b) OF THE INVESTMENT COMPANY +ACT OF 1940 AND INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS, AND +IMPOSING SANCTIONS PURSUANT TO +RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE AS TO THOMAS F. +DUSZYNSKI, CPA + + +I. + + On December 20, 2016, the Securities and Exchange Commission (“Commission”) +instituted proceedings 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 Augustine Capital Management, LLC (f/k/a Augustine Capital +Management, Inc.) (“ACM”); and pursuant to Sections 203(f) and 203(k) and Section 9(b) of the +Investment Company Act against John T. Porter (“J. Porter”) and Thomas F. Duszynski, CPA +(“Duszynski”) (collectively, ACM, J. Porter and Duszynski are referred to herein as the +“Respondents”). Further, the Commission deems it appropriate and in the public interest that + + 2 +public administrative proceedings be, and hereby are, instituted against Duszynski pursuant to Rule +102(e)(3)(i)(B) of the Commission’s Rules of Practice.1 + +II. + + Respondents have submitted Offers of Settlement (the “Offers”) which the Commission +has determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over them and +the subject matter of these proceedings, which are admitted, Respondents consent to the entry of +this Order Making Findings and Imposing Remedial Sanctions And A Cease-And-Desist Order +Pursuant To Sections 203(e), 203(f) and 203(k) of the Investment Advisers Act, and Section 9(b) +of the Investment Company Act (“Order”), and Instituting Public Administrative Proceedings, and +Imposing Sanctions, Pursuant to Rule 102(e) of the Commission’s Rules of Practice as to Thomas +F. Duszynski, CPA, as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +Summary + +1. Respondents J. Porter and Duszynski, together with another individual, own +Respondent Augustine Capital Management, LLC. ACM, in turn, acts as an investment adviser +for Augustine Fund, L.P. (the “Fund”), a private fund. +2. Respondents caused the Fund to engage in conflicted transactions without +disclosure to, or the consent of, the Fund’s investors. Such consent was needed because the +investment adviser had a conflict of interest and therefore could not give meaningful consent on +behalf of the Fund. Respondents invested in and lent money to two entities in which the ACM +owners had an interest. Respondents also lent an ACM owner, Duszynski, money to fund his +investment in a business venture with other ACM owners. Duszynski defaulted on the loan. +3. Respondents used nearly $950,000 in investor funds to pay for ACM’s expenses. +These expenses, which under the investment documentation provided to investors were to be +borne by ACM, included virtually all of ACM’s overhead expenses – including the salaries of +ACM employees. J. Porter, Duszynski and certain of their family members paid approximately + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, +temporarily suspend from appearing or practicing before it any attorney, accountant . . . who has been by name: +… +(B) . . . found by the Commission in any administrative proceeding to which he or she is a party to have violated +(unless the violation was found not to have been willful) or aided and abetted the violation of any provision of the +Federal securities laws or of the rules and regulations thereunder. + + 3 +$362,000 of these excess expenses. The other investors in the Fund paid approximately +$585,000 of these excess expenses. Additionally, even though J. Porter and Duszynski were +themselves investors in the Fund, they exempted themselves and certain of their relatives who +were investors in the Fund from paying their pro rata shares of their salaries. +4. The offering documentation ACM gave to investors provided that classes would +be formed and that an investor’s holdings in the Fund would be based upon when the investor +made an investment in the Fund. In practice, however, Respondents unilaterally determined +which investments were allocated to which investors, and how much cash was allocated to each +investor’s account. Respondents thereafter periodically reallocated various investors’ holdings. +Respondents improperly kept investors in the dark about what investments were allocated to +them, and why. +5. Respondents provided investors with account statements that did not accurately +reflect the value of certain underlying investments. Respondents privately concluded that one of +the Fund’s investments had been rendered worthless. But the account statements for the quarter +did not capture adverse developments that occurred during that timeframe. Instead, in the +account statements Respondents valued the investment at what the Fund had originally paid for +the investment before their determination the investment was worthless. +Respondents + +6. ACM is an Illinois limited liability company with its principal place of business in +Chicago, Illinois. It is an unregistered investment adviser owned by J. Porter, Duszynski and +another individual. It was formed in 1997 to act as the investment adviser for the Fund, and is the +general partner of the Fund. J. Porter and Duszynski control ACM. +7. J. Porter, 63 years old, is a resident of Chicago, Illinois and is a one-third owner of +ACM. He serves as its chief executive and chairman. He formerly was a futures trader and +member of the Chicago Board of Trade. J. Porter has never been registered with the Commission +in any capacity. +8. Duszynski, 62 years old, is a resident of Chicago, Illinois, and is a one-third owner +of ACM, for which he served as the chief operating officer, secretary and director. Duszynski was +a licensed CPA in Illinois but his status is currently inactive. Duszynski has never been registered +with the Commission in any capacity. + +Other Relevant Entity + +9. Augustine Fund, is an Illinois limited partnership formed in 1997. It operates as a +private fund and it meets the definition of a Pooled Investment Vehicle under Section 206(4)-8(b) +of the Advisers Act. At all relevant times, ACM managed the Fund. + + 4 +Background + +10. In 1997, J. Porter, Duszynski and another individual formed ACM to serve as the +investment adviser for a private fund they simultaneously launched, the Fund. ACM is the +general partner of the Fund. J. Porter and Duszynski each hold a one-third ownership interest in +ACM. J. Porter serves as ACM’s chief executive officer and chairman. Duszynski was its chief +operating officer. J. Porter and Duszynski handle the Fund’s investment decisions and day-to- +day operations. The Fund has operated continuously since 1997. +11. Between 2012 and 2015, the Fund had between 35 and 40 limited partners. +During that time the net asset value of the Fund as calculated by ACM ranged between +approximately $9 million and $14 million. The Fund is governed by a limited partnership +agreement, subscription agreement and private offering memorandum (“PPM”), as amended in +1999, (collectively the “Offering Documents”). +12. Since the early 2000s, the Fund has suffered a number of losses, and its +investments have become increasingly illiquid. + Respondents Caused the Fund to Engage in Conflicted Transactions +Without Disclosing the Conflict and Obtaining Consent. + +13. In late 2011 and January 2012, J. Porter and Duszynski caused the Fund to make +investments totaling $500,000 in a new trading venture, FT Investing, LLC (“FT Investing”), in +which they and the other ACM owner held a significant ownership interest. The Fund had no +investor advisory committee or other independent entity or person that could effectively consent +to conflicted transactions. ACM never disclosed to investors that the Fund had invested in the +venture, or that J. Porter and Duszynski had a significant ownership interest in it. +14. In December 2013, J. Porter and another ACM owner bought out the Fund’s +interest in the venture for $400,000—causing investors to take a 20% loss on their investment. +Respondents never apprised investors of this transaction, or of the conflict of interest inherent in +the transaction. +15. From 2012 through 2014, the Fund made a series of undocumented loans to FT +Trading, LLC (“FT Trading”), a wholly owned subsidiary of FT Investing. The loans were made +to cover FT Trading’s broker-dealer margin calls, which were wholly unrelated to the Fund. +The Fund’s internal records show that the outstanding balance on these loans reached more than +$600,000 at times. Respondents claimed the Fund received a five percent interest rate on these +loans. No loan documents reflected any such arrangement. +16. Reasonable investors would have considered it important that the Fund’s monies +were being used to make undocumented loans, without their consent, to cover the margin calls of +an entity controlled by J. Porter and Duszynski. + + 5 +17. Duszynski, J. Porter, and others formed FT Investing in late 2011. In January +2012, Duszynski, with J. Porter’s consent, took a $250,000 loan from the Fund to pay for his +ownership interest in the venture. ACM treated this personal loan as one of the Fund’s +“investments” and allocated it to a subset of investors in the Fund. Nothing in the Offering +Documents permitted the Fund to use Fund assets for personal loans to the directors of ACM. +Respondents never told investors about this purported investment, let alone procured the +investors’ consent. +18. Instead, ACM, J. Porter, and Duszynski actively concealed this loan from +investors. In August 2014, three investors in the Fund requested a description of the investments +they held as well as their value. Before they provided any information to the investors, +Respondents struggled with how to describe the loan. An email written by J. Porter stated: “We +need to discuss how to present the loan to Tom.” In another email, he suggested: “We may want +to make the loan to our co investor . . . due at the end of this year? That way [an Investor] will +know the money is coming and will be less inclined to ask questions. Also, a co investors name +should be kept private?” In response, Duszynski wrote: “As for [the loan to Duszynski], I’m not +comfortable calling it something else. If we deceive them it could come back and bite us . . . . +Maybe we reallocate some other stuff to the . . . just a thought.” J. Porter had another idea: “Can +we call it a loan to something not using your name?” +19. J. Porter prevailed, and Respondents ultimately agreed on the following verbiage, +which was provided to the three investors in August 2014: +Augustine Fund formerly held an investment in FT Investing, LLC. This +investment was liquidated in December 2013. When the original investment was +made, the Fund also made an interest-bearing loan to one of its co-investors in FT +Investing. This loan is on track to be fully repaid on its maturity date in +December 2014. + +20. This description was misleading because it did not reflect the conflicted nature of +the loan – that is, that the loan was made to Duszynski, a director of ACM. Additionally, it +misrepresented the loan’s repayment status, since by then Duszynski had not begun repaying the +loan. +21. Duszynski defaulted on the loan, which was to be repaid on January 3, 2015. Ten +days later, he made one payment of $163,233 on the loan. The remaining balance and interest +were not paid until February 13, 2017. +22. Reasonable investors would have considered it important both that the Fund’s +monies were used to make a substantial personal loan to a director of the general partner without +the investors’ consent, and that the director defaulted on the loan. + + + + 6 + Respondents Improperly Charged Investors for ACM’s Expenses. + +23. The Offering Documents entitle ACM to a management fee of one percent per +annum of the partnership’s net asset value. The management fee is intended to compensate +ACM for its “overhead and expenses in managing the Partnership.” The PPM allows ACM to +charge the Fund for “operating expenses” incurred by the Fund, a term defined by the PPM to +include communication costs, brokerage commissions, legal, accounting, and auditing fees. The +Offering Documents do not contemplate the Fund paying ACM’s salaries, healthcare, rent, or +other ACM expenses. +24. ACM nonetheless charged the Fund for all of ACM’s expenses. Between 2012 +through 2015, ACM totaled all of its expenses on a quarterly basis and deducted them as +“operating expenses” from the investors’ cash accounts in the Fund. Certain of these expenses +were unauthorized and exceeded the one percent management fee that the Offering Documents +authorized ACM to receive from the Fund. +25. ACM’s purported “operating expenses” collected from the Fund included the +salaries of Duszynski and two ACM employees: J. Porter’s son and an administrative assistant. +Additionally, Respondents made the Fund pay rent for ACM’s office space and healthcare costs +for J. Porter, Duszynski, the other ACM owner, J. Porter’s son and ACM’s administrative +assistant. +26. The Fund also made transfers to J. Porter totaling more than $373,000 even +though he was not owed these amounts as either salary or a profit distribution and he did not +have sufficient available cash in his account in the Fund to cover these withdrawals. +27. J. Porter and Duszynski chose not to allocate any portion of their salary expenses +to themselves as limited partners or certain of their relatives who were investors in the Fund. +Thus, the remaining Fund investors paid more than a pro rata share of J. Porter’s and +Duszynski’s salaries. +28. In 2003, certain investors approved a salary not to exceed $175,000 per year for +J. Porter. The investors never agreed to pay the salaries of the other ACM employees. +29. Respondents failed to exercise reasonable care by overcharging the Fund by +nearly $950,000 in expenses. + Respondents Concealed Losses and Bankruptcies from Investors. +30. Respondents provided investors with account statements on a quarterly basis and +gave summaries to certain investors in the relevant period. The quarterly statements were titled +“Partner’s Investment For The Calendar Quarter” and reflected the month and year of each +statement. The quarterly statements included account values as of the date of the statement. The +statements were misleading because they included values that were calculated by including the +original cost of investments despite the fact that the Respondents had determined certain +holdings were worthless and Respondents knew that certain fund holdings were in bankruptcy. + + 7 +31. Critically, that disclosure failed to incorporate Respondents’ revised valuation of +certain investments as a result of bankruptcies that occurred during the period covered by the +account statements. In May 2013, Respondents determined that one of the Fund’s investments +was “worthless.” In September 2013, they decided that three other investments had no value. +32. In some cases Respondents ultimately discounted the value of these investments +in documents supplied to investors. But they waited more than a year after first determining the +investments were worthless or were in bankruptcy before doing so. +33. In May 2013, Duszynski emailed an investor about the Fund’s investment in +Company A: “It appears that our remaining investment in [Company A] is worthless.” He +copied J. Porter on the email. Four months later, in a letter to an investors’ wife, Duszynski +similarly wrote: “[Company A] is a publicly traded company that has no value, and which we +will be writing off this year.” +34. Respondents did not write off Company A until the fourth quarter of 2014—more +than a year and a half after they had independently concluded the investment was “worthless.” +35. In September 2013, Respondents engaged in similar deception concerning three +other investments. These were all investments in which Respondents had concluded that “any +future recovery is doubtful,” and thus internally estimated their value at zero. But Respondents +failed to account for such developments in the account statements they sent investors during the +relevant period. Rather, in such statements to investors Respondents used the initial cost of the +investments – which they called the “book value.” +36. As discussed in paragraphs 37 through 42 below, two companies in which +Respondents invested on the investors’ behalf went bankrupt. In communications with investors +and in account statements during that timeframe, Respondents misrepresented that these +investments were worth what the Fund had initially paid for them years before the bankruptcies. +37. In 1999, the Fund made an investment of approximately $1.67 million in +Company B. Thereafter, the company struggled. In November 2001, Respondents forced the +company into bankruptcy. As part of the Chapter 11 reorganization, ACM assumed ownership +of the company and Respondents transformed it into a publicly traded shell company. The Fund +thereafter invested an additional $1.53 million of Fund monies into the company, but to no avail. +From 2004 through 2011, the company had no revenues, limited assets, and mounting liabilities. +38. Only in February 2012 did Respondents first notify the Fund’s investors that +Company B had been forced into bankruptcy more than a decade earlier. But even after that +belated disclosure, Respondents then delayed writing off the Fund’s $3.2 million investment +until the first quarter of 2014. + + + + 8 +39. Shortly after the Fund made a debt investment of $150,000 in Company C, its +wholly owned subsidiary and sole asset filed for bankruptcy – in September 2013. Respondents +knew about the bankruptcy no later than October 2013. But in ACM’s quarterly statements to +investors, Respondents continued to carry Company C at the amount of the Fund’s original debt +investment in the company. They did so for years. +40. In August 2014, internal emails show that Respondents came close to disclosing +the bankruptcy filing to three investors who had requested a summary of their holdings in the +Fund. But they ultimately omitted this information in the summary sent to investors. Rather, as +of 2015, in disclosures to the investors Respondents continued valuing Company C at the cost of +the Fund’s original investment in the company before the bankruptcy. +41. As a result, between the first quarter of 2012 and the fourth quarter of 2015 +Respondents gave investors quarterly account statements with inflated valuations that did not +accurately reflect the value of the investments. +42. Reasonable investors would have considered it important that two of the Fund’s +holdings—including one that had previously made up more than 20% of the Fund’s Net Asset +Value—were involved in bankruptcy proceedings, and that four other investments had no value. +Reasonable investors would have also found it important that Respondents hid such information +when Respondents supplied Fund investors with account statements that did not reflect the value +of the investments in the wake of the bankruptcies and other events Respondents had determined +impacted the value. + Respondents Denied Investor Redemption Requests and +Prevented Investor Exits from the Fund. + +43. The PPM states that limited partnership interests are sold in successive classes, +each class invests in the same investment(s), and new investors in the Fund are put into a new +class. The classes do not share in the same investments as previous classes. The PPM also states +that profits and losses will be shared on a pro rata basis by class. +44. In practice, however, that is not the way Respondents managed the Fund. Rather, +Respondents never formed classes. During the relevant period, Respondents periodically +transferred the investment holdings among and between the Fund’s investors, a process they +referred to as “reallocation.” They did so without the investors’ knowledge or consent. +45. In at least two instances, the reallocations prevented investors who sought to exit +the Fund from doing so. In 2008 an investor requested that the Fund stop using his funds to +make new investments, and to pay him any available cash in his account. The Fund maintained a +cash component allocated to each investor. J. Porter agreed to this request. Nonetheless, +Respondents allocated at least three new investments to this investor in 2012. Doing so used +more than $80,000 of this investor’s available cash in the Fund at that time. The full amount of +that cash was returned to the investor in November of 2016. + + 9 +46. In October 2012, another investor made clear to J. Porter in an email that “getting +cashed out now is my number 1 objective.” J. Porter promised to try to honor the investor’s +request. He copied Duszynski on his response. Rather than doing so, however, less than two +weeks after he received the email, J. Porter instead directed that another investor’s share of +Duszynski’s loan and Company C – one of the bankrupt companies described above – be +allocated to the requesting investor in exchange for the investor’s available cash. This +reallocation prevented the investor from withdrawing all his available cash from the Fund at that +time. That cash has since been returned to the investor. + J. Porter and Duszynski Were Investment Advisers, Committed +Violations and Aided and Abetted and Caused ACM’s Violations. + +47. At all times, J. Porter and Duszynski managed the Fund’s investments and made +all final investment decisions for the Fund. They received salaries for advising the Fund during a +portion of the relevant time. +48. J. Porter and Duszynski decided and directed that: (a) Fund monies were loaned to +their private venture and to Duszynski; (b) the Fund invested in J. Porter and Duszynski’s private +venture; (c) all of ACM’s expenses were charged to the Fund; (d) Company C and the Duszynski +loan “investment” were allocated to an investor after he directed Respondents not to make any +further investments on his behalf; (e) ACM not disclose Duszynski’s receipt of a personal loan +from Fund assets; (f) ACM not disclose to investors that certain companies in which the Fund +had invested were impacted by bankruptcy proceedings; (g) ACM continued to value +investments at the original amount invested and delayed the write-off of other investments it had +determined were worthless or were in bankruptcy; and (h) Fund holdings were allocated and +reallocated in a manner inconsistent with the offering documents. +49. ACM owed fiduciary duties to the Fund. As investment advisers and associated +persons of the investment adviser for the Fund, J. Porter and Duszynski were also fiduciaries. +50. Respondents breached their fiduciary duties to the Fund when they caused the +Fund to engage in the above described transactions with FT Investing and FT Trading and +caused the Fund to make a personal loan to Duszynski. +51. Respondents sent misleading account statements and other communications to +Fund investors, and engaged in other acts, practices or courses of business that were fraudulent, +deceptive, or manipulative by arbitrarily reallocating investment holdings within the Fund and +not returning available cash to investors who sought to exit the Fund. +Violations + +52. As a result of the conduct described above, Respondents ACM, J. Porter and +Duszynski willfully violated, Sections 206(1), 206(2), and 206(4) of the Advisers Act, and Rule +206(4)-8(a) thereunder, which prohibit fraudulent conduct by an investment adviser. + + 10 +53. As a result of the conduct described above, Respondents J. Porter and Duszynski +also willfully aided and abetted and caused ACM’s violations of Sections 206(1), 206(2), and +206(4) of the Advisers Act and Rule 206(4)-8(a) thereunder. +Undertakings + +54. Respondents ACM, J. Porter and Duszynski have each undertaken to: +a. provide a copy of this Order via mail, email, or hand delivery to each of the +Augustine Fund’s limited partners within thirty (30) days of entry of this +Order. +b. agree not to receive any portion of any monies distributed to limited +partners of the Augustine Fund pursuant to this Order. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent ACM’s, Respondent J. Porter’s and Respondent +Duszynski’s Offers. + + Accordingly, pursuant to Sections 203(e) and 203(k) of the Advisers Act and Section 9(b) +of the Investment Company Act against ACM; and pursuant to Sections 203(f) and 203(k) and +Section 9(b) of the Investment Company Act against J. Porter and Duszynski, and pursuant to Rule +102(e)(3)(i)(B) of the Commission’s Rules of Practice against Duszynski, it is hereby ORDERED +that: + +A. Respondent ACM cease and desist from committing or causing any violations and +any future violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act and +Rule 206(4)-8 promulgated thereunder. + +B. Respondent J. Porter cease and desist from committing or causing any violations and +any future violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act and +Rule 206(4)-8 promulgated thereunder. + +C. Respondent Duszynski cease and desist from committing or causing any violations +and any future violations of Sections 206(1), 206(2), and 206(4) of the Advisers Act +and Rule 206(4)-8 promulgated thereunder. + +D. Respondent J. Porter be, and hereby is: + +barred from association with any broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization; + + + 11 +prohibited from serving or acting as an employee, officer, director, member +of an advisory board, investment adviser or depositor of, or principal +underwriter for, a registered investment company or affiliated person of such +investment adviser, depositor, or principal underwriter; + +with the right to apply for reentry after three (3) years to the appropriate self- +regulatory organization, or if there is none, to the Commission. + +E. Respondent Duszynski be, and hereby is: + +barred from association with any broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization; + +prohibited from serving or acting as an employee, officer, director, member +of an advisory board, investment adviser or depositor of, or principal +underwriter for, a registered investment company or affiliated person of such +investment adviser, depositor, or principal underwriter; + +with the right to apply for reentry after three (3) years to the appropriate self- +regulatory organization, or if there is none, to the Commission. + +F. Respondent Duszynski be, and hereby is, suspended from appearing and practicing +before the Commission as an accountant. + + G. Respondent ACM is censured. + +H. Any reapplication for association by J. Porter or Duszynski 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 +Respondents, 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. + +I. Respondents ACM, J. Porter and Duszynski shall within thirty (30) days of the +entry of this Order, pay disgorgement of $685,514.73, and prejudgment interest of +$42,791.38, for which Respondents are jointly and severally liable, to the Securities +and Exchange Commission. If timely payment is not made, additional interest shall + + 12 +accrue pursuant to SEC Rule of Practice 600, 17 C.F.R. § 201.600. Respondents +shall also pay a civil money penalty as follows: + +(i) Respondent ACM shall pay a civil money penalty in the amount of +$150,000.00, consistent with the provisions of this Subsection I. + +(ii) Respondent J. Porter shall pay a civil money penalty in the amount +of $75,000.00, consistent with the provisions of this SubsectionI. + +(iii) Respondent Duszynski shall pay a civil money penalty in the +amount of $50,000.00 consistent with the provisions of this +Subsection I. + + 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 ACM may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; +2. Respondent ACM 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 j +3. Respondent ACM 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 Respondents ACM, J. Porter and Duszynski 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 Robert J. Burson, Division of Enforcement, +Securities and Exchange Commission, 175 W. Jackson Boulevard, +Suite 1450, Chicago, IL 60604. + + + 13 +J. 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 described +in Paragraph I above for distribution to affected investors. No portion of the Fair +Fund shall be paid to any affected investor account to which Respondents, or the +wife of any Respondent, has a direct or indirect financial interest. 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 thirty (30) days after entry +of a final order granting the Penalty Offset, notify the Commission’s counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against any Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent J. Porter and Respondent Duszynski, and further, any debt for disgorgement, +prejudgment interest, civil penalty or other amounts due by Respondent J. Porter and Respondent +Duszynski under this Order or any other judgment, order, consent order, decree or settlement +agreement entered in connection with this proceeding, is a debt for the violation by Respondent of +the federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3905.txt b/raw/aaer/2017/AAER-3905.txt new file mode 100644 index 0000000000000000000000000000000000000000..905f3bb3c67d8370973c0191f10c57e35457619d --- /dev/null +++ b/raw/aaer/2017/AAER-3905.txt @@ -0,0 +1,1379 @@ + + + + + + + + + + + + + + + + SEC.gov | Osiris Therapeutics, Inc., et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/520391","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Osiris Therapeutics, Inc., et al. + + + + + + + + + + + + Osiris Therapeutics, Inc., et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 23978 / November 3, 2017 + + Accounting and Auditing Enforcement Release No. 3905 / November 3, 2017 + + Securities and Exchange Commission v. Osiris Therapeutics, Inc., et al. , Civil Action No. 17-cv-03230 (D. Maryland, November 2, 2017) + + SEC CHARGES BIOTECH COMPANY, EXECUTIVES WITH ACCOUNTING FRAUD + + + + + The Securities and Exchange Commission yesterday charged a Maryland-based biotech company and four former top executives with prioritizing revenue growth over lawful accounting and misleading investors in the process. + + The SEC alleges that Osiris Therapeutics routinely overstated company performance and issued fraudulent financial statements for a period of nearly two years. According to the SEC's complaint, the company improperly recognized revenue using artificially inflated prices, backdated documents to recognize revenue in earlier periods, and prematurely recognized revenue upon delivery of products to be held on consignment. Osiris Therapeutics and its executives also allegedly used pricing data that they knew was false and attempted to book revenue on a fictitious transaction, among other accounting improprieties. + + The SEC's complaint charges Osiris Therapeutics and four executives who led the company during the alleged period of accounting fraud from 2014 to 2015: chief executive officer Lode B. Debrabandere, chief financial officers Philip R. Jacoby Jr. and Gregory I. Law, and chief business officer Bobby Dwayne Montgomery. The complaint alleges that OsirisTherapeutics, Debrabandere, Jacoby, and Law violated the antifraud provisions of the securities laws in 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. The complaint also alleges that Osiris Therapeutics violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a11, and 13a-13 thereunder, and that Debrabandere, Jacoby, and Law aided and abetted or acted as a control person for Osiris Therapeutics' violations of these provisions and the antifraud provisions. Additionally, the complaint alleges that Debrabandere, Jacoby, and Law directly violated Exchange Act Section 13(b)(5) and Rules 13a-14, 13b2-1, and 13b2-2 thereunder. Finally, the complaint alleges that Montgomery aided and abetted Osiris Therapeutics' violations of the antifraud provisions and directly violated Exchange Act Section 13(b)(5) and Rules 13b2-1 and 13b2-2. The SEC's complaint seeks disgorgement of ill-gotten gains plus interest and penalties along with officer-and-director bars. + + Osiris Therapeutics agreed to settle the charges without admitting or denying the allegations and must pay a $1.5 million penalty. The litigation continues against the four executives. + + The SEC appreciates the cooperation of the U.S. Attorney's Office for the Southern District of New York, which filed criminal charges against Jacoby. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2017/AAER-3906.txt b/raw/aaer/2017/AAER-3906.txt new file mode 100644 index 0000000000000000000000000000000000000000..a1fce69394750a1a608c2d1b71373b5fb52c40a8 --- /dev/null +++ b/raw/aaer/2017/AAER-3906.txt @@ -0,0 +1,80 @@ + 1 +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10437 / November 14, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82073 / November 14, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3906 / November 14, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18281 + +In the Matter of +PAUL BEHRENS, CPA, +Respondent. + +ORDER OF SUSPENSION PURSUANT TO +RULE 102(e)(2) OF THE COMMISSION’S +RULES OF PRACTICE + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate to issue an +order of forthwith suspension of Paul Behrens (“Behrens”) pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + +II. + + The Commission finds that: + +A. Respondent + +1. Behrens, age 54, previously held licenses as a Certified Public Accountant in Florida +and Wisconsin, which expired in 2006 and 2007, respectively. + +2. Behrens previously served as senior vice president and Chief Financial Officer of +WellCare Health Plans, Inc. (“WellCare”), a public company, from 2003 until his resignation in + +1 Rule 102(e)(2) provides in pertinent part: “any person whose license to practice as an +accountant . . . has been revoked or suspended in any State; or any person who has been +convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended +from appearing or practicing before the Commission.” See 17 C.F.R. 201.102(e)(2). + 2 +January 2008. In that capacity he routinely signed WellCare’s financial statements and other +documents filed with the Commission. + +B. Behrens Was Convicted of Fraud and Health Care Law Violations + +3. On June 13, 2013, a judgment of conviction was entered against Behrens in United +States v. Farha, et al., Crim. No. 8:11cr-00115-JSM-MAP (MDFL), a criminal action filed in the +United States District Court for the Middle District of Florida. After a trial, Behrens was found +guilty of two counts of making false statements relating to health care matters in violation of 18 +U.S.C. § 1035 and two counts of health care fraud in violation of 18 U.S.C. §1347. + +4. As a result of the conviction, in May 2014, Behrens was sentenced to 24 months +imprisonment in a federal penitentiary. The United States Court of Appeals for the Eleventh +Circuit upheld Behrens’ conviction and sentence on appeal, United States v. Clay, 832 F.3d 1259 +(Aug. 11, 2016), and Behrens began serving his prison sentence in December 2016. + +III. + + In view of the foregoing, the Commission finds that Behrens has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + + Accordingly, IT IS ORDERED that Paul Behrens is forthwith suspended from appearing or +practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3908.txt b/raw/aaer/2017/AAER-3908.txt new file mode 100644 index 0000000000000000000000000000000000000000..5fda57ea737f1fee9bb0ed6c0a5217cc4c833644 --- /dev/null +++ b/raw/aaer/2017/AAER-3908.txt @@ -0,0 +1,1380 @@ + + + + + + + + + + + + + + + + SEC.gov | Jay Mac Rust and Christopher K. 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Brenner + + + + + + + + + + + + Jay Mac Rust and Christopher K. Brenner + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + + Litigation Release No. 23996 / November 21, 2017 + + Accounting and Auditing Enforcement Release No. 3908 / November 21, 2017 + + Securities and Exchange Commission v. Jay Mac Rust and Christopher K. Brenner , No. 16-cv-03573 (S.D.N.Y. filed May 13, 2016) + + SEC Obtains Judgment Against Attorney Who Defrauded Escrow Clients in Securities Fraud Scheme + + + + + The Securities and Exchange Commission announced that it obtained a final judgment by default on November 13, 2017 against Jay Mac Rust, an attorney whose license to practice law was suspended for three years by the State Bar of Texas as of August 15, 2017. The case involved a scheme to defraud by Rust and a co-defendant in connection with the offer and sale of securities. + + The amended default judgment, entered by the Honorable Edgardo Ramos of the U.S. District Court for the Southern District of New York, permanently enjoins Rust from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and orders Rust to pay disgorgement and pre-judgment interest of $191,783.01 and a civil money penalty of $160,706.79. + + On May 13, 2016, the SEC charged Rust and his co-defendant, Christopher K. Brenner, with fraud for making undisclosed risky investments and in some instances outright stealing money they obtained in escrow accounts from small business owners seeking commercial loans. On June 9, 2017, the SEC obtained a partial judgment against Brenner that permanently enjoined him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and ordered him to pay disgorgement, pre-judgment interest, and a civil money penalty in amounts to be determined at a later date. Brenner consented to the issuance of a June 21, 2017 Commission Order suspending him from appearing and practicing before the SEC as an attorney. Brenner neither admitted nor denied the allegations in the complaint or the findings in the Order. On October 6, 2017, the SEC filed a motion with the Court seeking disgorgement and a civil money penalty against Brenner, which remains pending. + + The examination that uncovered the misconduct was conducted by broker-dealer examiners in the New York office. The ensuing investigation was conducted by Daphna A. Waxman, Tuongvy T. Le, and Valerie A. Szczepanik. The litigation is being led by Richard G. Primoff, and the case is being supervised by Lara S. Mehraban. + For further information, see Litigation Release No. 23865 (June 21, 2017) + + + + + SEC Complaint --> + + +   + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2017/AAER-3909.txt b/raw/aaer/2017/AAER-3909.txt new file mode 100644 index 0000000000000000000000000000000000000000..15980b202b0b4e36430fe218230ea20bb063e3cb --- /dev/null +++ b/raw/aaer/2017/AAER-3909.txt @@ -0,0 +1,183 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82154 / November 27, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3909 / November 27, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18289 + + + +In the Matter of + +JON L. FRANK, + +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 Jon L. Frank +(“Respondent” or “Frank”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C +and 21C of the Securities Exchange Act of 1934 and Rule102(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: + +Respondent + +1. Jon L. Frank, age 48, is a resident of Reston, Virginia. Frank was employed by +NCI, Inc. from March 2000 to January 2017. During the relevant period, Frank worked for NCI, +Inc. as a Vice President and Controller. Frank has an accounting education and expertise but does +not hold any professional licenses. + +Relevant Entities + + 2. NCI, Inc. (“NCI” or “Company”), an information technology and staffing services +firm headquartered in Reston, Virginia, was a public company with its stock listed on NASDAQ +throughout Frank’s employment. + +Facts + +3. As Vice President and Controller of NCI, Frank had responsibility for the +Company’s accounting functions, including accounts receivable, accounts payable, and the +general ledger. In connection with his role as Controller, Frank had access to the Company’s +financial statements, general ledger, payroll, and bank accounts. Frank also had the ability to +initiate payments from NCI bank accounts using a telephonic system through NCI’s bank. + + + + 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 + 4. Beginning in approximately 2007, Frank used his position at NCI to direct +unauthorized payments from NCI’s payroll account to his personal bank accounts. He continued +to make these payments until his conduct was discovered by NCI in January 2017. As an +example, on January 15, 2016, Frank placed a telephone call from his office to approve a transfer +of $359,997.32 from NCI’s bank account to Frank’s personal bank account. Over an +approximately 10 year period, Frank diverted more than $19 million of Company funds to his +personal bank accounts. He then used much of the money to buy expensive automobiles and real +estate. + + 5. To hide his fraud, Frank created false records to make it appear that the money +was going to the company that administered NCI’s health insurance plan. The false records +included false payment requests from the company administering the health insurance plan and +false bank records for NCI’s payroll bank account. Frank used these fictitious documents as +support for his fraudulent payments and to mislead NCI employees. The false accounting entries +directed by Frank were reflected in financial statements incorporated in NCI quarterly and +annual reports filed with the Commission. + +6. NCI uncovered Frank’s scheme in January 2017. Subsequently, NCI restated +financial statements that the Company had previously filed with the Commission for 2014, 2015 +and 2016 to reclassify the embezzled funds from cost of revenues and general and administrative +expenses to misappropriation loss. + +Plea Agreement + +7. On June 9, 2017, Frank pleaded guilty to criminal conduct relating to the findings +in this Order. Specifically, in United States v. Jon Lawrence Frank, Crim. No. 1:17-CR-114 +(E.D.VA.), Frank pleaded guilty to one count of wire fraud in violation of 18 U.S.C. §1343. As +part of his guilty plea, Frank agreed to an order requiring him to pay full restitution of the +misappropriated funds. + +Violations + + 8. As described above, Frank engaged in a fraudulent scheme by embezzling funds +from a public company, and creating false documents to mislead company employees and hide his +fraud. + + 9. As a result of the conduct described above, Frank willfully violated Section 10(b) +of the Exchange Act and Rules 10b-5(a) and (c) thereunder, which prohibit, in connection with the +purchase and sale of securities, the use of any device, scheme, or artifice to defraud, or engaging in +any act, practice or course of business which operates or would operate as a fraud. + +Findings + + 10. Based on the foregoing, the Commission finds that Frank willfully violated +Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder. + + +4 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Frank’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Frank shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) +thereunder; + +B. Pursuant to Section 21C(f) of the Exchange Act, Frank be, and hereby is, prohibited +from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act; and + +C. Frank is denied the privilege of a ppearing or practicing before the Commission as +an accountant. + + By the Commission. + + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3912.txt b/raw/aaer/2017/AAER-3912.txt new file mode 100644 index 0000000000000000000000000000000000000000..183404b508cce20a6ab8b151f84a45ad515dce74 --- /dev/null +++ b/raw/aaer/2017/AAER-3912.txt @@ -0,0 +1,851 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82207 / December 4, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3912 / December 4, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18293 + + + + +In the Matter of + +RICHARD J. KOCH, 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 Richard J. +Koch, CPA (“Respondent” or “Koch”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in pertinent part, that the Commission may censure any person, or +deny, temporarily or permanently, to any person the privilege of appearing or practicing +before the Commission in any way, if that person is found . . . to have engaged in +unethical or improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that the Commission may censure a person +or deny, temporarily or permanently, the privilege of appearing or practicing before it in +any way to any person who is found . . . to have engaged in unethical or improper +professional conduct. +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. These proceedings arise out of improper professional conduct by Koch, an audit +partner at Anton & Chia, LLP (“A&C”), related to the 2013 year-end audit of Premier Holding +Corp. (“Premier”) and the 2013 second and third quarter interim reviews of CannaVEST Corp. +(“CannaVEST”). For both the Premier and CannaVEST engagements, Koch was the engagement +quality reviewer (“EQR”). As the EQR, Koch failed to adhere to standards of the Public Company +Accounting Oversight Board (“PCAOB”) and ignored a number of red flags that indicated that +Premier’s and CannaVEST’s financial statements did not conform to Generally Accepted +Accounting Principles (“GAAP”) and contained material misstatements. As a result, Koch engaged +in improper professional conduct during these engagements. + +2. In addition, for Premier’s 2013 audit, despite his improper professional conduct, +Koch provided his concurring approval to issue an audit report for Premier’s year-end financial +statements in which the report inaccurately represented that A&C had conducted the audit in +accordance with PCAOB standards and further misleadingly represented that, based on that audit, in +A&C’s opinion, Premier’s financial statements presented fairly, in all material respects, the +company’s financial position and results of operations in accordance with GAAP. As a result, +Koch was a cause of A&C’s violation of Rule 2-02(b) of Regulation S-X. + + + + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +RESPONDENT + +3. Richard J. Koch, CPA, age 62, of Westlake Village, California, is an A&C audit +partner. Koch is a licensed CPA in California and Texas, and was a licensed CPA in Louisiana. +Koch joined A&C in June 2013 as a partner and was the managing partner of A&C’s Westlake +Village office from July 2014 to June 2016. Koch served as the EQR for Premier’s 2013 year-end +audit, and as the EQR for CannaVEST’s second and third quarter of 2013 interim reviews. + +OTHER RELEVANT PERSONS AND ENTITIES + +A&C Related Persons and Entities + +4. Anton & Chia, LLP is a PCAOB registered audit firm since 2009 and a California +limited liability partnership headquartered in Newport Beach, California, with additional offices in +San Diego and Westlake Village, California. A&C was founded in 2009 by Georgia Chung +(“Chung”), and is currently co-owned by Chung and her husband, Gregory Wahl (“Wahl”). A&C +conducted Premier’s 2013 year-end audit and CannaVEST’s 2013 interim reviews. + +5. Gregory A. Wahl, CPA, age 43, of Irvine, California, is A&C’s managing partner, +and co-owner with Chung. Wahl is a licensed CPA in California and New York, and a chartered +accountant in British Columbia, Canada. Wahl served as the engagement partner for Premier’s +2013 year-end audit and CannaVEST’s 2013 interim reviews. + +6. Georgia Chung, CPA, age 49, of Irvine, California, is A&C’s co-owner with +Wahl. Chung is a licensed CPA in California and Colorado. Chung served as the EQR for +CannaVEST’s first quarter of 2013 interim review. + +7. Tommy Shek, CPA (“Shek”), age 34, of Rowland Heights, California, was an +A&C audit manager. Shek is a licensed CPA in California. Shek worked at A&C from July 2011 +through at least October 2015. From January 2013 to July 2014, Shek was an A&C audit manager. +In July 2014, Shek was promoted by A&C to senior audit manager. Shek served as the audit +manager for CannaVEST’s 2013 interim reviews.4 + +4 On December 4, 2017, the Commission instituted an Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of +the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of +Practice and Notice of Hearing against A&C, Wahl, Chung, Shek, and Michael +Deutchman, CPA (a former A&C audit partner) concerning their conduct in the audits +and/or interim reviews for Premier, CannaVEST, and/or a third company, Accelera +Innovations, Inc. (“Accelera”) (Exchange Act Rel. No. 34-82206). Also on December 4, +2017, the Commission instituted an Order Instituting Public Administrative and Cease- +and-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and + +4 + +Premier Related Persons and Entities + +8. Premier Holding Corporation is a Nevada corporation with its principal place of +business in Tustin, California. At all relevant times, Premier was a self-described provider of a +large array of energy services through its subsidiary companies. Premier’s common stock is and +was at all relevant times registered with the Commission pursuant to Section 12(g) of the Exchange +Act and quoted on the OTC Link, under ticker PRHL. Premier files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. Premier’s fiscal year ends on December 31. Throughout the relevant +period, Premier raised funds through purportedly private sales of stock. For most of the relevant +period, Premier was run, at least nominally, by Kevin Donovan and, from October 2012 on, by +Randall Letcavage. + +9. WePower Ecolutions, Inc. was a wholly-owned subsidiary of Premier formed in +November 2011 for the purpose of “offer[ing] renewable energy production and energy efficiency +products and services.” In January 2013, Premier effectively sold the business and the name. On +February 26, 2013, WePower Ecolutions’ name was changed to Energy Efficient Experts (E3). + +10. WePower Eco Corp. (“New Eco”), a Delaware corporation located in Aliso Viejo, +California, effectively acquired WePower Ecolutions in January 2013. + +11. The Power Company USA, LLC (“TPC”) was a privately-owned deregulated +power broker that brokered power to both residential and commercial users in the twelve states that +allowed the distribution of deregulated power. Since February 28, 2013, TPC has been 80% +owned by Premier. + +CannaVEST Related Persons and Entities + +12. CannaVEST Corp. is a Delaware corporation headquartered in Las Vegas, +Nevada. CannaVEST, originally a shell company named Foreclosure Solutions, Inc., changed its +name to CannaVEST Corp. (OTCBB, ticker: CANV) on January 29, 2013. CannaVEST entered +into the business of acquiring raw hemp product from suppliers in Europe and reselling it to third +parties and also developing, producing, and selling consumer products that contain Cannabidiol +(“CBD”) oil (a type of hemp oil). In early January 2016, CannaVEST changed its name to CV +Sciences, Inc. (OTCQB, ticker: CVSI), and claimed to develop pharmaceutical drugs that contain +CBD oil. CannaVEST’s common stock is registered with the Commission pursuant to Exchange +Act Section 12(g). + +Imposing Remedial Sanctions and a Cease-and-Desist Order against Rahuldev Gandhi, +CPA, a former A&C audit partner, concerning his conduct in an audit for Accelera +(Exchange Act Rel. No. 34-82208). +5 + +13. Michael J. Mona, Jr. (“Mona”), age 63, of Las Vegas, Nevada, is CannaVEST’s +CEO and a board member. Mona became CannaVEST’s CEO in November 2012, and a board +member in January 2013.5 + +FACTS + + 2013 PREMIER AUDIT + +Background + +Premier’s Fraudulent Valuation of the Note and the Gain on the Sale of the Worthless Assets + +14. In December 2011, Randall Letcavage and an associate (“Associate A”) acquired +approximately 50% of Premier’s outstanding shares, paying $175,000 in cash to the Company’s +then-CEO and majority shareholder, and caused Premier to acquire certain assets from green +energy companies owned entirely or in large part by either Letcavage or Associate A (“related- +party green energy companies”) in exchange for additional Premier stock. Using these assets, and +through a new wholly-owned subsidiary, WePower Ecolutions, Premier’s business changed from +selling low-priced caskets to providing clean energy products and services. Letcavage and +Associate A installed Kevin Donovan as CEO of WePower Ecolutions and as president and CEO +of Premier itself. + +15. Premier valued the assets obtained from the related-party green energy companies +at zero, noting in its FY 2011 and FY 2012 financial statements that the assets had been obtained +from the two related-party green energy companies and that the equipment obtained, originally +valued at approximately $16,000, had proven to be defective, and thus its value had been reduced +to zero. + +16. Premier’s performance following the change in business model remained poor, +however, and its share price declined throughout 2012. In the fourth quarter of 2012, Letcavage +and Associate A arranged for a management shake-up in which, among other changes, Letcavage +joined the board of directors and replaced Donovan as Premier’s and WePower Ecolutions’ +president and CEO and several board members were replaced. Under Letcavage’s management, +Premier then decided to discontinue the operations of WePower Ecolutions and report a roughly +$750,000 loss on the discontinued operations. + +The Discontinued-Operations-for-Note Swap + +17. In January 2013, after protracted negotiations with Donovan over his exit package, +Premier effectively sold WePower Ecolutions to a newly-formed company (New Eco), to be run + +5 On June 15, 2017, the Commission filed a civil injunctive action against CannaVEST and +Mona in District Court in Nevada (Case No. 2:17-CV-01681-APG-PAL). +6 + +by Donovan. In exchange, New Eco gave Premier an unsecured note with a $5 million face value +(the “Note”), and purportedly assumed certain Premier liabilities (the “Discontinued-Operations- +for-Note Swap”). + +18. The terms of the Note were extremely generous to New Eco. Among other things, +the Note was unsecured and secondary to all other debt New Eco might incur, the interest rate was +below market at 2%, and repayment was scheduled over twenty years, with no principal payments +due for five years and no interest due for eleven months. Neither the face amount nor the terms of +the Note were based on a valuation, independent or otherwise, of the assets transferred to New +Eco. + +19. Given that the Note was received in exchange for assets and not cash, under GAAP, +upon receipt the Note should have been “recorded at the fair value of the property, goods, or +services or at the amount that reasonably approximates the fair value of the note [receivable], +whichever is the more clearly determinable.” ASC 310-10-30-5, Receivables. + +20. Premier management’s estimate of the fair value of the Note at the time of receipt +was $869,000 – a figure that was inconsistent with GAAP but rather was chosen to achieve the +desired accounting result. The $869,000 figure was the largest of three fair value figures that +appeared on a document provided to Premier by an independent valuation firm the company had +engaged to value the Note (“Valuation Firm”). This document, which Premier later characterized +as a “preliminary valuation,” consisted solely of Excel spreadsheets illustrating the Valuation +Firm’s valuation models, as applied to outdated and unsupported revenue projections for New +Eco.6 The Valuation Firm sought updated revenue projections and support for such projections +from New Eco, and sought Premier’s help in getting such information, but never received it.7 + + + +6 The Valuation Firm needed current revenue projections for New Eco and support for the +projections in order to value New Eco, the borrower. The Firm was trying to value the +borrower, because the collectability of the Note was entirely dependent on the borrower’s +(New Eco’s) ability to pay because the Note was unsecured and not guaranteed. The +$869,000 figure was one of the two – unsupported – figures for the fair value of New Eco +that appeared on the spreadsheets; the third was a figure for the fair value of the Note. + +7 The Valuation Firm ultimately completed its work without the requested information, +valuing the Note at zero and New Eco at less than $10,000. The Firm’s findings and +analysis were set forth in a draft valuation report, which the Firm sent to Premier +management on or about April 9, 2014. As explained in the report, the Firm’s valuations +were primarily based on the 2012 performance of WePower Ecolutions, which had not +been known to the Firm when it generated the “preliminary valuation” and the terms of +the Note. That information was, or should have been, known to Koch during the audit. + +7 + +The Note-for-Stock Swap + +21. The first payment on the Note – an interest payment of $50,000 – was due on +December 7, 2013. New Eco failed to make the payment and the Note went into default on +December 22, 2013. Without assessing the Note for impairment or collectability, Premier +continued to report the Note as an asset valued at $869,000 on its December 31, 2013 balance +sheet. + +22. On or about February 27, 2014, Premier exchanged the Note with WePower LLC, a +related party,8 for the return of 2.5 million shares of Premier common stock held by WePower LLC +)(the “Note-for-Stock Swap”). WePower LLC was not only a related party; it was also the source +of most of the worthless related-party green energy assets upon which New Eco’s business was +based (and the discontinued WePower Ecolutions’ operations had been based). + +23. Premier disclosed the Note-for-Stock swap in a Subsequent Events note to its 2013 +financial statements. The company failed to disclose, however, that the Note was in default on +December 31, 2013. + +Premier Improperly Accounted for its Stake in TPC + +24. On February 28, 2013, Premier acquired an 80% interest in TPC, along with an +option to purchase the remaining 20% interest within 120 days, in exchange for 30 million shares +of Premier common stock. + +25. In its financial statements for the first three quarters of 2013 and its audited FY +2013 financial statements, Premier valued its interest in TPC at $4.5 million – the purported value +of the 30 million shares issued to the sellers as consideration for the acquisition – and allocated the +entire amount to goodwill, which then constituted a majority of the company’s assets. The +company explained that it had allocated the $4.5 million amount to goodwill because an +independent valuation of the identifiable assets and liabilities it had acquired had not yet been +completed. + +26. Premier’s accounting for its stake in TPC did not conform to GAAP in several +respects. First, according to ASC 805, Business Combinations, before recognizing goodwill from +an acquisition, all identifiable assets and liabilities acquired (including identifiable intangible +assets) must be assigned a portion of the purchase price based on their fair values. Only after this + +8 Related parties include owners of record or known beneficial owners of more than 10% +of the voting interests of the entity and their immediate families. ASC 850-10-20. +WePower LLC, which was owned by Associate A, was a related party because it was an +owner of record or beneficial owner of more than 10% of Premier’s voting stock, directly +and/or through another company purportedly controlled by Associate A’s son. + +8 + +valuation of, and allocation to, identifiable assets is performed can the remaining unallocated +purchase price be recorded as goodwill. If, as the company represented in public statements +around the time it purchased TPC, Premier had acquired certain customer contracts and receivables +that purportedly had value, to comply with GAAP, the company should have assigned a portion of +the purported purchase price to such assets.9 + +27. Second, after recording the $4.5 million in goodwill for its stake in TPC, Premier +later failed to adequately assess that goodwill for impairment, in accordance with ASC 350-20-35, +Goodwill, Subsequent Measurement.10 Premier determined, incorrectly, that as of December 31, +2013, the $4.5 million of goodwill attributable to its TPC stake – which constituted approximately +99% of its goodwill and 65% of its total assets reported as of December 31, 2013 – was not +impaired. It was not until the fourth quarter of 2014 that Premier recognized any impairment to its +TPC-related goodwill. + +Koch’s Engagement Quality Review of A&C’s Audit of Premier’s FY 2013 Financial +Statements + +28. Koch served as the EQR on A&C’s audit of Premier’s FY 2013 financial +statements. An auditor may not grant permission to the client to use the audit report without the +EQR’s concurring approval of issuance. PCAOB Standard AS No. 7.13, Engagement Quality +Review. In an audit, an EQR should perform an evaluation of the significant judgments made by +the engagement team and the related conclusions reached in forming the overall conclusion on the +engagement and in preparing the engagement report in order to determine whether to provide +concurring approval of issuance. (AS No. 7.2). The EQR, among other things, should also +evaluate the engagement team's assessment of, and audit responses to, significant risks identified +by the engagement team, including fraud risks, AS No. 7.10, and evaluate whether the engagement +documentation that he or she reviewed when performing the procedures required under the +standard supports the conclusions reached by the engagement team with respect to the matters +reviewed. (AS No. 7.11). + +29. When he conducted his engagement quality review, Koch should have known of +several risks associated with the audit. In planning the audit, the engagement team identified as +significant risks and fraud risks: (a) the weakness in the company’s control environment, +(b) significant transactions between related parties, and (c) revenue recognition. The engagement + +9 Premier engaged the Valuation Firm to prepare a purchase price allocation report, which +would have assigned fair value estimates to the identifiable assets and liabilities the +company had acquired from TPC, but failed to provide the Firm with the information it +needed to perform its analysis. As a result, by the time of the 2013 audit, and to this day, +the Valuation Firm prepared neither a report nor an underlying analysis. + +10 The PCAOB standards cited in this order are those that were in effect at the time of the +relevant conduct being specifically discussed. +9 + +team also identified as significant risks, (d) the overstatement of assets, (e) the Note, and (f) +goodwill and planned for the audit to focus on the collectability of the Note and related-party +transactions and disclosures. + +30. The engagement team had identified several risks specifically associated with the +company’s control environment with respect to financial reporting and disclosures, including the +absence of an audit committee or a full-time CFO who was sufficiently competent to achieve +financial reporting objectives, and the lack of effective controls over the financial close and +reporting process. + +31. As detailed below, in performing his engagement quality review of A&C’s audit of +Premier’s 2013 financial statements, Koch failed to fulfill his responsibilities as EQR under +PCAOB Standard AS No. 7, Engagement Quality Review, by failing to exercise due professional +care as required by PCAOB Standards AS No. 7.12 and AU § 230, Due Professional Care in the +Performance of Work. + +32. The audit team made at least two significant judgments in the 2013 Premier audit: +the judgments to (a) accept management’s assertion of the fair value of the Note, and (b) accept +management’s allocation of the entire purported purchase price of the TPC acquisition to goodwill +and its conclusion that no impairment to goodwill was required. + +33. Koch reviewed the financial statements and the audit work papers, which included a +version of the Valuation Firm’s spreadsheets obtained from the Firm containing the same three fair +value figures described above, a memorandum documenting the engagement team’s review of the +Valuation Firm’s work, which the engagement team treated as the work of a specialist under +PCAOB Standard AU § 336, Using the Work of Specialist, and a memorandum documenting the +team’s review of management’s goodwill impairment analysis. From his review of those +documents, Koch should have known that the engagement team had not responded adequately to +significant risks, including fraud risks, and had not obtained sufficient appropriate audit evidence +to support A&C’s opinion that the financial statements properly (a) included the Note as an asset of +Premier valued at $869,000 and a source of $985,138 in income, and (b) included the TPC stake +with the entire purchase price allocated to goodwill. + +34. In conducting the engagement quality review of A&C’s audit of Premier’s 2013 +financial statements Koch failed to exercise the appropriate level of due professional care and +professional skepticism. Examples of such failures include the following: + +• Koch reviewed the Valuation Firm’s preliminary valuation of the Note, but +failed to notice or failed to raise with the engagement team the facts that (a) more than a +year after the Discontinued-Operations-for-Note swap had occurred, the Valuation Firm +had not issued a valuation report or other form of findings but instead issued only +spreadsheets, (b) the figure used by management to represent the value of the Note was +actually characterized on the Valuation Firm’s spreadsheets as a fair value of the borrower, +which was significantly higher than the figure that the Valuation Firm’s spreadsheet +10 + +characterized as the fair value of the Note, (c) the Valuation Firm had identified the +spreadsheets in the work papers as an analysis as of December 31, 2012, and (d) although +the Note was the largest tangible asset on the company’s balance sheet, and its second +largest asset overall, management had not recorded on the year-end income statement any +accrued interest or any gain or loss as a result of change in the Note’s fair value and +management’s asserted value of the Note had not been updated and/or revised from when +the Note was issued in January 2013, nearly a year earlier. + +• Koch should have known that (a) WePower LLC, the entity with which +Premier exchanged the Note for the return of stock, was a related party and the party from +whom Premier had originally acquired the assets, in exchange for stock, and thus the Note- +for-Stock Swap was effectively the last stage in a round trip of essentially worthless assets, +and (b) those essentially worthless assets, which had generated approximately $750,000 in +losses for 2012, were the basis of the borrower’s business. + +• Koch failed to notice or failed to raise with the engagement team that the +work papers purportedly testing the valuation of the Note did not document the +assumptions underlying the Valuation Firm’s fair value figures, the reasons that the +engagement team concluded that those assumptions were reasonable, or any testing by the +engagement team of the data provided to and used by the Valuation Firm in the +spreadsheets that were the basis of management’s “preliminary valuation,” as required by +PCAOB Standards AU § 336, Using the Work of Specialist, 11 and AS No. 3, Audit +Documentation. + +• Koch failed to notice or failed to raise with the engagement team (a) +management’s allocation of the entire $4.5 million TPC purported value to goodwill, and +the absence from the work papers of an explanation for such allocation from either +management or the audit team, (b) that no appraisal of the TPC identifiable assets acquired +and liabilities transferred had been completed, either at the time the transaction was +consummated in February 2013 or by the December 31, 2013 reporting date, ten months +later; and (c) and that the audit team had failed to obtain sufficient appropriate evidence to + +11 To use the findings of a specialist, the “auditor should (a) obtain an understanding of the +methods and assumptions used by the specialist, (b) make appropriate tests of data +provided to the specialist, taking into account the auditor’s assessment of control risk, +and (c) evaluate whether the specialist’s findings support the related assertions in the +financial statements.” (AU § 336.12). PCAOB standards require accountants to +document the procedures performed, evidence obtained, and conclusions reached. (AS +No. 3.6). Audit documentation must contain information sufficient to allow an +experienced auditor with no connection to the work to understand the procedures +performed, evidence obtained, and conclusions reached and to determine who performed +the work, when the work was completed, the person who reviewed the work, and the date +of the review. (AS No. 3.6). +11 + +accept management’s representations that goodwill based on the TPC acquisition had not +been impaired since the acquisition. + +2013 CANNAVEST INTERIM REVIEWS + +Background + +35. CannaVEST was originally a shell company with no operations, no revenues, and +only $431 in assets at December 31, 2012. In December 2012, the company entered into an +agreement to buy PhytoSphere Systems, LLC (“PhytoSphere”) from Medical Marijuana, Inc. +(“MJNA”) for a stated purchase price of $35 million. On January 29, 2013, the PhytoSphere +acquisition closed, and the company was transformed from a shell company into a business +allegedly with over $35 million in assets and operations in the hemp business. + +36. In connection with the acquisition, on June 15, 2017, the Commission filed a civil +injunctive action against CannaVEST and its CEO Mona (Case No. 2:17-CV-01681-APG-PAL). +The Commission’s complaint alleges that CannaVEST Corp. and Mona made material +misrepresentations and/or misleading omissions on CannaVEST’s quarterly reports filed with the +SEC for its first three quarters of 2013. + +37. The Commission’s complaint alleges that in CannaVEST’s Forms 10-Q for the first +two quarters of 2013, CannaVEST and Mona overstated CannaVEST’s total assets. The +overstatements related to CannaVEST’s acquisition of PhytoSphere in the first quarter of 2013 for +a purported $35 million purchase price. The Commission’s complaint alleges that the PhytoSphere +purchase agreement stated that CannaVEST would pay for PhytoSphere with CannaVEST shares +and/or cash, and that CannaVEST would make these payments in five installments over the course +of fiscal year 2013. The Commission alleges that Mona intended to pay the five installments +primarily with CannaVEST shares and only a small amount of cash. + +38. The Commission’s complaint also alleges that the PhytoSphere purchase agreement +stated that CannaVEST’s shares would be valued at a minimum of $4.50 and a maximum of $6.00 +per share (the “collar”). Mona, however, had no basis for assigning a value of $4.50 to $6.00 per +share and Mona only came up with the collar in order to cap the number of shares provided to +MJNA. The Commission further alleges that Mona did not know how much CannaVEST shares +were worth because the shares were either not trading or had very little trading on the OTC market. +The Commission’s complaint alleges that Mona agreed to the purported $35 million purchase price +only because CannaVEST could pay it primarily with CannaVEST shares that had little or no +trading volume at the time, and which Mona believed had little value, and a small amount of cash. + +39. In addition, the Commission’s complaint alleges that Mona knew that CannaVEST +was paying substantially less than $35 million to acquire the PhytoSphere business, that +PhytoSphere was not worth $35 million, and that CannaVEST would have never agreed to the +purported purchase price if CannaVEST were required to pay cash for PhytoSphere. Nevertheless, +Mona had CannaVEST record $35 million worth of assets related to the PhytoSphere acquisition +12 + +on CannaVEST’s balance sheet in its Form 10-Q for the first quarter of 2013. The Commission’s +complaint alleges that as a result, CannaVEST materially overstated its assets on its balance sheet +for the first quarter of 2013. In its Form 10-Q for the second quarter of 2013, CannaVEST +continued to report falsely the value of its assets related to the PhytoSphere acquisition. + +40. In its Form 10-Q for the third quarter of 2013, the Commission’s complaint alleges +that CannaVEST and Mona wrote down the value of the assets related to the PhytoSphere +acquisition to $8 million after obtaining a third-party valuation of PhytoSphere as of January 29, +2013. The Commission alleges that CannaVEST, however, failed to disclose that it had never paid +$35 million for those assets, that the assets were never worth $35 million, and that the balance +sheets for the first and second quarters of 2013 were materially overstated. In April 2014, +CannaVEST restated all three quarters to reflect $8 million in assets related to the PhytoSphere +acquisition on CannaVEST’s balance sheet. + +41. On December 4, 2017, the Commission instituted an order that will be litigated +against A&C and certain individuals that relates to, among other things, A&C’s first through third +quarter interim reviews of CannaVEST (Exchange Act Rel. No.82206). In that litigated order, the +Commission alleges that CannaVEST and Mona treated the PhytoSphere acquisition as a business +combination under GAAP. See ASC 805, Business Combinations, and ASC 820, Fair Value +Measurement. The Commission further alleges that under ASC 805 and 820, CannaVEST and +Mona should have determined the fair value of CannaVEST’s stock (i.e., the fair value of the +consideration) as of the acquisition date, January 29, 2013, and used this fair value to determine +how much CannaVEST was paying to acquire PhytoSphere. The Commission alleges that +CannaVEST and Mona, however, never determined the fair value of CannaVEST’s shares as of +January 29, 2013, and A&C failed to make inquiries of Mona for the fair value of the shares during +CannaVEST’s first quarter of 2013 interim review. The Commission’s litigated order alleges, +among other things, that had A&C made inquiries into the fair value of CannaVEST’s shares, +A&C would have become aware that material modifications to the total asset value on +CannaVEST’s balance sheet should have been made.12 + + + + + + +12 CannaVEST ultimately provided a total of 5,825,000 restricted shares and paid $950,000 +in cash (borrowed from another entity) to MJNA during fiscal year 2013. CannaVEST +and Mona never determined the fair value of CannaVEST’s shares as of January 29, +2013. However, in September 2013, CannaVEST had an independent valuation done on +its shares (related to another transaction) that found CannaVEST’s unrestricted shares +were worth $1.13 per share and its restricted shares were worth $0.68, as of August 21, +2013. +13 + +Koch Failed to Conduct Adequate Engagement Quality Reviews in CannaVEST’s Q2 and +Q3 2013 Interim Reviews + +42. Koch was the EQR for CannaVEST’s Q2 and Q3 2013 interim reviews. PCAOB +Standard AS No. 7, Engagement Quality Review, provides that an EQR in an interim review +evaluates the significant judgments made by the engagement team and the related conclusions +reached in forming the overall conclusion on the interim review. To evaluate such judgments +and conclusions, the EQR, to the extent necessary, holds discussions with the engagement +partner and other team members and reviews documentation. (AS No. 7.14). + +43. Furthermore, the EQR evaluates, among other things, the engagement team’s +significant judgments that relate to engagement planning, including the consideration of the +company’s business, recent significant activities, and related financial reporting issues and risks. +In addition, the EQR reviews the interim financial information for all periods presented and for +the immediately preceding interim period. (AS No. 7.15). The EQR also evaluates whether the +engagement documentation that he or she reviewed supports the conclusions reached by the +engagement team with respect to the matters reviewed. (AS No. 7.16). + +44. The EQR may provide a concurring approval of issuance only if, after performing +his review with due professional care, he is not aware of a significant engagement deficiency. A +significant engagement deficiency in an interim review includes but is not limited to: (1) the +engagement team failing to perform interim review procedures necessary in the circumstances of +the engagement; and (2) the engagement team reaching an inappropriate overall conclusion on +the subject matter of the engagement. (AS No. 7.17). + +45. Koch provided a concurring approval of issuance for CannaVEST’s Q2 and Q3 +2013 interim reviews. Koch, however, failed to conduct adequate engagement quality reviews +and identify significant engagement deficiencies in these interim reviews. As a result, Koch +should not have provided a concurring approval of issuance for the Q2 and Q3 interim reviews. + +46. For the Q2 interim review, Koch discussed the PhytoSphere acquisition with the +engagement team, knew that the acquisition was significant, and reviewed the PhytoSphere +purchase agreement. Koch, however, failed to identify that the engagement team did not +perform appropriate analytical procedures and did not make adequate inquiries of management +related to PhytoSphere. + +47. For the Q2 interim review, the engagement team failed to perform appropriate +analytical procedures because they did not prepare balance sheet analytics that compared the Q1 +2013 balance sheet to the Q2 2013 balance sheet. See AU § 722.16, Analytical Procedures and +Related Inquiries, analytical procedures should include comparing the quarterly interim financial +information with comparable information from the immediately preceding interim period. +A&C’s Q2 2013 balance sheet analytics only compared the FYE 2012 balance sheet to the Q2 +2013 balance sheet. From Q1 to Q2 2013, CannaVEST made significant changes to the +allocation of the $35 million value among the individual assets related to the PhytoSphere +14 + +acquisition. For example, from Q1 to Q2, CannaVEST decreased the value of its rights to +purchase CBD oil from $11.5 million to $947,388, and increased the value of its goodwill from +$17,535,000 to $26,998,125. Appropriate balance sheet analytics would have shown these +substantial changes in allocation between Q1 and Q2. + +48. The Q2 balance sheet analytics only listed the new asset values, e.g. $947,388 for +rights to purchase CBD oil and $26,998,125 for goodwill, and did not show how these Q2 asset +values had changed significantly since Q1. Koch reviewed the balance sheet analytics, but failed +to identify that the analytics did not compare Q1 to Q2. Had Koch identified and instructed the +engagement team to perform a proper Q1 to Q2 analytical review, it would have revealed that +CannaVEST made significant changes to the allocation of the $35 million value among the +individual assets related to the PhytoSphere acquisition, which should have raised a red flag with +Koch regarding the accuracy of the $35 million total asset value. This would have allowed Koch +to instruct the engagement team to make inquiries into the fair value of the consideration that +CannaVEST paid for PhytoSphere. Koch, however, failed to identify that the balance sheet +analytics did not compare Q1 to Q2, failed to identify these significant changes in asset +allocation, and as a result failed to identify this red flag that the $35 million total asset value may +be incorrect and that the engagement team should make inquiries into the fair value of the +consideration. + +49. For the Q3 interim review, Koch failed to identify that the engagement team did +not consider whether a restatement of CannaVEST’s Q1 and Q2 2013 financial information was +necessary. In October 2013, CannaVEST obtained a valuation report from a third-party +valuation firm that reported PhytoSphere was worth $8 million as of January 29, 2013. Koch +reviewed this valuation report. The valuation report should have been a red flag to Koch and the +engagement team that the original $35 million total asset value reported on CannaVEST’s Q1 +and Q2 balance sheets may be materially incorrect and needed to be restated. Koch, however, +failed to identify that the engagement team did not consider whether a restatement of +CannaVEST’s Q1 and Q2 financial information was necessary. + +50. For the Q2 and Q3 interim reviews, Koch failed to identify that the engagement +team did not properly plan the interim reviews. CannaVEST and Mona failed to devise a +sufficient system of internal accounting controls, such that transactions (like the PhytoSphere +acquisition) were properly recorded to permit preparation of financial statements in accordance +with GAAP and to maintain accountability of assets. In addition, CannaVEST lacked personnel +with appropriate accounting qualifications. CannaVEST did not have a CFO from Q1 through +Q3 2013, and its Forms 10-Q for those quarters stated that management had identified a material +weakness in the effectiveness of internal control over financial reporting related to CannaVEST’s +lack of personnel with appropriate accounting qualifications. When planning the Q2 and Q3 +interim reviews, the engagement team failed to consider and update their knowledge of +CannaVEST’s internal controls and lack of accounting personnel, did not assess whether these +matters increased the risk of material misstatement, and did not plan their interim review +procedures accordingly to address that risk. As a result, the engagement team failed to properly +plan the Q2 and Q3 interim reviews, and Koch failed to identify these planning failures. +15 + +51. Moreover, Koch failed to identify that the engagement team did not have a +sufficient understanding of CannaVEST’s internal controls when they planned the Q2 and Q3 +interim reviews. The engagement team’s inquiries checklist for the Q2 and Q3 interim reviews +indicated that CannaVEST did not have any significant deficiencies or material weaknesses in +internal control over financial reporting. This directly contradicted CannaVEST’s disclosure in +its Forms 10-Q, which stated that management had identified a material weakness in internal +control over financial reporting related to CannaVEST’s lack of personnel with appropriate +accounting qualifications. + +52. Furthermore, for the Q2 and Q3 interim reviews, Koch failed to identify that the +engagement team did not prepare adequate documentation. For example, for the Q2 interim +review, Koch failed to identify that the balance sheet analytics did not compare Q1 to Q2. For +the Q3 interim review, Koch failed to identify that the work papers did not discuss whether or +not a restatement was necessary. For the Q2 and Q3 interim reviews, Koch failed to identify that +the planning memos did not document CannaVEST’s lack of internal accounting controls and +accounting personnel, how the lack of controls and accounting personnel increased the risk of +material misstatement, and how the engagement team planned to address that risk through +interim review procedures. + +Koch Failed to Exercise Due Professional Care in CannaVEST’s Q2 and Q3 2013 Interim +Reviews + +53. PCAOB Standard AS No. 7, Engagement Quality Review, requires that an EQR +perform his review with due professional care. (AS No. 7.17). Under PCAOB Standard +AU § 230, Due Professional Care in the Performance of Work, due professional care requires +that an accountant exercise professional skepticism, which is an attitude that includes a +questioning mind and a critical assessment of the evidence. (AU § 230.07). + +54. When Koch provided an engagement quality review for CannaVEST’s Q2 and Q3 +interim reviews, he failed to exercise due professional care and failed to exercise a sufficient +level of professional skepticism. As a result, Koch failed to identify that the engagement team +did not properly plan the interim reviews, properly assess the risk of material misstatement, +consider how to address that risk through interim review procedures, and adequately document +the interim reviews. Koch also failed to identify that the interim reviews had significant +engagement deficiencies, such as the engagement team not performing adequate inquiries and +analytics, and the engagement team failing to consider that CannaVEST’s Q1 and Q2 financial +information needed to be restated to conform to GAAP. + +FINDINGS + +55. Based on the foregoing, the Commission finds that Koch, related to his conduct in +the 2013 year-end audit for Premier and the second and third quarter of 2013 interim reviews for +CannaVEST, engaged in improper professional conduct within the meaning of Section 4C(a)(2) of +the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by engaging in, as +16 + +provided under Rule 102(e)(1)(iv), at least 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 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. + +56. Based on the foregoing, the Commission finds that Koch, related to his conduct in +the 2013 year-end audit for Premier, was a cause of A&C’s violation of Rule 2-02(b) of Regulation +S-X, which requires an accountant’s report to state whether the audit was made in accordance with +generally accepted auditing standards.13 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Koch’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Koch shall cease and desist from committing or causing any violations and any +future violations of Rule 2-02(b) of Regulation S-X. + + B. Koch is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After two years from the date of this Order, Koch may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +(1) a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Exchange Act). Such an application must +satisfy the Commission that Koch’s work in his practice before the +Commission as an accountant will be reviewed either by the independent +audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this +capacity; and/or + + +13 Pursuant to Commission interpretive guidance, GAAS, as used in Regulation S-X, means +the standards of the PCAOB and any applicable Commission rules. Securities Act +Release No. 8422 (May 14, 2004). +17 + +(2) a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Exchange Act. Such an application will be +considered on a facts and circumstances basis with respect to such +membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee +in financial and accounting matters; and/or + +(3) an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Koch, 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) Koch, 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 Koch will not receive appropriate supervision; + + (c) Koch 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) Koch acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Koch 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 Koch’s character, integrity +professional conduct, or qualifications to appear or practice before the Commission as an +accountant. Whether an application demonstrates good cause will be considered on a facts and +circumstances basis with due regard for protecting the integrity of the Commission’s processes. + +18 + +E. Koch shall pay a civil money penalty in the amount of $15,000 to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: (1) $5,000 +within 10 days of 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. + +F. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Koch 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, New York Regional Office, Securities and Exchange Commission, 200 Vesey Street, +Suite 400, New York, NY 10281. + +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 +19 + +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 + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3914.pdf b/raw/aaer/2017/AAER-3914.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b63fc9f525c3774ec0116e120ef25ff4a659efe4 Binary files /dev/null and b/raw/aaer/2017/AAER-3914.pdf differ diff --git a/raw/aaer/2017/AAER-3915.txt b/raw/aaer/2017/AAER-3915.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8682a614e4401bc5e4da97818461781050a04b3 --- /dev/null +++ b/raw/aaer/2017/AAER-3915.txt @@ -0,0 +1,108 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82220 / December 5, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3915 / December 5, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-14113 + +In the Matter of +Robert W. Davis, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On November 5, 2010, Robert W. Davis, CPA (“Davis”) was suspended from +appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against him pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice.1 This order is issued in response to +Davis’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. +The Commission found that Davis had been permanently enjoined by a United States +District Court from future violations of Section 17(a)(2) and Section 17(a)(3) of the Securities +Act of 1933 (“Securities Act”), Section 13(b)(5) of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting +violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1, +and 13a-13 thereunder. In its complaint in the injunctive action, the Commission alleged, +among other things, that Dell Inc. (“Dell”) fraudulently committed various accounting +violations through the conduct of Davis and others. The Commission’s complaint also +alleged that Davis directed and engaged in improper accounting that resulted in Dell filing +materially false and misleading financial statements in the company’s annual reports on Form + +1 See Accounting and Auditing Enforcement Release No. 3210 dated November 5, 2010. Davis was permitted, +pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +10-K and in the company’s quarterly reports on Form 10-Q from FY02 to FY05. The +complaint alleged that Davis directed Dell’s improper use of reserves and, further, that Davis +directed others to maintain and track excess reserves and to use excess reserves from prior +periods to offset unforecasted expenses in order to meet financial targets. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation +or review, of financial statements of a public company to be filed with the Commission, Davis +attests that he will undertake to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, +while practicing before the Commission in this capacity. Davis is not, at this time, seeking to +appear or practice before the Commission as an independent accountant. If he should wish to +resume appearing and practicing before the Commission as an independent accountant, he +will be required to submit an application to the Commission showing that he has complied +and will comply with the terms of the original suspension order in this regard. Therefore, +Davis’s suspension from practice before the Commission as an independent accountant +continues in effect until the Commission determines that a sufficient showing has been made +in this regard in accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination +is necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed +to by Davis, it appears that he has complied with the terms of the November 5, 2010 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Davis, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, +in his practice before the Commission as a preparer or reviewer of financial statements +required to be filed with the Commission, has shown good cause for reinstatement. +Therefore, it is accordingly, + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or +(e)(3) of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been +reinstated by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Robert W. Davis, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary + \ No newline at end of file