diff --git a/raw/aaer/2018/AAER-3969.txt b/raw/aaer/2018/AAER-3969.txt new file mode 100644 index 0000000000000000000000000000000000000000..19921e6692740eef514a1bd6321cb65370900863 --- /dev/null +++ b/raw/aaer/2018/AAER-3969.txt @@ -0,0 +1,97 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84055 / September 7, 2018 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3969 / September 7, 2018 +ADMINISTRATIVE PROCEEDING +File No. 3-17628 + +In the Matter of +SARAH E. ADAMS, 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 October 18, 2016, Sarah E. Adams, CPA (“Adams”) 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 her pursuant to Rule 102(e)(1) +of the Commission’s Rules of Practice.1 This order is issued in response to Adams’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 Adams caused Weatherford International Ltd.’s +(“Weatherford”) violations of Section 13(a) of the Securities Exchange Act of 1934 and Rules +12b-20, 13a-1, and 13a-13 thereunder, and engaged in improper professional conduct under Rule +102(e)(1) of the Commission’s Rules of Practice between 2007 and the third quarter of 2010. +The Commission’s findings related to her work as a tax partner on the audits and reviews of +Weatherford’s financial statements. During the relevant period, Weatherford improperly inflated +its earnings and materially understated its effective tax rate and tax expense through the use of +deceptive intercompany tax accounting. The Commission found that Adams and others failed to +comply with Public Company Accounting Oversight Board standards related to due professional +care, professional skepticism, supervision, staffing, training, and documentation. + +In her 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, Adams + +1 See Accounting and Auditing Enforcement Release No. 3814 dated October 18, 2016. Adams was permitted, +pursuant to the order, to apply for reinstatement after one year upon making certain showings. + + 2 +attests that she will undertake to have her work reviewed by the independent audit committee of +any company for which she works, or in some other manner acceptable to the Commission, +while practicing before the Commission in this capacity. Adams is not, at this time, seeking to +appear or practice before the Commission as an independent accountant. If she should wish to +resume appearing and practicing before the Commission as an independent accountant, she will +be required to submit an application to the Commission showing that she has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Adams’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 Adams, it appears that she has complied with the terms of the October 18, 2016 order +suspending her from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to her character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against her pursuant to Rule 102(e) of the Commission's Rules of Practice, and +that Adams, by undertaking to have her work reviewed by the independent audit committee of +any company for which she works, or in some other manner acceptable to the Commission, in +her practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Sarah E. Adams, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Brent J. Fields +Secretary + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this 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/2018/AAER-3987.txt b/raw/aaer/2018/AAER-3987.txt new file mode 100644 index 0000000000000000000000000000000000000000..ba0e5a4657e36adb208d84d4aad0e6dfb12affa5 --- /dev/null +++ b/raw/aaer/2018/AAER-3987.txt @@ -0,0 +1,1015 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84281 / September 25, 2018 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3987 / September 25, 2018 + +ADMINISTRATIVE PROCEEDING +File No. 3-18838 + +In the Matter of + +Lichter, Yu and Associates, Inc., +Lawrence P. Lichter, CPA, and +Peter L. Yu, 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 Lichter, Yu +and Associates, Inc. (“LYA” or the “Firm”), Lawrence P. Lichter, CPA (“Lichter”), and Peter L. +Yu, CPA (“Yu”) (collectively, “Respondents”) pursuant 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 . . . 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 be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. +2 + +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”), which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, and except as provided herein in Section V, Respondents consent to the entry of this +Order, as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. These proceedings involve Respondents’ improper professional conduct and +violations of the federal securities laws in their audit of the FY 2015 financial statements of Code +Rebel Corporation (“Code Rebel” or “the Company”) in which Code Rebel materially overstated +the Company’s assets by recording as “Cash and Cash Equivalents” approximately $2.2 million +that had been misappropriated. The misappropriated cash constituted 77% of Code Rebel’s +reported current assets and approximately 80% of its reported cash and cash equivalents. + +2. During the audit of Code Rebel’s FY 2015 financial statements, Lichter and Yu +were confronted with a series of significant red flags regarding the Company’s cash and cash +equivalents supposedly held by an entity called Thorsdale Fiduciary and Guarantee Company Ltd. +(“Thorsdale”). By the time the audit was completed, they had learned, among other things, that, +contrary to Code Rebel’s representations in the financial statements: Thorsdale was not an FDIC- +insured bank but was instead a family trust nominally managed by a related party who was the +father-in-law of Jason Galanis, who they also learned had twice been charged by the Commission +with violations of the federal securities laws and had recently been indicted in a parallel criminal +fraud case. They had also learned that Thorsdale had refused to promptly return to Code Rebel +funds that the Company had requested, claiming that it was entitled to 90 days’ notice of Code +Rebel’s intent to withdraw funds. In addition, they knew or should have known that Thorsdale had +named Galanis as its agent in the agreement that purportedly governed the Thorsdale-Code Rebel +relationship. + +3. Despite all the indications that $2.2 million of the Company’s funds should not +have been reported as cash or a cash equivalent, LYA issued an audit report that included an + +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 + +unqualified opinion on Code Rebel’s FY 2015 financial statements. In that audit report, which was +included in Code Rebel’s Form 10-K along with the financial statements, LYA incorrectly stated +that the Firm had conducted its audit in accordance with the standards of the Public Company +Accounting Oversight Board (United States) (“PCAOB”) and opined that Code Rebel’s +consolidated financial statements presented fairly, in all material respects, Code Rebel’s financial +position as of December 31, 2015 and the Company’s results of operations and cash flows for the +year then ended, in conformity with U.S. generally accepted accounting principles (“GAAP”). + +4. As a result, Respondents engaged in improper professional conduct, violated +Section 10A(a)(1) of the Exchange Act, and caused Code Rebel’s violations of Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder. In addition, LYA violated Rule 2-02 (b) of Regulation +S-X and Lichter and Yu caused that violation. + +B. RESPONDENTS + +5. Lichter, Yu and Associates, Inc. (“LYA” or “the Firm”) is located in Woodland +Hills, California and was registered with the PCAOB from September 2009 until July 2018 and +from November 2003 until October 2006. At all relevant times, LYA consisted of owners Lichter +and Yu, one other individual who was also a Certified Public Accountant (“CPA”), and another +individual who was not a CPA. + +6. Lawrence P. Lichter, age 56, resides in Woodland Hills, California. He has been +a CPA licensed by the state of California since 1988. Throughout the relevant period, Lichter was +a 50% owner of LYA. Lichter was the engagement partner on the Code Rebel FY 2015 audit. + +7. Peter L. Yu, age 46, resides in Canoga Park, California. He has been a CPA +licensed by the state of California since 2004. He began to work for Lichter’s firm in December +1998 and became the co-owner in 2006. As discussed below, Yu purportedly acted as the +engagement quality reviewer on the Code Rebel FY 2015 audit but he also performed some of the +work on the audit, including the audit of cash and cash equivalents. + +C. OTHER RELEVANT PERSONS AND ENTITIES + +8. Code Rebel Corporation (“Code Rebel” or “the Company”) was, at all relevant +times, an information technology company with its principal executive offices in Kahului, Hawaii. +The Company was formed as a Hawaii limited liability company in 2007, and subsequently +incorporated in Delaware in May 2014. On May 19, 2015, the Company conducted an initial +public offering and its stock began trading on the Nasdaq Capital Market under the symbol +“CDRB.” On May 6, 2016, the Commission suspended trading of Code Rebel stock. At all +relevant times, Code Rebel was subject to the reporting requirements of Section 12(b) of the +Exchange Act. Code Rebel’s fiscal year ended on December 31. In addition to information +technology contractors who worked in the Ukraine, for most of the relevant period, the Company’s +personnel consisted of its CEO, CFO, Chief Technology Officer, and a bookkeeper, who was the +Company’s primary contact with LYA. The CEO was also the president of Code Rebel at all +4 + +relevant times until the Company’s September 2015 acquisition of a privately-held information +technology consulting company, when the consulting company’s owner became president of Code +Rebel. + +9. Jason Galanis (“Galanis”), age 48, is currently incarcerated at the Terminal Island +Federal Correctional Institution near Los Angeles. Galanis’s regulatory and criminal history dates +from at least 2005 and includes two recent Commission securities fraud cases and parallel criminal +cases. + +10. In 2005, the Commission brought an accounting fraud case against Galanis based +on his conduct while serving as a major shareholder of Penthouse International, Inc., SEC v. +Penthouse International, Inc., et al., 05-cv-0780 (S.D.N.Y.). On September 24, 2015, the +Commission and the Office of the United States Attorney for the Southern District of New York +brought parallel civil and criminal actions against Galanis and five others (including his father and +two brothers) for their manipulation of the market for the stock of Gerova Financial Group, Ltd., +SEC v. Jason W. Galanis, et al., 15-cv-07547-VSB (S.D.N.Y.); United States v. Jason Galanis, et +al., 15-cr-0643 (PKC) (S.D.N.Y.) (collectively, the “Gerova cases”). The second set of parallel +Commission and criminal cases (SEC v. Devon D. Archer, et al., 16-cv-3505 (WHP) (S.D.N.Y.); +United States v. Jason Galanis, et al., 16-cr-371 (RA) (S.D.N.Y.) (collectively the “Archer cases”) +was announced on May 11, 2016. Galanis pleaded guilty in both criminal cases and was sentenced +to a total of 173 months incarceration, with 113 months to be served concurrently, and ordered to +forfeit a total of over $80 million. + +11. Thorsdale Fiduciary and Guaranty Company Ltd. (“Thorsdale”) was +incorporated in Nevada on June 23, 2011 as a “Family Trust Company” for “members of the +Berger family and its Family Affiliates.” Ralph Berger, Galanis’s father-in-law (now deceased) +was one of Thorsdale’s two members. + +12. Burnham Securities, Inc. (“Burnham”) was, at all relevant times, a registered +broker-dealer. Burnham was the sole book-running manager and underwriter of Code Rebel’s +initial public offering. + +13. Devon Archer, age 44, resides in Brooklyn, N.Y. At all relevant times, Archer was +an officer, director, direct or indirect owner, and/or investor in various entities controlled by +Galanis or another Galanis associate. During the relevant period, he was part of the group that was +in contract to buy the holding company for Burnham and had loaned the broker-dealer working +capital. On June 28, 2018, after a 5½ week-long jury trial, Archer was convicted on all counts of +the superseding indictment against him. + + +5 + +D. FACTS + +1. Background + +14. In December 2011, Galanis’s father-in-law, Ralph Berger, and the other member of +Thorsdale opened an account with Bank A, a national, FDIC-insured bank in the name of +Thorsdale (the “Thorsdale Bank A account”). Initially Berger and the other member were the only +signatories on the Thorsdale Bank A account but in June 2014, Galanis was added as a signatory +and was issued the sole ATM/debit card for the account. + +15. That same month, Archer invested $485,000 in a Code Rebel convertible note. +Shortly thereafter, at the direction of Code Rebel’s CEO, $484,000 was transferred from a Code +Rebel bank account to the Thorsdale Bank A account. No one from Code Rebel received copies of +account statements or had online access to the account. Code Rebel’s board of directors had not +authorized the transfer of Code Rebel’s funds to the Thorsdale Bank A account. Indeed, until the +audit of Code Rebel’s FY 2015 financial statements, none of Code Rebel’s officers and directors +other than the CEO were aware that Code Rebel’s funds had been entrusted to Thorsdale or were +aware that anyone other than the three individuals authorized by the board of directors (the CEO, +CFO, and bookkeeper) had control over any of Code Rebel’s funds. + +16. In April 2014, in anticipation of an initial public offering and upon the +recommendation of a friend of Galanis, Code Rebel engaged LYA to audit Code Rebel’s financial +statements for FY 2013 and FY 2014. + +17. The IPO occurred on May 19, 2015. The offering raised net proceeds (after +underwriting discounts, commissions and estimated expenses) of approximately $4.3 million. On +May 21, 2015, again at the CEO’s direction, $1,766,000 of the offering proceeds was transferred +from one of Code Rebel’s bank accounts to the Thorsdale Bank A account (for a total of $2.25 +million of Code Rebel funds transferred to the account). + +2. Respondents Ignored Red Flags and Failed to Adhere to PCAOB Standards in +Their Audit of Code Rebel’s 2015 Year-End Cash Balance + +18. PCAOB standards require the auditor to exercise due professional care in planning +and performing the audit and preparing the audit report. (AU § 230, Due Professional Care in the +Performance of Work)4 Auditors are required to maintain an attitude of professional skepticism +that includes a “questioning mind and a critical assessment of audit evidence.” (AU § 230.07) In +addition, the auditor should “consider the competency and sufficiency of the evidence. Since +evidence is gathered and evaluated throughout the audit, professional skepticism should be + +4 Citations in this Order to PCAOB standards are to the standards that were in effect at the +time of the audit. + +6 + +exercised throughout the audit process.” (AU § 230.08) + +19. At December 31, 2015, Code Rebel reported total assets of $12,069,365, the +majority of which (roughly $9 million) consisted of goodwill resulting from the September 2015 +acquisition. The Company also reported total current assets of $2,849,217, nearly all of which +($2,717,414) was reportedly cash and cash equivalents. The $2.2 million on deposit with +Thorsdale represented approximately 80% of the Company’s cash and cash equivalents, 77% of its +total current assets and roughly 18% of its total assets. Accordingly, the audit of the Company’s +year-end cash balance was a critical part of the audit. + +20. Lichter and Yu were unaware of the Thorsdale Bank A account. 5 Based on the +account statements and confirmations they obtained during the audit, they apparently believed that +$2.2 million of Code Rebel’s funds were on deposit with Thorsdale at December 31, 2015 and +assumed that Thorsdale was an FDIC-insured bank. Until the events described below, they +operated under this belief even though Code Rebel’s accounting records – and thus LYA’s work +papers – identified the custodian of the $2.2 million as “Escrow – Bank A” + +a. Respondents Encountered a Series of Red Flags During the FY 2015 +Audit + +21. During the audit, Lichter and Yu were confronted with a number of significant red +flags suggesting that the $2.2 million supposedly held by Thorsdale should not be reported as a +cash or cash equivalent. + +22. First, the Thorsdale account statements Lichter and Yu received from Code Rebel +during the audit contained red flags. For example, these purported account statements, for the +periods “30 Sep 2015 through 31 Dec 2015” and “31 Dec 2015 through 31 Jan 2016” contained a +client number but no account number and contained a website address but no phone number, street +address or email address. The statements included a field for “Investment Category,” for which the +entry was “Cash,” and showed no interest accrued or fees charged. Moreover, the statements did +not indicate that Thorsdale was a bank or that its accounts were covered by FDIC insurance. + +23. In addition, the January 2016 statement reflected two “debits,” which had +purportedly reduced the account balance from $2.2 million on December 31, 2015 to $1.4 million +by the middle of January 2016. The statement described the two transactions as “debits” and stated +the amounts of the debits in the “Balance” column but left the column for “Funds Paid” blank. The +statement identified the payee for one debit but for the other debit it reported only that the payment +was for “legal expenses.” The statement did not indicate whether the payments from the account +were effected by check or wire transfer. + +5 The Thorsdale Bank A account had been fully depleted and closed by the end of +November 2015. Galanis used almost all of the funds in the account to support his lavish +lifestyle, fund his criminal defense, and for other purposes unrelated to Code Rebel. + +7 + + +24. Second, on or around March 19, 2016, Lichter and Yu learned from Code Rebel’s +CFO that the CEO had been unable to withdraw funds from Thorsdale on demand, because – +according to the CEO – there was a 90-day hold on the money, i.e. Code Rebel was required to +provide Thorsdale with 90-days’ notice of its intent to withdraw the funds. + +25. Third, on or around March 22, Lichter and Yu learned from Code Rebel’s CFO that +Code Rebel had received an administrative subpoena issued earlier that month in a Commission +investigation. The subpoena sought documents concerning nineteen listed individuals and entities, +including Thorsdale, Galanis, Burnham and Archer. + +26. Fourth, from their internet research during the audit, Lichter and Yu learned that +Thorsdale was not an FDIC-member bank but instead a limited liability company registered with +the Nevada Secretary of State for the benefit of eleven related families; they also learned from the +CFO that one of Thorsdale’s managers was Galanis’s father-in-law, who was also a 12.5% +shareholder. + +27. Fifth, they learned that the address to which they had been directed by Code +Rebel’s bookkeeper to send the requests for Thorsdale confirmations was the address of a mailbox +store. + +28. Sixth, Respondents learned from Code Rebel’s CEO that he had entrusted the Code +Rebel funds to Thorsdale at the direction of Archer, who reportedly wanted an independent +fiduciary overseeing the disbursement of Code Rebel’s funds, to prevent them from being +squandered. + +29. Finally, Lichter and Yu learned that Galanis had been charged by the Commission +and indicted for securities fraud in September 2015 and had been charged by the Commission with +violations of the federal securities laws once before. + +b. Code Rebel’s Efforts to Recover the $1.3 Million6 Respondents Believed +Was Still Held by Thorsdale + +30. On or about March 21, 2016, Lichter notified the chairman of Code Rebel’s audit +committee, of the issues concerning Thorsdale and the January $300,000 debit for legal fees for +which the receiving law firm had not provided LYA an adequate explanation. On March 23, +Lichter, the CFO, and the chairman of the audit committee spoke with the CEO, who provided +them with the “Cash Management Custodial Account Agreement” (the “Custody Agreement”) that + +6 On March 10, 2016, Code Rebel had received $100,000 of the funds supposedly then +held for it by Thorsdale, reducing the purported Thorsdale account balance from $1.4 +million in January 2016, as described above. + +8 + +supposedly governed the arrangement between Code Rebel and Thorsdale. On the call, all agreed +that the funds then still supposedly held by Thorsdale should be returned to Code Rebel’s control +and the law firm should be asked to provide a more detailed invoice. + +31. On April 7, Lichter and Yu learned that Code Rebel’s CFO and Thorsdale’s +attorney had reached an agreement in principle concerning the return of the Code Rebel funds +purportedly still held by Thorsdale, with the terms of the agreement – including Code Rebel’s +release of potential claims against Thorsdale – to later be memorialized in writing. Thorsdale’s +attorney had agreed that the $1.3 million would be returned to Code Rebel in two installments: +$200,000 that day or the following day and the remaining $1.1 million on April 11. + +32. Lichter and Yu then learned that $200,000 was returned to Code Rebel on April 8, +but that the promised $1.1 million payment was not made on April 11. + +33. On April 11, Lichter and Code Rebel’s CFO spoke to Thorsdale’s attorney who told +them that Thorsdale would enter into a settlement agreement with Code Rebel in which it would +agree to pay Code Rebel $200,000 on April 12 and the remaining $900,000 on April 26. In an +email he sent to the chairman of Code Rebel’s audit committee later that day, Lichter stated: +“Based on [the earlier conversation with Thorsdale’s attorney], and the settlement agreement with +Thorsdale we will move forward in filing the audit and the 10K will be filed on time. We are just +going to add some descriptions to the footnotes on the [Custody Agreement].7 + +34. Lichter and Yu learned that $200,000 was returned to Code Rebel on April 13, but +they knew that Thorsdale purportedly still had possession of $900,000 of Code Rebel’s funds when +Code Rebel filed its Form 10-K. + + c. The Filing of the 2015 Form 10-K and the End of Code Rebel + +35. On April 14, 2016, Code Rebel filed its 2015 Form 10-K. In the 2015 audited +financial statements contained therein, the Company reported total assets of $12,069,365, roughly +$9 million of which consisted of goodwill, and total current assets of $2,849,217. The audited +financial statements included as roughly 80% of the Company’s “Cash and Cash Equivalents” at +December 31, 2015 the $2.2 million that was supposedly held by Thorsdale on that date, +constituting 77% of Code Rebel’s total current assets and roughly 18% of its total assets. + +36. The only changes to the financial statements made in light of the developments +described in Paragraphs 21-34 above were: (1) the addition to the Related Party Transactions note +of the following disclosure: “The Company has a cash deposit of $2,200,000 with another + +7 On March 30, 2016, Code Rebel filed a Notification of Late Filing on Form 12b-25 +disclosing that the Company was unable to timely file its 2015 Form 10-K but would do +so by April 15, 2016. + +9 + +Company whose member owns approximately 12.5% shares of Code Rebel,” and (2) the following +indication in the Company’s standard note on cash and cash equivalents that the entire $2.2 million +entrusted to Thorsdale was uninsured, instead of just the amount over $250,000 (the standard +insurance limit for deposits with FDIC-member banks): + +Cash and equivalents include cash in hand and cash in demand deposits, certificates +of deposit and all highly liquid debt instruments with original maturities of three +months or less. We maintain cash deposits at banks located in Hawaii and New +York. Deposits at the banks are insured up to $250,000 by the Federal Deposit +Insurance Corporation. The Company’s uninsured portion of the balances held at +the banks aggregated to approximately $2,365,069 and $184,000 [on December 31, +2015 and December 31, 2014], respectively. No reserve has been made in the +financial statements for any possible loss due to any financial institution failure. +The Company has not experienced any losses in such accounts and believes we are +not exposed to any significant risk on cash and cash equivalents. + +37. The Form 10-K also contained LYA’s audit report which included an unqualified +opinion on the financial statements. LYA’s audit report stated that the Firm’s audit of the +consolidated financial statements had been conducted in accordance with PCAOB standards and, +based on that audit, LYA was of the opinion that the consolidated financial statements presented +fairly, in all material respects, Code Rebel’s financial position as of December 31, 2015 and the +Company’s results of operations and cash flows for the year then ended, in conformity with U.S. +GAAP. + +38. The $900,000 payment to Code Rebel was not made on April 26 as promised. On +May 5 and 6, the Company received two payments totaling $300,000. On May 6, 2016, the +Commission suspended trading of Code Rebel stock. And, on May 18, Code Rebel filed for +liquidation. + + d. Respondents’ Failures to Adhere to PCAOB Standards in the Audit of the +Balance in the Thorsdale Bank A Account + +39. Under AU § 230, Due Professional Care in the Performance of Work, the auditor is +required to exercise due professional care and professional skepticism in conducting the audit. +“Professional skepticism is an attitude that includes a questioning mind and a critical assessment of +audit evidence[.]” (AU § 230.07) Moreover, the auditor has a responsibility to plan and perform +the audit to obtain reasonable assurance about whether the financial statements are free of material +misstatement, whether caused by fraud or error. (AU § 316.01, Consideration of Fraud in a +Financial Statement Audit) AU § 316 identifies two types of misstatements that are relevant to the +auditor's consideration of fraud: (1) misstatements arising from fraudulent financial reporting and +(2) misstatements arising from misappropriation of assets. (AU §316.06) + +40. AU § 316 also notes that management and employees engaged in fraud will +typically take steps to conceal the fraud from auditors (AU § 316.09) and points out that fraud may +10 + +be concealed through collusion among management and third parties, who may, for example, +provide the auditor with false confirmations. (AU § 316.10) + +41. Accordingly, AU § 316.13 emphasizes the importance of the auditor’s exercise of +professional skepticism when considering fraud risks and requires an ongoing questioning of +whether the information and evidence obtained during the audit suggests that a material +misstatement due to fraud has occurred. In exercising professional skepticism in gathering and +evaluating evidence, the standard warns that the auditor should not be satisfied with less-than- +persuasive evidence because of a belief that management is honest. + +42. AU § 316 also advises that significant unusual transactions may be used to engage +in fraudulent financial reporting or conceal misappropriation of assets (AU §316.66) and requires +auditors to design and perform procedures to obtain an understanding of the business purpose (or +the lack thereof) of any significant unusual transaction that the auditor has identified. (AU +§316.66A) Among the procedures the auditor should follow to gain an understanding of the +business purpose (or the lack thereof) of significant unusual transactions are: + +a. Reading the underlying documentation and evaluating whether the terms and other +information about the transaction are consistent with explanations from inquiries +and other audit evidence about the business purpose (or the lack thereof) of the +transaction; + +b. Determining whether the transaction has been authorized and approved in +accordance with the company's established policies and procedures; and + +c. Evaluating the financial capability of the other parties with respect to significant +uncollected balances, loan commitments, supply arrangements, guarantees, and +other obligations, if any. (AU §316.66A) + +43. To evaluate whether the business purpose (or the lack thereof) of a significant +unusual transaction indicates that the transaction may have been entered into to conceal +misappropriation of assets, AU §316.67 also requires the auditor to evaluate whether, among other +things: + +a. The transaction involves related parties or relationships or transactions with related +parties previously undisclosed to the auditor; and + +b. Management has discussed the nature of and accounting for the transaction with the +audit committee or another committee of the board of directors or the entire board. + +44. AU §316.56 advises that the scope of the auditor’s work in response to a fraud risk +related to misappropriation of assets should be linked to the specific information about the +misappropriation risk that has been identified. For example, if a particular asset is highly +susceptible to misappropriation and a potential misstatement would be material to the financial +11 + +statements – the situation Respondents faced – obtaining an understanding of the controls related to +the prevention and detection of such misappropriation and testing the design and operating +effectiveness of such controls may be warranted. In addition, in response to an assessed fraud risk, +it may be appropriate to, among other things, “interview[] personnel involved in activities in areas +in which a fraud risk has been identified to obtain their insights about the risk and how controls +address the risk.” (AU §316.53) + +45. During the 2015 audit, Lichter and Yu became aware of a significant unusual +transaction — the deposit of 80% of the Company’s cash and cash equivalents with Thorsdale, a +family trust not covered by FDIC insurance and controlled by a related party. But Lichter and Yu +either failed to follow the procedures required or suggested by AU § 316 or disregarded the results +of those procedures. + +46. Lichter and Yu received a copy of the Custody Agreement that supposedly +governed the relationship between Code Rebel and Thorsdale and they knew or should have +known that the terms of the transaction were inconsistent with explanations they had received from +the CEO and Thorsdale’s attorney about the business purpose (or lack thereof) of the transaction. +For example, the terms of the transaction were inconsistent with its purported rationale – to serve +as a check on Code Rebel’s management, to prevent the funds from being squandered. That +purpose could have been achieved through more appropriate means, such as requiring a second +signature or approval for the expenditure of funds or creating a segregation of duties between those +authorized to disburse the Company’s funds and those responsible for financial reporting. (There +was no such segregation of duties at Code Rebel.) Moreover, as Respondents knew or should +have known, the CEO had not taken advantage of the opportunity provided by the Custody +Agreement to designate someone to monitor activity in the account. They also knew or should +have known that Thorsdale had supposedly delegated its responsibilities under the agreement to +Galanis, who they knew had recently been indicted for securities fraud and had twice been charged +by the Commission with violations of the securities laws. In addition, they knew or should have +known that the 90-day hold made no sense for a cash account, and the Custody Agreement did not +provide for such a hold. + +47. Respondents also knew or should have known that the transaction had not been +authorized and approved in accordance with the Company's established policies and procedures. +The CFO and the chairman of the audit committee made clear to Lichter and Yu that neither the +deposit of Company funds with Thorsdale nor control of Company funds by Thorsdale, Berger, +Galanis or anyone other than Code Rebel’s CEO, CFO, and bookkeeper had been authorized by +Code Rebel’s board of directors, as required under the Company’s established policies and +procedures. Indeed, the CFO and head of the audit committee made clear to Respondents that they +had been unaware of the transaction before they learned of it during the audit. + +48. Respondents also failed to evaluate Thorsdale’s ability to repay the $900,000 they +understood Thorsdale owed Code Rebel at the time the Form 10-K was filed, much less the entire +$2.2 million that had been entrusted to it. Respondents failed to make this evaluation even though +12 + +they knew that Thorsdale was not a bank and not even $250,000 of Code Rebel’s funds entrusted +to it were covered by FDIC insurance. + +49. Moreover, Respondents failed to interview the bookkeeper, from whom they might +have learned that the $2.2 million had been transferred to a bank account over which no one from +Code Rebel had control and for which Galanis was Code Rebel’s only source of information. +Respondents might also have learned from the bookkeeper that she received the name and address +of the person to whom the Thorsdale confirmation requests should be sent from the CEO, and that +the CEO had likely received the information from Galanis. + +50. Finally, Respondents knew that the deposit with Thorsdale involved a related party +previously undisclosed to them: Berger, one of Thorsdale’s two principals, who was a 12.5% +shareholder of Code Rebel. + +51. The objective of the auditor is to evaluate the results of the audit to determine +whether the audit evidence obtained is sufficient and appropriate to support the opinion to be +expressed in the auditor's report. (AS No. 14, Evaluating Audit Results ¶ 2; AS No. 15, Audit +Evidence ¶ 3) Sufficiency is the measure of the quantity of audit evidence. (AS No. 15 ¶ 5) +Appropriateness is the measure of the quality of audit evidence, i.e., its relevance and reliability. +(AS No. 15 ¶ 6). The quantity of audit evidence needed depends on the risk of material +misstatement and the quality of the audit evidence obtained. As the quality of the evidence +increases, the need for additional corroborating evidence decreases. (AS No. 15 ¶ 5) If the auditor +is unable to obtain sufficient appropriate audit evidence to have a reasonable basis to conclude +about whether the financial statements as a whole are free of material misstatement, the auditor +should express a qualified opinion or a disclaimer of opinion. (AS No. 14 ¶ 35) + +52. When LYA issued its audit report on Code Rebel’s FY 2015 financial statements, +Lichter and Yu knew or should have known that: + + Code Rebel’s board of directors had not authorized the deposit of Company funds +with Thorsdale; + + Code Rebel’s board of directors had not authorized anyone other than the Code +Rebel’s CEO, CFO, and bookkeeper to disburse Company funds; + + Thorsdale was not an FDIC-insured bank but rather a trust company established for +the benefit of Galanis’s extended family. + + At least $900,000 of the Company’s cash – 32% of Code Rebel’s total current +assets as of December 31, 2015 and roughly 40% of the total Code Rebel funds that +had been transferred to Thorsdale – was still not accounted for at the time of the FY +2015 Form 10-K filing. + +13 + + Code Rebel’s CEO had recently been unable to withdraw funds from Thorsdale on +demand because of a purported 90-day notice requirement, a requirement that was +not reflected in the operative agreement and made no sense for a cash account. + + One of the two principals of Thorsdale was Galanis’s father-in-law, whose only +connection to Code Rebel was that he was a 12.5% shareholder (the other principal +was unknown to Lichter or Yu). + + The Commission had recently subpoenaed Code Rebel for documents concerning +Thorsdale and Galanis, as well as Burnham, the underwriter of Code Rebel’s IPO, +and Archer; + + Galanis had been charged by the Commission and indicted for securities fraud in +September 2015 and had been charged by the Commission in an earlier case; + + The Thorsdale account statements differed from typical bank statements in a +number of respects and the most recent statements contained no contact information +for Thorsdale other than a website address; and + + The address Respondents had been given to use for the Thorsdale confirmations +was the address of a mailbox store in a strip mall. + +53. Moreover, Lichter and Yu knew that Thorsdale was not a bank, knew that during +the first quarter of 2016 a portion of the funds Code Rebel had entrusted to Thorsdale was not +available to the Company on demand, and knew or should have known that at December 31, 2015 +there was a significant risk that $2.2 million (over 80%) of Code Rebel’s reported cash had been +misappropriated. Thus they knew or should have known that the amount of the Company’s cash +and cash equivalents reported in the Company FY 2015 financial statements was materially +overstated. + +54. LYA nonetheless did not express a qualified opinion or disclaim an opinion as +required under AS No. 14 ¶ 35. + +55. Accordingly, in their audit of Code Rebel’s year-end 2015 cash balance, +Respondents failed to act in accordance with applicable professional standards, specifically the +standards on Due Professional Care in the Performance of Work (AU § 230), Audit Evidence (AS. +No. 15), Evaluating Audit Results (AS No. 14) and Consideration of Fraud in a Financial +Statement Audit (AU § 316). + +3. Additional Audit Deficiencies + +56. LYA failed to obtain an engagement quality review for the 2015 Code Rebel audit, +as required under AS No. 7, Engagement Quality Review ¶ 1. The objective of the engagement +quality reviewer is to perform an evaluation of the significant judgments made by the engagement +14 + +team and the related conclusions in forming the overall conclusion on the engagement . . . in order +to determine whether to provide concurring approval [of an engagement report]. (AS No. 7 ¶ 2) +The engagement quality reviewer (“EQR”) must maintain objectivity in performing the review. To +maintain objectivity, the EQR reviewer should not make decisions on behalf of the engagement +team or assume any of the responsibilities of the engagement team. (AS No. 7 ¶ 6 and ¶ 7) + +57. Although Yu was identified in the work papers as the EQR for the audit, he and +Lichter both worked on the cash audit and other aspects of the audit. Accordingly, Yu could not +provide an objective evaluation of the significant judgments made by the engagement team and the +related conclusions in forming the overall conclusion on the engagement, as required by AS No. 7 +¶ 1, and LYA failed to adhere to AS No. 7. + +58. LYA also failed to adhere to PCAOB Standard QC § 20, System of Quality Control +for a CPA Firm's Accounting and Auditing Practice. PCAOB Standard QC § 20.1 requires an +auditor to have a system of quality control for its auditing practice and describes elements of +quality control essential to the effective design, implementation, and maintenance of that system. +A system of quality control includes adopting policies and establishing procedures to provide the +firm with reasonable assurance of complying with professional standards. (QC § 20.04). + +59. LYA failed to adhere to QC § 20 because the Firm’s quality control policies and +procedures manual failed to adequately address all phases of the design and execution of these +engagements. LYA’s policies and procedures covering audits were deficient because they did not +discuss, for example: (1) exercising due professional care throughout the performance of the audit; +(2) the purpose of audit work papers and what should be included in the work papers; (3) +evaluating the results of the audit to determine whether the evidence is sufficient and appropriate to +support the conclusions reached and opinions expressed; and (4) evaluating significant unusual +transactions identified by the accountant or brought to the accountant’s attention. + +E. VIOLATIONS + +60. As a result of the conduct described above, Respondents were each a cause of Code +Rebel’s violation of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which require +an issuer to file with the Commission accurate annual reports. + +61. As a result of the conduct described above, LYA violated Rule 2-02(b) of +Regulation S-X, which requires an accountant’s report to accurately state whether the audit was +made in accordance with generally accepted auditing standards,8 and Lichter and Yu were each a +cause of LYA’s violations of Rule 2-02(b) of Regulation S-X. + + +8 Pursuant to Commission interpretive guidance, generally accepted auditing standards, 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). +15 + +62. As a result of the conduct described above, Respondents violated Section 10A(a)(1) +of the Exchange Act, which requires, among other things, each audit conducted of an issuer by a +registered public accounting firm to include “procedures designed to provide reasonable assurance +of detecting illegal acts that would have a direct and material effect on the determination of +financial statement amounts.” + +F. FINDINGS + +63. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct as defined in Section 4C(b)(2)(A) of the Exchange Act and Rule +102(e)(1)(iv)(B)(1) of the Commission’s Rules of Practice. + +64. Based on the foregoing, the Commission finds that Respondent LYA violated +Section 10A(a)(1) of the Exchange Act and Rule 2-02(b) of Regulation S-X, and caused Code +Rebel’s violations of Sections 13(a) and Rule 13a-1 thereunder. + +65. Based on the foregoing, the Commission finds that Respondent Lichter violated +Section 10A(a)(1) of the Exchange Act and caused Code Rebel’s violations of Sections 13(a) and +Rule 13a-1 thereunder and LYA’s violations of Rule 2-02(b) of Regulation S-X . + +66. Based on the foregoing, the Commission finds that Respondent Yu violated Section +10A(a)(1) of the Exchange Act and caused Code Rebel’s violations of Sections 13(a) and Rule +13a-1 thereunder and LYA’s violations of Rule 2-02(b) of Regulation S-X. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED that: + +A. Respondents LYA, Lichter, and Yu shall cease and desist from committing or +causing any violations and any future violations of Sections 10A(a)(1) and 13(a) of the Exchange +Act and Rule 13a-1 thereunder and Rule 2-02(b) of Regulation S-X. + +LYA + +B. LYA 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, LYA may request that the +Commission consider its reinstatement by submitting an application to resume appearing or +practicing before the Commission as: + +16 + + 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 LYA’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) LYA 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) LYA 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 LYA’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 LYA’s +employees will not receive appropriate supervision. LYA 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 LYA, 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 LYA, 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; + +17 + + (c) LYA 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) LYA acknowledges its responsibility, as long as it appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, engagement quality reviews and quality control +standards. + +D. The Commission will consider an application by LYA 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 LYA’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. + +Lichter + +E. Lichter is denied the privilege of appearing or practicing before the Commission as +an accountant. + +F. After five years from the date of this order, Lichter may request that the Commission +consider his reinstatement by submitting an application 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 Lichter’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 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 +18 + + + 3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Lichter, or the public accounting firm with which he is associated, is +registered with the Board in accordance with the Sarbanes-Oxley Act +of 2002, and such registration continues to be effective; + + (b) Lichter, 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 Lichter +will not receive appropriate supervision; + + (c) Lichter 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) Lichter acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, engagement quality reviews and quality control +standards. + +G. The Commission will consider an application by Lichter 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 Lichter’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. + + +19 + +Yu + +H. Yu is denied the privilege of appearing or practicing before the Commission as an +accountant. + +I. After five years from the date of this order, Yu may request that the Commission +consider his reinstatement by submitting an application 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 Yu’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 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) Yu, 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) Yu, 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 Yu will +not receive appropriate supervision; + +20 + + (c) Yu 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) Yu acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, engagement quality reviews and quality control +standards. + +J. The Commission will consider an application by Yu 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 Yu’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. + +Monetary Remedies + +K. Respondent LYA shall, within ten days of the entry of this Order, pay +disgorgement of $39,900, plus prejudgment interest thereon of $3,788.49 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. + +L. Respondent LYA, shall, within ten days of the entry of this Order, pay 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). 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 + +21 + +(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 LYA +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Mehraban, Associate Regional +Director, Securities and Exchange Commission, Brookfield Place, 200 Vesey Street, Suite 400, +New York, New York 10281. + +M. Respondent Lichter shall, within ten days of the entry of this Order, pay a civil +money penalty of $7,500 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 +Lichter as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Lara Mehraban, Associate Regional +Director, Securities and Exchange Commission, Brookfield Place, 200 Vesey Street, Suite 400, +New York, New York 10281. +22 + + +N. Respondent Yu shall, within ten days of the entry of this Order, pay a civil money +penalty of $7,500 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 Yu +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Lara Mehraban, Associate Regional +Director, Securities and Exchange Commission, Brookfield Place, 200 Vesey Street, Suite 400, +New York, New York 10281. + +O. 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. +23 + + +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/2019/AAER-4049.txt b/raw/aaer/2019/AAER-4049.txt new file mode 100644 index 0000000000000000000000000000000000000000..0ed511306fe4afb93ff1d60ec14ab53778228a83 --- /dev/null +++ b/raw/aaer/2019/AAER-4049.txt @@ -0,0 +1,303 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86034 / June 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4049 / June 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19194 + + +In the Matter of + +Pinnacle Accountancy Group, +PLLC +and Douglas W. Child, 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 cease- +and-desist proceedings be, and hereby are, instituted against Pinnacle Accountancy Group, PLLC +(“Pinnacle” or the “Firm”) and Douglas W. Child, CPA (collectively, “Respondents”) pursuant to +Section 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and that public +administrative proceedings be, and hereby are, instituted against Child pursuant to Exchange Act +Section 4C1 and pursuant to 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 . . . +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 +2 + + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative 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. SUMMARY + + These proceedings arise out of the failure by Pinnacle to register with the Public Company +Accounting Oversight Board (the “PCAOB” or the “Board”), as required by Section 102(a) of the +Sarbanes-Oxley Act of 2002 (“SOX”)3 and Child’s willful aiding and abetting of Pinnacle’s +registration violation. + +B. RESPONDENTS + +1. Pinnacle is a Utah professional corporation and public accounting firm +headquartered in Farmington, Utah. The Firm has never been registered with the PCAOB. + +2. Child, 59, of East Eden, Utah, is a certified public accountant licensed in Utah +since 1986. During the relevant time period, Child was the managing partner at Pinnacle. At all +relevant times, Child was also a minority partner at Pritchett, Siler & Hardy, P.C. (“PSH”), a +PCAOB-registered public accounting firm, where he served as the engagement partner for PSH’s +audits of certain issuers (“Issuers”). +C. OTHER RELEVANT ENTITIES + +3. PSH, a Utah professional corporation based in Salt Lake City, Utah, is a public +accounting firm that registered with the PCAOB in October 2003. During the relevant time + +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder.” +3 See also PCAOB Rule 2100(b) which states in pertinent part that each public accounting firm that “plays a +substantial role in the preparation or furnishing of an audit report with respect to any issuer” must be registered with +the Board. +3 + +period, PSH was the principal auditor of the Issuers (the “Audits”) and signed the audit reports +with respect to the Audits (the “Audit Reports”). Child served as engagement partner for the +Audits. + +4. Issuers are companies as defined in Section 2(a)(7) of SOX. The overwhelming +majority of Issuers in this matter were penny stock, shell, or blank-check companies. + +D. FACTS + +5. Child joined PSH as a minority partner for the purpose of, among other things, +serving as the engagement partner on the Audits. From 2015 through early 2018, Pinnacle played +a substantial role in the preparation of the Audit Reports at the direction of Child, Pinnacle’s +managing partner.4 During the relevant time period, PSH relied on the material services Pinnacle +performed when it issued the Audit Reports. 5 The Audit Reports were filed with the Commission +pursuant to Section 15(d) of the Exchange Act. + +6. At all times, Pinnacle was not registered with the PCAOB, as required by Section +102(a) of SOX. + +E. VIOLATIONS + +7. Section 102(a) of SOX provides in pertinent part that it is unlawful for any person +that is not a registered public accounting firm to participate in the preparation or issuance of any +audit report with respect to any issuer.6 + +8. Based on the conduct described above, Pinnacle willfully7 violated Section 102(a) +of SOX. + +9. Based on the conduct described above, Child willfully aided and abetted and caused +the Firm’s violation of Section 102(a) of SOX. + + +4 PCAOB Rule 1001(p)(ii)(1) defines the phrase “play a substantial role in the preparation or furnishing of +an audit report” as “perform[ing] material services that a public accounting firm uses or relies on in issuing all or +part of its audit report.” +5 PCAOB Rule 1001(p)(ii)(Note 1) defines the term “material services” as services, “for which the +engagement hours or fees constitute 20% or more of the total engagement hours or fees, respectively, provided by +the principal auditor in connection with the issuance of all or part of its audit report…” +6 A violation of SOX or any rule that the PCAOB issues under SOX is treated for all purposes in the same +manner as a violation of the Exchange Act, including with respect to penalties. Sarbanes-Oxley Act of 2002, 15 +U.S.C. § 7202(b)(1). +7 “Willfully” as used in this Order means intentionally committing the act that constitutes the violation. +There is no requirement that the actor also be aware that he is violating a rule or statute. See Wonsover v. SEC, 205 +F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). +4 + +F. FINDINGS + +10. Based on the foregoing, the Commission finds that Pinnacle willfully violated +Section 102(a) of SOX and that Child caused the Firm’s violation of Section 102(a) of SOX. + +11. Based on the foregoing, the Commission finds that Child willfully aided and +abetted Pinnacle’s violations of Section 102(a) of SOX pursuant to Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pinnacle and Child shall cease and desist from committing or causing any violations +and any future violations of Section 102(a) of SOX. + + B. Child is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After two years from the date of this order, Child 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 Child’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 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 +5 + + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Child, or the public accounting firm with which he is associated, is +registered with the Board in accordance with SOX, and such +registration continues to be effective; + + (b) Child, 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 Child will not receive appropriate supervision; + (c) Child 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) Child acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +D. The Commission will consider an application by Child 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 Child’s character, +integrity professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +E. Respondents shall pay, on a joint and several basis, 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). Payment shall +be made in the following installments: (1) $15,000.00 shall be due and payable within 10 days +of the entry of this Order; and (2) three equal payments each in the amount of $5,000.00 shall be +made within 120, 240, and 360 days of the entry of this Order. Payments shall be applied first to +post order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the final payment +set forth herein, Respondents shall contact the staff of the Commission for the amount due. If +6 + +Respondents fail to make any payment by the date agreed and/or in the amount agreed according +to the schedule set forth above, all outstanding payments under this Order, including post-order +interest, minus any payments made, shall become due and payable immediately at the discretion +of the staff of the Commission without further application to the Commission. + +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 +Pinnacle and Child as Respondents in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Glenn S. Gordon, Associate +Regional Director, Division of Enforcement, Securities and Exchange Commission, Miami +Regional Office, 801 Brickell Avenue, Suite 1800, Miami, FL 33134. + + F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondents by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +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 Child, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Child 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 Child of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4056.txt b/raw/aaer/2019/AAER-4056.txt new file mode 100644 index 0000000000000000000000000000000000000000..a5aed0b2cc1c6ea5b4e0694e2e2ecb6673bcc072 --- /dev/null +++ b/raw/aaer/2019/AAER-4056.txt @@ -0,0 +1,523 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86240 / June 28, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4056 / June 28, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19225 + + +In the Matter of + + S. JEFFREY JONES, 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 S. Jeffrey Jones, CPA +(“Respondent” or “Jones”) 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 … (2) … to have engaged in unethical or improper professional +conduct…. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + +2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purposes of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, 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 + +1. These proceedings arise out of Jones’s improper professional conduct as the lead +engagement partner on the audits of Blue Earth Inc.’s (“Blue Earth”) 2013 and 2014 fiscal year +financial statements and reviews of the fiscal year 2014 interim financial statements. Blue Earth, a +provider of efficient and renewable energy solutions, has since filed for Chapter 11 bankruptcy. +Jones had overall responsibility for the conduct of the audits and interim reviews, including +supervision of team members and compliance with Public Company Accounting Oversight Board +(“PCAOB”) standards. Jones caused the issuance of audit reports for those years, signed by Jones +on behalf of the audit firm, containing an unqualified opinion that Blue Earth’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. The financial statements were included in the Forms 10-K for the fiscal +years 2013 and 2014. The interim financial statements were included in the Forms 10-Q for the +first three quarters of 2014. + +2. Jones failed to conduct the audits and interim reviews in accordance with PCAOB +standards referenced herein. + +B. RESPONDENT + + 3. S. Jeffrey Jones, CPA, age 52, resides in South Jordan, Utah. Jones has been +licensed as a CPA in the State of Utah since November 1997. During and after the relevant period, +Jones was a partner at a PCAOB-registered accounting firm. + + +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 +C. RELEVANT ENTITY + +4. Blue Earth, Inc. is incorporated in Nevada and, during the relevant period, was +headquartered in Henderson, Nevada. During the relevant period, it provided a limited range of +renewable and energy efficient solutions for commercial and industrial facilities. During the +relevant period up to August 28, 2014, the company had a class of common stock registered with +the Commission pursuant to Exchange Act Section 12(g) which was quoted on the OTC Bulletin +Board. Effective August 28, 2014, the company registered its common stock with the Commission +pursuant to Section 12(b) of the Exchange Act, and the stock was listed on the NASDAQ Capital +Market. On March 21, 2016, Blue Earth filed for Chapter 11 bankruptcy. The NASDAQ +suspended Blue Earth’s common stock on March 28, 2016 and delisted the stock effective April +18, 2016. Blue Earth filed with the Commission a Form 15 terminating the registration of its +common stock under Section 12(g) on August 1, 2016 and a Form 15 suspending its periodic +reporting obligations under Section 15(d) of the Exchange Act on January 4, 2017. + +D. FACTS + +Failure to Comply with PCAOB Auditing Standards During the Audit of Blue +Earth’s 2013 Fiscal Year Financial Statements + +5. On July 15, 2013, Blue Earth acquired a subsidiary4 it eventually renamed Blue +Earth CHP (“BE CHP”). Through BE CHP, Blue Earth intended to enter into agreements with +customers pursuant to which Blue Earth would develop, build, own, and operate combined heat +and power plants on land leased from the customer. The plants would generate steam and +electricity for the customer at below market rates, and Blue Earth would sell the excess electricity +to the local utility. Blue Earth paid for BE CHP with 15,500,000 shares of restricted company +stock. To determine the purchase price, the company multiplied the number of shares paid by the +share price resulting in a value of $44,035,500. + +6. Shortly after the acquisition, BE CHP entered into seven non-binding term sheets +with a major meat processing company. At the insistence of the meat processing company, the +term sheets expressly stated that they were non-binding. The meat processing company would be +bound only when the parties signed a “definitive agreement” for each facility, meaning: (i) a +ground lease allowing Blue Earth access to the premises for purposes of constructing and operating +the plant; and (ii) a power purchase agreement obligating BE CHP to sell, and the meat processing +company to buy, steam and electricity at a set price. No such contract was signed until August +2014, when Blue Earth and the meat processing company executed a definitive agreement for one +plant. Blue Earth and the customer signed a definitive agreement for a second, smaller plant in +December 2014. Definitive agreements were not executed for any other plants. + + +4 Blue Earth initially acquired and combined two affiliated private entities to form BE CHP. BE +CHP is used herein to refer to both the pre-merger entities and the single post-merger subsidiary +into which they were combined. +4 +7. The GAAP governing accounting for business combinations, Accounting Standards +Codification (“ASC”) 805 Business Combinations (“ASC 805”), requires that a company: (a) +determine the purchase price which, in the case of a stock-for-stock acquisition, is the fair market +value of the shares paid (unless the acquiree’s share price is more reliably measured); (b) identify +all the assets acquired, including intangible assets; (c) determine the fair value of each asset; (d) +allocate the purchase price to each identified asset, offset by the liabilities; and (e) allocate the +residual to goodwill. + +8. Instead of complying with ASC 805, Blue Earth erroneously concluded that +because BE CHP had no revenues and no customer base, it could not have any goodwill; did not +attempt to separately identify intangible assets or obtain a fair market value of any identifiable +intangible asset; and concluded that the amount of the purchase price in excess of the tangible +assets should be allocated to an asset, which Blue Earth incorrectly classified as a “Construction in +Progress” asset. + +9. The company recorded the $44 million “Construction in Progress” asset on its +books and records during the third quarter of 2013. The asset comprised 56% and 51% of Blue +Earth’s assets reported on its balance sheet in the financial statements for the quarter ended +September 30, 2013 and the fiscal year ended December 31, 2013, respectively. + +10. Based on the reported $44 million value of the purported “Construction in +Progress” asset relative to all Blue Earth’s reported assets, the audit engagement team, led by +Jones, identified the asset as possessing a risk of material misstatement during the audit of the +company’s 2013 fiscal year financial statements, meaning that the auditor was required to design +and implement an audit response that addresses the risks of material misstatement. In the course of +doing that testing, Jones was put on notice of red flags indicating that the company had improperly +applied ASC 805 during the third quarter of 2013 and that almost the entire $44 million purchase +price should have been allocated to goodwill. + +11. The red flags included the following: + +a. For purposes of testing the company’s analysis of the $44 million +“Construction in Progress” asset for impairment, the audit team obtained from +the company a discounted cash flow (“DCF”) of future revenues from seven +sites. On Jones’s asking to see the contracts for the seven sites underlying the +DCF, the company told Jones there were no contracts, only non-binding term +sheets, and that the company was in the process of negotiating contracts with a +potential customer with respect to the seven potential sites. + +b. The DCF provided by the company to the audit team reflected a value for the +entire enterprise of $42.3 million, whereas the “Construction in Progress” asset +was reported on the company’s balance sheet as having a $44 million value. + +c. In light of information gathered during the audit, Jones advised the company to +obtain an independent valuation. The company declined on the grounds that no +5 +one was better positioned to value the asset than company insiders. + +d. The audit team retained a valuation firm for the limited purpose of assessing +the reasonableness of the discount rate used by Blue Earth in its DCF. The +valuation firm provided to the audit team a revision of the company’s DCF, +using the inputs from the company’s DCF and after correcting for errors in the +company’s DCF. The valuation firm’s revised DCF arrived at a potential +enterprise value of BE CHP at the time of acquisition of $8.1 million -- not the +$42 million reflected in Blue Earth’s DCF. + +e. Jones knew that ASC 805 required the identification of each discrete asset +acquired and a fair valuation of each asset. He and the audit team under his +supervision, however, did not obtain sufficient information about whether and +how the company had performed a fair valuation pursuant to ASC 805 of the +$44 million “Construction in Progress” asset that was identified. + +12. Jones failed to respond appropriately to these red flags. Further, he took the +position that no portion of a purchase price is allocable to goodwill under ASC 805 if the company +acquired has no brand name or operations at the time of acquisition, as was the case with BE CHP. +As a result, Jones failed to test whether the company had properly applied ASC 805 in recording a +$44 million ”Construction in Progress” asset on its books and records. + +13. Instead of questioning or testing the company’s application of ASC 805 at the +acquisition date during the 2013 fiscal year audit, Jones focused on whether the company had to +take an impairment on the purported $44 million “Construction in Progress” asset as of December +31, 2014. The audit team, under Jones’s supervision, initially took the position that it needed to see +the executed contracts in order to complete its testing of the asset for impairment. Despite this, and +in the face of the foregoing red flags, the audit team, under Jones’s supervision, ultimately relented +in the face of the company’s assurances that the contracts for the seven sites were being negotiated +and their execution was imminent. While knowing that the $42.3 million DCF was based on an +assumption of seven contracts, the audit team, at Jones’s direction, relied on the company’s DCF to +conclude that no impairment of the purported $44 million “Construction in Progress” asset was +warranted. + +14. PCAOB Auditing Standard No. 9, Audit Planning (“AS No. 9”)5 required an +auditor to establish the overall audit strategy for the engagement and develop an audit plan, which +includes, in particular, planned risk assessment procedures and planned responses to the risks of +material misstatement. (AS No. 9 at ¶ .05). Jones failed to plan appropriate audit procedures, as +required by AS No. 9, in light of the audit team’s determination that the $44 million “Construction +in Progress” asset posed risks of material misstatement. + +15. PCAOB Standard AU Section 230, Due Professional Care in the Performance of + +5 All references to auditing standards in this Order are to PCAOB standards in effect at the time +the audit work was performed. +6 +Work (“AU §230”) required that an auditor exercise professional skepticism. Professional +skepticism is an attitude that includes a questioning mind and a critical assessment of audit +evidence. In exercising professional skepticism, the auditor should not be satisfied with less than +persuasive evidence because of a belief that management is honest. (AU §230 at ¶¶ .07, .09). +PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of Material +Misstatement (“AS No. 13”) requires the auditor design and implement audit responses that +address the risks of material misstatements and, when responding to the assessed risks of material +misstatement, to apply professional skepticism in gathering and evaluating audit evidence. (AS +No. 13 at ¶¶ .03; .07). PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”) states +that the auditor must plan and perform audit procedures to obtain sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion. The auditor should perform +additional procedures if audit evidence from one source is inconsistent with that from another. As +the risk increases, the amount of evidence that the auditor should obtain also increases. (AS No. +15 at ¶¶ .04; .05; .29). Jones failed to apply professional skepticism in gathering and evaluating +audit evidence given the assessed risks of material misstatement, as required by AU §230 and AS +Nos. 13 and 15. For example, he accepted the company’s representation that lease and power +purchase agreements relating to seven sites on which the DCF was based were imminent, without +performing additional testing procedures. Further, he also failed to follow up on the valuation +expert’s revised DCF reflecting an $8.1 million valuation, given that the company’s DCF arrived at +a valuation of $42 million. + +16. PCAOB Standard AU Section 328, Auditing Fair Value Measurements and +Disclosures (“AU §328”) stated the auditor should obtain sufficient appropriate audit evidence to +provide reasonable assurance that fair value measurements and disclosures are in conformity with +GAAP. (AU §328 at ¶ .03). Jones failed to obtain sufficient appropriate audit evidence, as +required by AS No. 15 and AU §328, to evaluate management’s explanations or representations +concerning the purchase price allocation for the BE CHP acquisition and the fair value of the $44 +million asset. Despite the company’s rebuffing his advice that it obtain an independent valuation, +and the revised DCF of the independent valuation expert the audit engagement team retained +which reflected an $8.1 million valuation, Jones accepted management’s assertion as to the fair +value. + +17. PCAOB Auditing Standard No. 3, Audit Documentation (“AS No. 3”) required +that an auditor prepare its documentation in sufficient detail as to provide a clear understanding of +its purpose, source, and the conclusions reached, including documenting evidence that is +inconsistent with or contradicts the audit conclusions. (AS No. 3 at ¶¶ .04; .08). Jones failed to +establish that the engagement team prepared its documentation in sufficient detail so as to support +its conclusions concerning the purchase price allocation under ASC 805 and documented the +inconsistent evidence of the valuation expert’s revised DCF reflecting an $8.1 million valuation. + + + + + + +7 +Failure to Comply with PCAOB Auditing Standards During the Reviews of Blue +Earth’s Interim 2014 Financial Statements and Audit of Blue Earth’s 2014 Fiscal +Year Financial Statements + + Impairment Analysis of $44 Million “Construction in Progress” Asset + +18. In October 2014, the meat processing company with which Blue Earth had been +negotiating contracts to develop and operate plants at seven sites determined to proceed with only +two sites, one of which had been contracted in August 2014 and one that was subsequently +contracted in December 2014. JBS would not even consider Blue Earth for other sites unless Blue +Earth successfully completed these two. Pursuant to ASC 350-30-35, Intangibles—Goodwill and +Other, the $44 million “Construction in Progress” asset, which appeared under “Property and +Equipment” on the company’s balance sheet, but should have been allocated to goodwill if ASC +805 had been properly applied, should have been impaired if the fair value was less than the asset’s +carrying value on the company’s books and records. A 70% reduction in the sites under +consideration in late 2014 should have prompted the company to determine whether a reduction in +the asset’s fair value had occurred and whether the company needed to take an impairment. +However, Blue Earth did not perform an impairment analysis with regard to the $44 million BE +CHP asset in its financial statements for the fiscal year ended December 31, 2014. + +19. In February 2015, Blue Earth informed Jones that contracts still had not been +entered into with respect to five of the seven sites. Although Blue Earth insisted that the customer +remained committed to pursuing all seven projects, it indicated that the customer had determined to +develop just the two contracted sites before proceeding with the remaining five. Blue Earth also +referenced the customer’s interest in pursuing projects in the alternative or in addition to the five +uncontracted sites. + +20. These developments should have prompted Jones and the audit team to conduct +further testing into the possible underlying causes and whether management’s representations were +reliable. The audit team, however, under the supervision of Jones, limited the information it +sought to the two contracted sites. In obtaining that limited information, a manufacturer of +equipment slated for one of two contracted sites informed the audit team that Blue Earth was +delinquent in paying, further calling into question Blue Earth’s ability to perform under the +existing two contracts and to undertake additional projects. Despite these circumstances, the audit +team did not perform additional procedures in considering whether an impairment exists. + +21. The audit team, under the supervision of Jones, relied on the discounted cash flow +figures in the exact same DCF which the company had provided a year earlier and on which the +auditor had relied in conducting the audit of the 2013 fiscal year financial statements. Jones and +the rest of the audit team did not consider whether an updated impairment analysis was warranted +given information available to the audit team that, among other things, the customer had entered +into contracts with respect to only two sites and the progress on the remaining sites was held in +abeyance pending the completion of the first two sites. + +22. Further, the audit team, under Jones’s supervision, also relied on the assertions of +8 +management that Blue Earth and the customer were contemplating alternative and additional sites +to those reflected in the DCF. + +23. The audit team, led by Jones, ultimately did not take issue with the company’s +failure to undertake an impairment analysis with respect to the $44 million “Construction in +Progress” asset. + +24. Jones failed to plan and perform appropriate audit procedures, as required by AS +No. 9 and AS No. 13, in light of the audit team’s determination that the purported $44 million +“Construction in Progress” asset posed risks of material misstatement. + +25. Jones failed to apply due professional care and professional skepticism in +gathering and evaluating audit evidence given the assessed risks of material misstatement for the +purported $44 million asset, as required by AU § 230 and AS Nos. 13 and 15. Instead of following +up on multiple red flags that the value of the asset needed to be tested for impairment, Jones +accepted the representations of management and did not undertake further testing. Jones failed to +obtain sufficient appropriate audit evidence to evaluate management’s explanations or +representations concerning the current status of the plants or to assess the possible impairment of +the “Construction in Progress” asset. + + Improper Capitalization of Compensation Expense + +26. In February 2014, Blue Earth hired an individual to run its capital formation +subsidiary pursuant to a three-year employment agreement for a salary of $120,000 per year. At +the same time, Blue Earth issued to the individual 1,725,000 shares of Blue Earth restricted +common stock, with no vesting schedule, valued at approximately $4.6 million. The value of the +shares should have been expensed in the quarter they were issued as compensation expense under +ASC 718 Compensation — Stock Compensation (“ASC 718”). Instead, Blue Earth improperly +recorded the $4.6 million as an asset, capitalized it, and amortized it over three years. + +27. The shares were issued to the individual pursuant to a so-called “Sale of +Goodwill” agreement under which Blue Earth purported to purchase the individual’s “Seller’s +goodwill” which included, among other things, an agreement that the individual share information +about certain of his relationships, recommend Blue Earth to his contacts in the energy efficiency +and clean tech industry, and enter into an employment agreement with Blue Earth. Under the +“Sale of Goodwill” agreement, Blue Earth issued the shares to the individual upon the execution of +the agreement. There were no conditions to the individual receiving the shares, nor was there any +vesting period. + +28. Under GAAP provision ASC 718, the $4.6 million fair value of the shares issued +should have been treated as stock compensation. As stock compensation, without a vesting period, +the $4.6 million share payment from Blue Earth to the individual should have been expensed in the +period it was made, instead of being capitalized as an asset and amortized over three years. + +29. This accounting error caused Blue Earth to materially understate its expenses by +9 +approximately $4.3 million, constituting a 43% understatement of its net income (loss) before taxes +and of its net loss, and overstate its assets by 5% for the quarter ending March 31, 2014. Blue +Earth materially understated its expenses by nearly $3.2 million for the year ending December 31, +2014, which constituted a 10% understatement of its net income (loss) before taxes and 9.4% +understatement of its net loss. This error also caused Blue Earth to overstate its assets by 3.1% for +the year ending December 31, 2014. + +30. In February 2016, the company restated its financial statements for the year ending +December 31, 2014, after determining that the $4.6 million asset should have been treated as +compensation expense, and expensed in the quarter during which the shares were issued. + +31. The audit team, under Jones’s supervision, conducted interim reviews of Blue +Earth’s financial statements for the first three quarters of 2014 and the audit of the year ended +December 31, 2014. + +32. In the first quarter, Jones was aware of the details of this transaction and failed to +take the appropriate steps to address the likely misstatement. Jones knew or should have known +that the compensation should have been expensed when the shares were issued. For example, he +knew that the value derived from the transaction was the individual’s contacts within the industry +and his potential use of those contacts to raise funds for Blue Earth and that there was no vesting +period and no continuing employment obligation in order to receive the stock compensation. +Despite these red flags, Jones accepted the company’s capitalization of the fair value of the shares +as an intangible asset. + +33. Further, in connection with the year end audit, Jones did not direct the audit team +to request evidence that a fair value assessment was conducted as to the $4.6 million purported +asset or collect any additional evidence as to the nature of the asset. + +34. Jones failed to exercise due professional care and professional skepticism in his +communication with management and in gathering and evaluating audit evidence, as required by +AU § 230. Despite understanding that there was no vesting period and no continuing employment +obligation in order to receive the stock compensation, Jones did not question Blue Earth’s +capitalization of the payment, even though he knew or should have known it was contrary to +GAAP. + +35. Jones failed to obtain sufficient appropriate audit evidence to evaluate +management’s explanations or representations concerning the treatment of the stock payment, as +required by AS No. 13 and AU § 328. Jones did not request or document evidence that the $4.6 +million stock payment was a compensation expense. Jones accepted management’s conclusion +that the $4.6 million payment should be treated as an asset valued at $4.6 million. Insufficient +testing was done on the transaction. + +36. The audit conclusion that Blue Earth had acquired an asset valued at $4.6 million +was not supported by the engagement team’s documentation. Accordingly, Jones failed to prepare +audit documentation in sufficient detail to support the conclusions, as required by AS No. 3. +10 + +37. PCAOB Standard AU 722, Interim Financial Information, provided that 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, and not to provide a basis for +opining that the financial statements are presented fairly in all material respects. Jones failed to +properly perform a review of interim financial information in connection with this transaction in +the first three quarters of 2014, because Jones was aware of information that should have put him +on notice that the interim financials with respect to the transaction did not comply with GAAP. +Therefore, Jones was required to make further inquiries or perform further procedures to determine +whether those changes should be made, but he failed to do so. + +38. Findings + + Based on the foregoing, the Commission finds that Jones 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 Jones’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Jones is denied the privilege of appearing or practicing before the Commission as +an accountant. + + B. After two years from the date of this order, Jones 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 Jones’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 +11 +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. Jones, 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. Jones, 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 Jones will not receive appropriate supervision; + c. Jones 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. Jones 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. + +C. The Commission will consider an application by Jones 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 Jones’s character, +integrity professional conduct, or qualifications to appear or practice before the Commission as + + + + + + + + +12 +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 +process. + + By the Commission. + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4058.txt b/raw/aaer/2019/AAER-4058.txt new file mode 100644 index 0000000000000000000000000000000000000000..2ae32397b831d2df8097060bf26a1e1fd46cf818 --- /dev/null +++ b/raw/aaer/2019/AAER-4058.txt @@ -0,0 +1,133 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86350 / July 10, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4058 / July 10, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19244 + +In the Matter of +THOMAS H. LAWS, CPA, +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO SECTION 15(b) 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 and in the +public interest that public administrative proceedings be, and hereby are, instituted against Thomas +H. Laws (“Respondent” or “Laws”) pursuant to Section 15(b) of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (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.3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to +Section 15(b) of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules +of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Laws, 61, is and has been a certified public accountant licensed to practice in the +State of New Mexico. From February 2002 until November 2017, Laws was a registered +representative associated with a broker-dealer registered with the Commission. Laws served as the +Chief Executive Officer of Santa Fe Gold Corporation (“Santa Fe”) from August 2016 until his +termination in September 2018. + +2. Santa Fe, a small mining company, is Delaware corporation with its principal place +of business in Albuquerque, New Mexico. At all relevant times, Santa Fe had a class of securities +registered under Section 12(g) of the Exchange Act, its common stock was quoted on the OTC +Link operated by OTC Markets Group Inc., and it filed periodic reports with the Commission +pursuant to Section 13 of the Exchange Act and related rules thereunder. + +3. On June 28, 2019, 2019, a final judgment was entered by consent against Laws, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +[15 U.S.C. §§ 77q(a)], Sections 10(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and +78m(b)(5)] and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder [17 C.F.R. §§ 240.10b-5, +240.13b2-1, 240.13b2-2, and 240.13a-14], and from aiding and abetting violations of Sections +13(a) and 13(b)(2) of the Exchange Act [15 U.S.C. §§ 78m(a) and 78m(b)(2)] and Rules 12b-20, +13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13], in the civil +action entitled Securities and Exchange Commission v. Thomas H. Laws, et al., Civil Action +Number 1:18-cv-1063, in the United States District Court for the District of New Mexico. + + 4. The Commission’s complaint alleged, among other things, that from at least +August 2016 through February 2018, Santa Fe transferred directly to Laws and an entity he +controlled approximately $1.1 million of investors’ funds for various corporate purposes, +including the purchase of a silver mine, the acquisition of mining claims, the purchase of +mining equipment, and for third party services to the company. Rather than use the funds for +corporate purposes, Laws misappropriated these funds and attempted to hide his theft by +fabricating documents, including by forging vendor invoices, agreements, bank records, +communications, and signatures. Because Laws misappropriated investor funds, he knew that + + + 3 +multiple Santa Fe periodic reports filed with the Commission, each of which were signed and +certified by Laws, were materially false and misleading. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Laws’ Offer. + + Accordingly, pursuant to Section 15(b)(6) of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, it is hereby ORDERED, effective immediately, that: + +A. Laws 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. + +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. + +B. Laws is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4059.txt b/raw/aaer/2019/AAER-4059.txt new file mode 100644 index 0000000000000000000000000000000000000000..88915bd65991fc2350d8f932665b9ae2b37cc118 --- /dev/null +++ b/raw/aaer/2019/AAER-4059.txt @@ -0,0 +1,501 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86385 / July 16, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4059 + +ADMINISTRATIVE PROCEEDING +File No. 3-19251 + + +In the Matter of + +DOV WEINSTEIN, CPA and +DOV WEINSTEIN & CO., 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 Dov Weinstein, +CPA (“Weinstein”) and Dov Weinstein & Co., CPA (“WCPA”) (together, 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 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted +an Offer of Settlement (the “Offer”) which the Commission has determined to accept. + +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 be lacking in character or integrity, or to have engaged in unethical +or improper professional conduct …. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + 2 +Solely for the purpose of these proceedings and any other proceedings brought by or on +behalf of the Commission, or to which the Commission is a party, and without admitting or +denying the findings herein, except as to the Commission’s jurisdiction over them and the +subject matter of these proceedings, which are admitted, Respondents consent to the entry +of this Order Instituting Public Administrative Proceedings Pursuant to Section 4C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY +1. Weinstein and his firm, WCPA, engaged in improper professional conduct +during the audits and interim reviews of thirteen public companies. +2. Between approximately 2012 and 2015, WCPA performed deficient audits and +interim reviews for four companies that were the products of a fraudulent scheme +orchestrated by others to create and market “shell companies”: Duane Street Corp.; +Lollipop Corp.; Olivia Inc.; and Secure It Corp. (the “Shell Issuers”).4 Between 2013 and +2017, WCPA also performed deficient audits and interim reviews for nine other issuers +(“WCPA Clients 1- 9”).5 +3. Weinstein served as the engagement partner for the audits and interim reviews +of the thirteen issuers, and he authorized the issuance of audit reports that were included in +the companies’ periodic reports filed with the Commission. +4. WCPA and Weinstein repeatedly violated Public Company Accounting +Oversight Board (“PCAOB” or “Board”) standards in connection with their audits and +interim reviews of the issuers. + +3 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. +4 On February 16, 2018, the Commission filed civil injunctive actions against three individuals who +carried out a fraudulent scheme to create and sell public shell companies (hereinafter, “the Shell +Operators”) and several gatekeepers who aided and abetted the scheme with respect to eight of those shell +companies. See Litigation Release No. 24051 (Feb. 16, 2018); SEC v. Perlstein et al, No. 1:18cv1026 +(E.D.N.Y. Feb. 16, 2018); SEC v. Weinberg, et al., No. 1:18cv360 (D.D.C. Feb. 16, 2018); SEC v. Strum, +No. 1:18cv361 (D.D.C. Feb. 16, 2018). +5 Two of those firms were successors to Secure It Corp. and Olivia Inc. + + 3 +5. In particular, WCPA failed to conduct engagement quality reviews (“EQRs”) +during at least 76 audits and interim reviews of certain of the Shell Issuers and WCPA +Clients 1-9. See Auditing Standard (“AS”) 1220 (formerly AS No. 7).6 +6. WCPA and Weinstein failed to exercise due care and professional skepticism +regarding the Shell Operators’ relationship with the Shell Issuers, see AS 1015 (formerly +Interim Auditing Standard (“AU”) § 230), and failed to obtain an understanding of the +Shell Issuers and their environment, see AS 2110 (formerly AS No. 12). WCPA also failed +to implement adequate client-acceptance and continuance procedures. See System of +Quality Control (“QC”) § 20. During the course of their engagements with the Shell +Issuers, Weinstein and WCPA ignored red flags that should have alerted them that the Shell +Issuers were controlled by the Shell Operators. +7. Weinstein and WCPA also failed to implement procedures designed to identify +material related party transactions of the Shell Issuers. See AU § 334.7 +8. WCPA and Weinstein also failed to maintain independence from their audit +clients by serving as a trustee for three audit clients during their audits or interim reviews, +see AS 1005 (formerly AU § 220) and Rule 2-01(b) of Regulation S-X. Finally, WCPA +failed to retain certain audit documentation. See AS 1215 (formerly AS No. 3). +9. As detailed below, these failures constitute 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. +B. RESPONDENTS +10. Dov Weinstein & Co., CPA is a public accounting firm that is registered with +the PCAOB and located in Israel. During the relevant period, WCPA had approximately +sixteen employees, including six accountants. As of February 2019, WCPA had nine +public company clients with securities registered with the Commission. +11. Dov Weinstein, age 65, resides in Israel. Weinstein is a CPA licensed in Israel +with the Israel Auditors’ Council. During the relevant period, Weinstein was the sole +partner of WCPA. + +6 As of December 31, 2016, the PCAOB reorganized its auditing standards using a topical structure +and a single, integrated numbering system. See PCAOB Auditing Standards Reorganized and Pre- +Reorganized Numbering (Jan. 2017). The reorganization did not impose additional requirements on +auditors or change substantively the requirements of PCAOB standards. Although the Respondents’ +conduct occurred both before and after the reorganization, for clarity, the reorganized standards are cited +herein, unless otherwise noted. +7 AU § 334 was superseded by AS 2410 (formerly AS No. 18), which became effective for audits of +fiscal years beginning on or after December 15, 2014. Those audits in which Weinstein and WCPA +violated AU § 334 were for fiscal years beginning before December 15, 2014. + + 4 +C. WEINSTEIN’S AND WCPA’S VIOLATIONS OF PROFESSIONAL +STANDARDS +12. Between approximately late 2011 or early 2012 and 2015, the Shell Operators +engaged WCPA to conduct approximately twenty-four audits and interim reviews of the +Shell Issuers’ financial statements that were included in registration statements and other +filings with the Commission. +13. In addition to the Shell Issuers, between approximately 2013 and 2017, WCPA +and Weinstein conducted approximately sixty-seven audits and interim reviews of WCPA +Clients 1-9. +14. In the course of those audits and interim reviews, Weinstein and WCPA failed +to comply with PCAOB standards. +15. The Commission’s Rules allow the Commission to censure or deny, +temporarily or permanently, the privilege of appearing or practicing before it in any way +certain professionals who violate “applicable professional standards.” 17 C.F.R. § +201.102(e). The applicable professional standards include standards issued by the PCAOB. +16. Weinstein, as the engagement partner for all of the audits and reviews at issue, +was responsible for the audit engagements and their performance, for properly supervising +the work of the engagement team members, and for ensuring compliance with PCAOB +standards. +WCPA Failed to Conduct EQRs +17. PCAOB standards provide that for both audits and interim reviews, an +engagement quality reviewer should, among other things, “evaluate the significant +judgments made by the engagement team and the related conclusions reached in forming +the overall conclusion on the engagement.” AS 1220.09 and .14, Engagement Quality +Review. “Documentation of an engagement quality review should be included in the +engagement documentation.” AS 1220.20. +18. Between approximately 2013 and 2017, WCPA violated AS 1220 for at least +76 audits and interim reviews that WCPA conducted of the issuers. WCPA’s work papers +for those audits and reviews do not contain any documentation that WCPA considered the +procedures described in AS 1220, or any indication that EQRs were conducted with regard +to the 76 audits and reviews. +19. By failing to conduct numerous EQRs, WCPA violated PCAOB standards. + + 5 +WCPA and/or Weinstein Failed to Exercise Due Professional Care and +Professional Skepticism, Obtain a Sufficient Understanding of the Shell +Issuers, and Implement Adequate Client Acceptance Procedures. +20. PCAOB standards require, among other things, that auditors “exercise +professional skepticism,” “consider the competency and sufficiency of the evidence,” +“neither assume[] that management is dishonest nor assume[] unquestioned honesty,” and +“obtain sufficient appropriate evidential matter to provide him or her with a reasonable +basis for forming an opinion.” AS 1015.07 – .11, Due Professional Care in the +Performance of Work. +21. AS 2110.7 - .10, Identifying and Assessing Risks of Material Misstatement, +requires that the auditor “obtain an understanding of the company and its environment.” +This should include, among other things, obtaining an understanding of the company’s +organizational structure, management personnel, the sources of funding of the company’s +operations, and the company’s operating characteristics. +22. Beginning in approximately late 2011 or early 2012, Weinstein and his firm +were retained within a period of about twelve months to audit and review the financial +statements of the four Shell Issuers. Thereafter, WCPA and Weinstein conducted annual +audits and quarterly interim reviews of the Shell Issuers’ financial statements. +23. In the course of the audits and reviews, Weinstein failed to obtain an +understanding of the Shell Issuers and ignored red flags that should have alerted him that +the purported directors and officers (“D&Os”) of the Shell Issuers did not act in those +capacities and that the shell companies that he was auditing were fraudulent and controlled +by the Shell Operators. For example: +a. Weinstein was hired by Shell Operator A over a period of approximately +twelve months to perform audits for all four Shell Issuers. Shell Operator A, +rather than the Shell Issuers’ purported D&Os, approached Weinstein to +conduct audits and interim reviews for the Shell Issuers. +b. Weinstein discussed and agreed on his fees for this work with Shell Operator +A, rather than with any of the purported D&Os of each issuer. +c. Weinstein never obtained documents regarding Shell Operator A’s role with +the Shell Issuers or Shell Operator A’s purported authority to act on behalf of +the Shell Issuers. +d. WCPA’s workpapers do not reflect any meetings or telephone calls between +WCPA and the Shell Issuers’ purported D&Os, other than a single, +handwritten note referring to a supposed call with one of the Shell Issuer’s +purported D&Os in 2013. +e. Shell Operator A sent emails directly to WCPA — at times without sending +copies to the purported D&Os— with instructions about the audits. + + 6 +f. Weinstein and his staff typically copied Shell Operator A (and sometimes +another individual acting on behalf of the Shell Issuers, Shell Operator B) on +substantive emails concerning the audits. However, Weinstein and WCPA +obtained no evidence that Shell Operators A or B were being compensated by +any of the Shell Issuers for their services. +g. There were telling similarities among the Shell Issuers: all of the firms had +been incorporated in Delaware between approximately August and November, +2011; purportedly had D&Os who resided in Israel; maintained principal +executive offices in the U.S; had few or no assets, and little, if any, business +activity; and none had made significant progress toward executing its +purported business plan. +24. By their failure to obtain sufficient evidence to understand the nature of the +Shell Issuers and their relationship with the Shell Operators, particularly in light of the red +flags discussed above, WCPA and Weinstein failed to exercise due professional care and +professional skepticism during their audits and interim reviews. +25. The PCAOB’s quality control standards require auditors to implement client +acceptance procedures, and provide that “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, System of Quality Control for a +CPA Firm’s Accounting and Auditing Practice. All of the firm’s personnel are responsible +for complying with the firm’s quality control policies and procedures. QC § 20.22. +26. WCPA conducted its audits of the Shell Issuers using an audit program that +included an assessment of the business reputation and integrity of the client’s management. +WCPA represented in the work papers that it had completed this assessment during its +audits of the Shell Issuers, whose D&Os all supposedly resided in Israel. For example, +work papers from Weinstein’s December 2013 audit of Olivia Inc. refer to the company’s +owners as being ethical, having integrity, and demonstrating a “positive attitude towards +the audit,” and state that “no circumstances have arisen to rouse suspicions.” +27. WCPA had an insufficient basis for those representations. As detailed above, +WCPA disregarded various red flags concerning management’s identity and integrity. In +doing so, WCPA failed to implement adequate client acceptance procedures, in violation of +QC § 20. +WCPA and Weinstein Failed to Properly Audit Related Party Transactions, +and Failed to Include Procedures Designed to Provide Reasonable Assurances +of Identifying Related Party Transactions +28. PCAOB standards include audit procedures that should be considered for +determining the existence of related parties and for identifying transactions with related +parties. See AU § 334.07 and .08, Related Parties. In defining “related parties,” AU § 334 +cited the definition used under generally accepted accounting principles (“GAAP”) in +Accounting Statement Codification (“ASC”) 850, which includes principal owners, + + 7 +management, and “other parties with which the enterprise may deal if one party controls or +can significantly influence the management or operating policies of the other to an extent +that one of the parties might be prevented from fully pursuing its own separate interests.” +ASC 850-10-20 (f). +29. AU § 334.04 stated that “the auditor 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 [Financial Accounting +Standards Board] Statement No. 57 [now codified in ASC 850] requires disclosure even +though there are no transactions.” Auditors are advised to “[c]onsider whether transactions +are occurring, but are not being given accounting recognition, such as receiving or +providing accounting, management or other services at no charge.” AU § 334.08(f). +30. Weinstein knew that Shell Operator A and Shell Operator B were purporting to +act on behalf of at least three of the Shell Issuers. Despite the time and effort that Shell +Operators A and B appeared to be investing on behalf of the companies, Weinstein and his +staff never asked them for evidence of how they were compensated, or asked the Shell +Issuers for invoices, agreements, or other details about their fee arrangements with the +Shell Operators. +31. The lack of compensation for services provided should have been a red flag to +Weinstein that Shell Operator A and Shell Operator B were related parties and had engaged +in transactions with the Shell Issuers that should have been disclosed. +32. Weinstein, therefore, failed to properly audit related party transactions and +perform the necessary auditing procedures with respect to related parties. +By Serving as a Trustee for Audit Clients, Weinstein and WCPA Lacked +Independence +33. PCAOB standards require “that the auditor be independent” and that “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.” AS 1005.02, Independence. “Public confidence would be impaired by evidence +that independence was actually lacking, and it might also be impaired by the existence of +circumstances which reasonable people might believe likely to influence independence.” +AS 1005.03. +34. 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 explains that under Rule +3520, an auditor’s independence obligation encompasses an obligation to satisfy the +“independence criteria set out in the rules and regulations of the Commission under the +federal securities laws.” +35. Rule 2-01(b) of Regulation S-X, in turn, sets forth the general standard of +independence, which recognizes that an auditor must be independent in fact and appearance +throughout the audit and professional engagement period, with appearance being measured + + 8 +by reference to a reasonable investor with knowledge of all facts and circumstances. Rule +2-01(c)(4)(viii) prohibits having custody of the assets of an audit client. +36. In or about the third quarter of 2013, WCPA provided trust services for Duane +Street, Olivia Corp., and Lollipop Corp. while also engaged as their auditor or while +performing interim reviews. +37. Specifically, WCPA, as trustee, (a) opened a bank account in Israel for each of +the three shell companies, (b) received the proceeds from their stock issuances into the +accounts, (c) operated and maintained control of those bank accounts, (d) managed and +distributed the proceeds according to the issuers’ written instructions, and (e) transferred +those proceeds to the companies’ respective bank accounts in the U.S. +38. Those trusts were established for the sole purpose of holding the proceeds from +the three issuers’ share issuances. +39. For providing these services, WCPA charged approximately $1,500 to each +issuer, in additional to its audit and review fees. +40. By taking custody of the issuers’ assets and acting as a trustee for trusts whose +assets were the proceeds from its clients’ share issuances, WCPA’s and Weinstein’s +independence was impaired, in violation of AS 1005. +WCPA Failed to Retain Audit Documentation +41. AS 1215.14 provides that “[t]he auditor must retain audit documentation for +seven years from the date the auditor grants permission to use the auditor’s report in +connection with the issuance of the company's financial statements.” +42. WCPA failed to retain any workpapers from their 2013 third quarter interim +review and 2015 audit of at least one of the issuers. +43. By failing to retain any documentation that this review and audit had been +performed, WCPA violated AS 1215. +D. FINDINGS +44. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice.8 + +8 Section 4C(b) and Rule 102(e)(1)(iv) define “improper professional conduct” with respect to +persons licensed to practice as accountants. Pursuant to these provisions, “improper professional conduct” +includes two types of negligent conduct: (1) a single instance of highly unreasonable conduct that results in +a violation of professional standards in circumstances where heightened scrutiny is warranted; or (2) +repeated instances of unreasonable conduct, each resulting in violations of professional standards, that +indicate a lack of competence. + + 9 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondents’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Weinstein and WCPA are denied the privilege of appearing or practicing +before the Commission as an accountant. + + B. After five years from the date of this order, WCPA may request that +the Commission consider its reinstatement by submitting an application (to the +attention of the 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 WCPA’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) WCPA 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) WCPA 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 WCPA’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 WCPA’s +employees will not receive appropriate supervision. WCPA +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 + + 10 +review, the consultant shall not enter into any employment, +consultant, attorney-client, auditing, or other professional +relationship with WCPA, 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 WCPA, 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) WCPA 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) WCPA 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. + + C. The Commission will consider an application by WCPA 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 Israel Auditors’ +Council. 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 WCPA’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. + + D. After five years from the date of this order, Weinstein may request +that the Commission consider his reinstatement by submitting an application (to the +attention of the Office of the Chief Accountant) to resume appearing or practicing +before the Commission as: + + + 11 + 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 Weinstein’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 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) Weinstein, or the public accounting firm with which he is +associated, is registered with the Board in accordance with +the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; + + (b) Weinstein, 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 Weinstein will not receive +appropriate supervision; + + (c) Weinstein 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) Weinstein 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, + + 12 +all requirements relating to registration, inspections, +concurring partner reviews, and quality control standards. + +E. The Commission will consider an application by Weinstein 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 Israel Auditors’ Council. 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 Weinstein’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of +the Commission’s processes. + + By the Commission. + + + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4081.txt b/raw/aaer/2019/AAER-4081.txt new file mode 100644 index 0000000000000000000000000000000000000000..2458c2202b741be9ac81b0df51ef029fbd7edeba --- /dev/null +++ b/raw/aaer/2019/AAER-4081.txt @@ -0,0 +1,385 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87036 / September 20, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4081 / September 20, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19477 + + +In the Matter of + +THE BANCORP, 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 The Bancorp, Inc. (“Bancorp” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that +Summary + +1. This matter concerns Bancorp’s failures between at least April 2012 and September +2014 to properly classify certain loans and to take appropriate charges for individually impaired +loans, resulting in Bancorp materially understating its Allowance for Loan and Lease Losses +(“ALLL”) and its Provision for Loan and Lease Losses (“PLLL”) in its requisite periodic reports +filed with the Commission. Bancorp failed to assign appropriate risk ratings to certain loans and to +identify certain large lending relationships as containing impaired or otherwise substandard loans, +repeatedly overlooking indicators of borrowers’ and guarantors’ financial distress. Bancorp also +failed to devise or maintain related internal accounting controls, including for credit file +maintenance and for identifying and appropriately considering Troubled Debt Restructurings. +2. As a result of these failures, on September 28, 2015, Bancorp restated its financial +results and financial statements for certain prior years. Pursuant to the restatement, the aggregate +adjustment to the PLLL for its fiscal years 2010 through 2013 was approximately $138.6 million. +Pursuant to the adjustments to the historical ALLL set forth in the restatement, Bancorp’s ALLL +for 2012 increased by 78.23% from the balance previously reported, and the ALLL for 2013 +increased by 73.97%. +3. As a result of the conduct described in this Order, Bancorp violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) and Rules 13a-1 and 13a-13 of the Exchange Act. + +Facts + +A. Respondent + +4. Bancorp is a Delaware corporation with its principal executive offices in +Wilmington, Delaware. Its common stock is registered with the Commission pursuant to +Section 12(b) of the Exchange Act and trades on the NASDAQ Stock Market under the ticker +symbol TBBK. Bancorp is the bank holding company for The Bancorp Bank (“Bancorp Bank”), a +regional bank headquartered in Wilmington, Delaware. Bancorp Bank is Bancorp’s primary +wholly-owned subsidiary. + +B. Accounting Guidance +5. Banking institutions carry loans on their balance sheets as assets and record on their +income statements any interest revenue on the loans. According to Generally Accepted +Accounting Principles (“GAAP”), an individual loan is impaired when “based on current + +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 +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. Furthermore, loan losses must be recognized for groups of loans with similar +risk characteristics and evaluated for impairment collectively when it is probable that the asset is +impaired as of the date of the financial statements and the amount of loss can be reasonably +estimated. Id. +6. GAAP also requires that when a loan is modified—whether by restructure, +extension, renewal, or other modification—the transaction must be evaluated to determine if the +modification constitutes a Troubled Debt Restructuring (“TDR”). Pursuant to ASC 310-40-15, a +loan is a TDR if there is a restructuring for a borrower in financial difficulty and the creditor grants +a concession to the borrower that it would not otherwise consider. A loan restructured as a TDR is +an impaired loan. ASC 310-40-35. +7. The ALLL is the current estimate of the aggregate probable loss inherent in a loan +portfolio and is reflected on the balance sheet as a reduction in loans. The ALLL encompasses the +effects of two types of loan losses: (1) loans identified and evaluated for impairment individually; +and (2) loans grouped by common risk characteristics and analyzed for impairment on an +aggregate basis. ASC 310-10-35. The PLLL reflects the income statement impact of impaired +loans for the period being reported. +C. Bancorp’s Failure to Identify Loan Impairments and Credit Deterioration +8. The component of the ALLL that is comprised of the effects of losses from loans +identified and evaluated for impairment individually is often referred to as the specific reserve. In +turn, the component of the ALLL that is comprised of the effects of losses from loans grouped by +common risk characteristics and analyzed for impairment on an aggregate basis is often called the +general reserve. +9. Pursuant to Bancorp’s Credit Policy, Bancorp Bank was supposed to periodically +review loan relationships by loan type and assign risk ratings ranging from I to VIII for purposes of +computing the general reserve portion of the ALLL. Each individual loan risk rating signifies a +level of credit quality. Loans rated I (Excellent – No Risk) to V (Special Mention) were +considered to have passing ratings, and loans rated VI (Substandard) to VIII (Loss) were +considered to have adverse ratings. Each loan-type pool was collectively evaluated for impairment +by assigning a weighted loss risk factor by risk rating. The resulting aggregate estimated loss by +loan type and risk rating category was then used to calculate the general reserve portion of the +ALLL. +10. During the relevant time period, Bancorp engaged in a business model called +“relationship banking.” Bancorp sought to develop long-standing banking relationships with +certain individuals and businesses within Bancorp Bank’s geographic region and provide them +with the attention of senior Bancorp Bank management. Bancorp’s focus on long-standing +relationships with borrowers and guarantors holding multiple Bancorp Bank loans was intended to +encourage cross-selling, provide insight into borrowers’ risk, and increase customer loyalty. + + 4 +Bancorp executives also believed that this model allowed Bancorp Bank to cross-collateralize +loans and take a holistic approach to loan management. +11. However, Bancorp made risk rating and impairment decisions that relied too +heavily on borrowers’ and guarantors’ reputations, their historic business and banking relationship +with Bancorp Bank, and their expected future prospects for more business, while overlooking +indicators of financial distress. This was particularly the case with respect to certain large or high- +profile lending relationships and with respect to borrowers and guarantors with long relationships +with Bancorp Bank. As a result, Bancorp failed to identify loan impairments and credit +deterioration within individual loans and repeatedly failed to re-evaluate loans and downgrade risk +ratings when confronted with negative information. This caused Bancorp to materially understate +its PLLL from 2010 through 2013 and its ALLL from 2010 through the third quarter of 2014. +12. For example, in 2012, Bancorp did not evaluate a $20 million loan relationship for +potential impairment after the criminal conviction of the guarantor, a long-time Bancorp Bank +customer. Bancorp also failed to change the risk ratings for the loans in the relationship at that +time. Instead, Bancorp focused on attempting to obtain an additional guarantee from the +guarantor’s brother. However, the guarantee was not obtained until May 2013. After the brother +failed to make promised loan payments the following year, Bancorp Bank increased the +relationship’s line of credit and used it to pay overdue balances on delinquent loans. Despite these +developments, the loans in the relationship retained their passing loan ratings. During the +restatement of its financial statements, Bancorp recorded a total of approximately $16.1 million in +impairment losses for loans in this relationship during the fourth quarter of 2012. +13. Similarly, for a lending relationship with another long-term Bancorp Bank +customer who was criminally convicted in early 2012, Bancorp failed to downgrade the loans in +the relationship, despite recognizing that the customer’s finances were suffering. In fact, no +downgrades occurred for nearly a year and a half after the customer’s conviction. Instead, Bancorp +Bank executives documented an expectation that the customer’s son would assume control of +certain faltering real estate and commercial ventures and improve their profitability. During the +restatement of its financial statements, Bancorp recorded a total of approximately $12.5 million in +impairment losses for loans in this relationship during the fourth quarter of 2012. +14. Another example involved a real estate ownership group whose shares constituted +the primary collateral for a $9.8 million line of credit granted to a high-profile executive. In the +third quarter of 2012, the ownership group ceased to operate. Moreover, that summer, Bancorp +Bank became aware that an airplane that served as collateral in the amount of $6.1 million for +another loan in the relationship had been grounded. Despite the cessation of the ownership group’s +operations, the airplane’s grounding, and the history of delinquency for loans in the relationship, +when Bancorp reviewed the loans in April 2013, it rated them as Class III (Acceptable). +15. On multiple occasions during the relevant time period, Bancorp Bank extended +additional credit to borrowers who had fallen behind on their loan payments. This additional credit +was then used to bring existing loans current, in the expectation that the borrower’s or guarantor’s +financial situation would improve in the future and allow resumption of normal payments. This + + 5 +overly optimistic view resulted in Bancorp failing to downgrade risk ratings and failing to classify +certain loans as impaired. +16. For example, Bancorp Bank increased the available funds in the high-profile +executive’s line of credit numerous times in order for the executive to be able to make quarter-end +payments on his delinquent loans. The increases resulted from Bancorp’s estimation of the +borrower’s potential future business opportunities based generally on his reputation and a business +license, rather than on his financial condition at the time of the increases. At the time, Bancorp did +not adjust the risk ratings for the loans and thus did not classify the loans as impaired. During the +restatement of its financial statements, Bancorp recognized an impairment loss on this line of credit +of approximately $8.7 million during the third quarter of 2012. +17. By failing to identify loan impairments and credit deterioration within individual +loans and by failing to re-evaluate loans, assign appropriate risk ratings, and classify certain loans +as impaired, and, as a result, failing correctly to state its ALLL and PLLL, Bancorp failed to make +and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected +the transactions and dispositions of its assets. +18. As a result, Bancorp failed to file with the Commission accurate periodic reports +required of issuers of securities registered pursuant to Section 12 of the Exchange Act. +D. Bancorp’s Incomplete Credit Files +19. Bancorp devised internal accounting controls for credit file maintenance; however, +for its fiscal years 2012, 2013, and 2014, it failed to maintain the controls. The controls were +intended to provide reasonable assurance that Bancorp’s credit files contained relevant +information, including timely appraisals and relevant financial information regarding borrowers. +Nevertheless, the internal controls were not maintained, and Bancorp’s credit files were +incomplete. This, combined with Bancorp’s reliance on relationships, led Bancorp Bank to +estimate impairment and assign risk ratings based on incomplete information. The assignment of +overly optimistic risk ratings led Bancorp to record insufficient general reserves, and faulty +individual loan impairment decisions led Bancorp to book insufficient specific reserves. +20. Accurate appraisals were important for properly evaluating the real estate collateral +underlying many Bancorp Bank loans and therefore for fairly and accurately assigning risk ratings +and estimating impairment. Nevertheless, Bancorp frequently relied upon outdated appraisals +when valuing real estate collateral in connection with impairment decisions and the assignment of +risk ratings. In multiple instances, Bancorp relied upon pre-financial crisis real estate appraisals +long after the crisis had come and gone. +21. Bancorp failed on two occasions to include in the credit files contemporaneous +information concerning criminal cases involving borrowers or guarantors. For example, although +Bancorp Bank was aware in December 2012 that a guarantor in a large lending relationship had +pleaded guilty to bank fraud, there was no mention of the criminal case in the paperwork for a +March 2013 maturity extension or in the paperwork for a line of credit increase in September 2013. + + 6 +22. Bancorp also failed to record instances of delinquency within credit files. Even +when additional credit was granted in order to allow delinquent borrowers to bring their loan +payments current, the delinquencies were often not documented in the requests for increases. This +lack of documentation contributed to Bancorp’s failure to identify and account for impaired and +adversely classified loans. +23. Additionally, on multiple occasions, Bancorp did not obtain financial statements +required under the terms of loan agreements with borrowers. For example, when it extended the +maturity of an entity’s $1.5 million line of credit, Bancorp failed to obtain timely financial +information required under the terms of the line of credit. Instead, it relied upon outdated tax +returns and financial statements and projections that had not been reviewed and audited as +required. +24. In its annual Report on Form 10-K for its fiscal year 2014, Respondent disclosed a +material weakness in its internal control over financial reporting for its fiscal years 2012, 2013, and +2014. The material weakness related to Bancorp’s “failure to maintain controls over credit file +maintenance, including the risk-rating of borrowers and the evaluation of collateral and industry- +specific information that [Bancorp] believed to be relevant in determining the occurrence of a loss +event and measuring impairment under ASC 310.” +25. By failing to maintain internal accounting controls sufficient to provide reasonable +assurances that credit files would be properly maintained, Bancorp failed to 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 conformity with GAAP. +26. By failing to make and keep complete, accurate, and current credit files, Bancorp +failed to make and keep books, records, and accounts which, in reasonable detail, accurately and +fairly reflected the transactions and dispositions of Bancorp’s assets. +E. Bancorp’s Process for Identifying Troubled Debt Restructurings +27. For many years, Bancorp had no TDR identification process. Rather than +reviewing loan modifications to identify TDRs as they occurred, Bancorp focused on responding to +questions by its independent public accountant regarding the modifications. +28. In September 2011, Bancorp implemented a TDR identification committee. The +committee was tasked with evaluating loan modifications to identify TDRs in conformity with +GAAP. However, the process by which the committee evaluated TDRs was deficient in several +respects. +29. The process as devised was not sufficient to provide reasonable assurances that +loan restructurings, extensions, renewals, and other modifications were evaluated for TDR status, +and the committee therefore reviewed only a limited pool of loan modifications. Additionally, +Bancorp’s processes did not provide the TDR identification committee with information sufficient +to accurately identify TDRs. The committee was presented only with summaries that often failed + + 7 +to include important information about the loans being considered, including information +concerning the financial difficulties of borrowers or guarantors of modified loans. +30. In March 2012, Bancorp management reported to the Audit Committee of its Board +of Directors a significant deficiency in its internal control over financial reporting concerning its +newly-created TDR identification process. The significant deficiency arose from Bancorp’s failure +to evaluate all renewed, extended, or modified loans. +31. Nevertheless, during its fiscal year 2012, Bancorp’s process for identifying and +evaluating TDRs was still not sufficient to provide reasonable assurances that TDRs would be +appropriately evaluated and identified. The process did not ensure documentary support for TDR +determinations. +32. For example, in 2012 the TDR identification committee determined that the loans +in a $44 million loan relationship involving one long-term borrower were not TDRs, based on the +committee’s consideration of a summary that described the modification of the loans as merely +short-term, interest-only requests from a borrower who was not experiencing financial difficulties. +In fact, at the time the committee made that determination, the guarantor had been criminally +convicted and Bancorp had extended maturity and interest-only periods for the loans in order to +allow the guarantor time to determine which of the collateral properties to reposition or sell. This +information was not included in the summary presented to the committee. In the restatement of its +financial statements, Bancorp determined that the loans in the relationship were TDRs as of the +time of the committee meeting in 2012. +33. In March 2013, Bancorp management again reported to the Audit Committee a +significant deficiency in its internal control over financial reporting concerning TDR identification. +This significant deficiency pertained to a lack of documentary support for TDR determinations. +34. In October 2013, Bancorp management implemented a TDR Policy and a TDR +Worksheet for use in identifying, evaluating, and documenting TDRs. + +35. By failing to provide reasonable assurances that loan modifications were being +correctly evaluated regarding TDR status, Bancorp failed to devise 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 GAAP. + +36. By failing to make correct and appropriate TDR determinations, identify certain +loans as impaired, and, as a result, correctly state its ALLL and PLLL, Bancorp failed to make and +keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the +transactions and dispositions of its assets. + +37. As a result, Bancorp failed to file with the Commission accurate periodic reports +required of issuers of securities registered pursuant to Section 12 of the Exchange Act. + + 8 +F. Bancorp’s Additional Loss Provisions and Restatement +38. In its earnings release for the first quarter of 2014, issued on April 24, 2014, +Bancorp reported that “[t]he quarter was significantly impacted by an additional loan loss +provision of $11.8 million principally related to newly identified adversely classified loans.” In its +earnings release for the second quarter of 2014, issued on July 23, 2014, Bancorp reported its +“provision for loan losses amounted to $15.5 million reflecting the impact of certain loan +relationships in its commercial loan portfolios.” +39. On November 10, 2014, Respondent disclosed in its quarterly Report on Form 10- +Q for the third quarter of 2014 that it would be discontinuing its commercial lending operations +and would “focus on its specialty finance lending.” +40. On April 1, 2015, Respondent announced that its previously issued financial +statements for its fiscal years 2012 and 2013, and for the first three quarters of 2014 should no +longer be relied upon and would be restated because “certain charges related to provisions for loan +losses should have been taken in earlier periods than the ones in which they were taken.” +41. On September 28, 2015, Bancorp filed its annual Report on Form 10-K for its fiscal +year 2014, which included restated financial results for its fiscal years 2010 through 2013 and +restated financial statements for its fiscal years 2012 and 2013, as well as for the first three quarters +of 2013 and 2014. The restatement included an aggregate adjustment to the PLLL of +approximately $138.6 million in Bancorp’s commercial loan portfolio from 2010 to 2013. That +total adjustment included an adjustment adding $90.5 million to the loan loss provision for 2012 and +an adjustment adding $28.9 million to the provision for 2013. The adjustment for 2012 exceeded +the $24.4 million in income before taxes previously reported by Bancorp, resulting in an overall loss +for that fiscal year. +G. Violations +42. As a result of the conduct described above, Bancorp violated Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require issuers 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. +43. As a result of the conduct described above, Bancorp also violated Section +13(b)(2)(A) of the Exchange Act, which requires an issuer 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 issuer’s transactions and dispositions of assets. +44. As a result of the conduct described above, Bancorp also violated Section +13(b)(2)(B) of the Exchange Act, which requires an issuer 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 executed in accordance with +management’s general or specific authorization; transactions are recorded as necessary to permit +preparation of financial statements in conformity with GAAP or any other criteria applicable to + + 9 +such statements, and to maintain accountability for assets; access to assets is permitted only in +accordance with management’s general or specific authorization; and the recorded accountability +for assets is compared with the existing assets at reasonable intervals and appropriate action is +taken with respect to any differences. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent The Bancorp, Inc.’s Offer. + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,400,000.00 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 The +Bancorp, Inc. as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Carolyn M. Welshhans, +Associate 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 + + 10 +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4082.txt b/raw/aaer/2019/AAER-4082.txt new file mode 100644 index 0000000000000000000000000000000000000000..82149ecb43b5ff13f4034c8f0ab71ae62718b531 --- /dev/null +++ b/raw/aaer/2019/AAER-4082.txt @@ -0,0 +1,319 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87037 / September 20, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4082 / September 20, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19478 + + +In the Matter of + +JAMES DAVID HILTY, + +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 James David Hilty (“Hilty” 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 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 matter concerns failures between April 2012 and September 2014 of The +Bancorp, Inc. (“Bancorp”) to properly classify certain loans and to record appropriate charges for +certain individually impaired loans, resulting in Bancorp materially understating its Allowance for +Loan and Lease Losses (“ALLL”) and its Provision for Loan and Lease Losses (“PLLL”) in its +requisite periodic reports filed with the Commission. Bancorp repeatedly overlooked indicators of +borrowers’ and guarantors’ financial distress as it failed to assign appropriate risk ratings to certain +loans and to identify certain large lending relationships as containing impaired or otherwise +substandard loans. +2. As a result of these failures, on September 28, 2015, Bancorp restated its financial +results and financial statements for certain prior fiscal years. Pursuant to the restatement, the +aggregate adjustment to the PLLL for the fiscal years 2010 through 2013 was approximately +$138.6 million. Pursuant to the adjustments to the historical ALLL set forth in the restatement, +Bancorp’s ALLL for 2012 increased by 78.23% from the balance previously reported, and the +ALLL for 2013 increased by 73.97%. +3. Hilty was Bancorp’s Chief Risk Officer from February 2004 until September 2015. +In that capacity, he led Bancorp’s Loan Review function, which was tasked with assigning risk +ratings to loans, including identifying impaired and otherwise substandard loans. He reviewed the +risk ratings and impairment decisions made by his subordinates and used the ratings and decisions +when he estimated Bancorp’s ALLL and its PLLL. As a result of his oversight of and role in Loan +Review, Hilty knew or should have known that risk ratings for certain loans had not been +reevaluated, downgraded, or impaired in spite of indicators of financial distress. Accordingly, Hilty +knew or should have known that, on multiple occasions, Bancorp’s risk ratings and impairment +decisions were not fair and accurate. +4. As a result of the conduct described in this Order, Hilty caused Bancorp’s violations +of Sections 13(a) and 13(b)(2)(A) and Rules 13a-1 and 13a-13 of the Exchange Act. Hilty also +violated Exchange Act Rule 13b2-1. +FACTS + +A. Respondent + +5. James David Hilty was Bancorp’s Chief Risk Officer from February 2004 to +September 2015. As Chief Risk Officer, he was responsible for, among other things, the Loan + +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 +Review function and estimating the ALLL and PLLL on a quarterly basis. He is currently +Bancorp’s Director of Consumer Lending, Senior Credit Allowance Officer. Hilty, age 56, is a +resident of Wilmington, Delaware. + +B. Relevant Entity +6. Bancorp is a Delaware corporation with its principal executive offices in +Wilmington, Delaware. Its common stock is registered with the Commission pursuant to +Section 12(b) of the Exchange Act and trades on the NASDAQ Stock Market under the ticker +symbol TBBK. Bancorp is the bank holding company for The Bancorp Bank (“Bancorp Bank”), a +regional bank headquartered in Wilmington, Delaware. Bancorp Bank is Bancorp’s primary +wholly-owned subsidiary. +C. Accounting Guidance +7. Banking institutions carry loans on their balance sheets as assets and record on their +income statements any interest revenue on the loans. According to Generally Accepted +Accounting Principles (“GAAP”), an individual 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. Furthermore, loan losses must be recognized for impairment of large groups +of smaller balance loans and loans with similar risk characteristics when it is probable that the asset +is impaired as of the date of the financial statements and the amount of loss can be reasonably +estimated. Id. +8. The ALLL is the current estimate of the aggregate probable loss inherent in a loan +portfolio and is reflected on the balance sheet as a reduction to the loan balance. The ALLL +encompasses the effects of two types of loan losses: (1) loans identified and evaluated for +impairment individually; and (2) loans grouped by common risk characteristics and analyzed for +impairment on an aggregate basis. ASC 310-10-35. The PLLL reflects the income statement +impact of impaired loans for the period being reported. +D. Bancorp’s Restatement + +9. On September 28, 2015, Bancorp filed its annual Report on Form 10-K for its fiscal +year 2014, which included restated financial data for its fiscal years 2010 through 2013 and +restated financial statements for its fiscal years 2012 and 2013, as well as for the first three quarters +of 2013 and 2014. The restatement included an aggregate adjustment to the PLLL of +approximately $138.6 million in Bancorp’s commercial loan portfolio from 2010 to 2013. That +total adjustment included an adjustment adding $90.5 million to the loan loss provision for 2012 +and an adjustment adding $28.9 million to the provision for 2013. The adjustment for 2012 +exceeded the $24.4 million in income before taxes previously reported by Bancorp, resulting in an +overall loss for that fiscal year. + + + 4 +E. Bancorp’s Business Model + +10. During the relevant time period, Bancorp engaged in a business model called +“relationship banking.” Bancorp sought to develop long-standing banking relationships with +certain individuals and businesses within Bancorp Bank’s geographic region and provide them +with the attention of senior Bancorp Bank management. Bancorp’s focus on long-standing +relationships with borrowers and guarantors holding multiple Bancorp Bank loans was intended to +encourage cross-selling, provide insight into borrowers’ risk, and increase customer loyalty. +Bancorp executives also believed that this model allowed Bancorp Bank to cross-collateralize +loans and take a holistic approach to loan management. +11. However, Bancorp made risk rating and impairment decisions that relied too +heavily on borrowers’ and guarantors’ reputations, their historic business and banking relationship +with Bancorp Bank, and their expected future prospects for more business, while overlooking +indicators of financial distress. This was particularly the case with respect to certain large or high- +profile lending relationships and with respect to borrowers and guarantors with long relationships +with Bancorp Bank. As a result, Bancorp failed to identify loan impairments and credit +deterioration within individual loans and repeatedly failed to re-evaluate loans and downgrade risk +ratings when confronted with negative information. This caused Bancorp to materially understate +its PLLL from 2010 through 2013 and its ALLL from 2010 through the third quarter of 2014. +F. Hilty’s Oversight of and Role in Bancorp’s Loan Review Function +12. The component of the ALLL that is comprised of the effects of losses from loans +identified and evaluated for impairment individually is often referred to as the specific reserve. In +turn, the component of the ALLL that is comprised of the effects of losses from loans grouped by +common risk characteristics and analyzed for impairment on an aggregate basis is often called the +general reserve. +13. Pursuant to Bancorp’s Credit Policy, Bancorp Bank was to periodically review loan +relationships by loan type and assign risk ratings ranging from I to VIII for purposes of computing +the general reserve portion of the ALLL. Each individual loan risk rating signifies a level of credit +quality. Loans rated I (Excellent – No Risk) to V (Special Mention) were considered to have +passing ratings, and loans rated VI (Substandard) to VIII (Loss) were considered to have adverse +ratings. Each loan-type pool was collectively evaluated for impairment by assigning a weighted +loss risk factor by risk rating. The resulting aggregate estimated loss by loan type and risk rating +category was then used to calculate the general reserve portion of the ALLL. +14. Hilty oversaw Bancorp’s Loan Review function. Loan Review was responsible for +periodically reviewing and assigning risk ratings to loans and identifying potentially impaired and +otherwise substandard loans. Hilty reviewed the decisions made by the Loan Review staff. +Bancorp’s Credit Policy contemplated review of assigned risk ratings in the instance of a +“deteriorating or negative situation.” As a result of his position, Hilty knew or should have known +about indicators of financial distress within certain large and high-profile loan relationships. +Nevertheless, Hilty approved risk ratings for loans within those relationships that he knew or + + 5 +should have known did not take such information into account. He also failed on multiple +occasions to instruct the Loan Review staff to re-evaluate loans that he knew or should have +known were of deteriorating credit quality. +15. As a result of his position, Hilty also knew or should have known that, on multiple +occasions during the relevant time period, Bancorp Bank extended additional credit to borrowers +who had fallen behind on their loan payments. This additional credit was used to bring existing +loans current in the expectation that the borrower’s or guarantor’s financial situation would +improve in the future and allow resumption of normal payments. Hilty knew or should have +known that, on multiple occasions, Loan Review failed to acknowledge that certain borrowers or +guarantors were in distress at the time they received extensions of credit from Bancorp Bank and +that Loan Review failed to review or downgrade risk ratings assigned to the underlying loans. +16. For example, Bancorp Bank increased the available funds in a high-profile +executive’s $9.8 million line of credit numerous times in order for the executive to be able to make +quarter-end payments on his delinquent loans. The increases resulted from Bancorp’s estimation +of the borrower’s potential future business opportunities based generally on his reputation and a +business license, rather than on his financial condition at the time of the increases. At the time, +Loan Review did not adjust the risk ratings for the loans and thus did not consider whether the +loans were required to be impaired. During the restatement of its financial statements, Bancorp +recognized an impairment loss on this line of credit of approximately $8.7 million during the third +quarter of 2012. +17. In another example, in 2012, Bancorp’s Loan Review function did not evaluate a +$20 million loan relationship for potential impairment after the criminal conviction of the +guarantor, a long-time Bancorp Bank customer. Loan Review also did not change the risk ratings +for the loans in this relationship at that time. Instead, Bancorp focused on attempting to obtain an +additional guarantee from the guarantor’s brother. However, the guarantee was not obtained until +May 2013. After the brother failed to make promised loan payments the following year, Bancorp +Bank increased the relationship’s line of credit and the increase was used to pay overdue balances +on delinquent loans. Despite these developments, the loans in the relationship retained their +passing risk ratings. During the restatement of its financial statements, Bancorp recognized a total +of approximately $16.1 million in impairment losses for loans in the relationship during the fourth +quarter of 2012. +18. In sum, as a result of his supervision of and role in Loan Review, Hilty knew or +should have known that specific Bancorp risk ratings and impairment decisions did not take into +account important information, including indicators of financial distress, and were not fair and +accurate. Nevertheless, Hilty subsequently used those risk ratings and impairment decisions to +estimate Bancorp’s specific and general reserves, and, ultimately, to estimate Bancorp’s ALLL and +PLLL on a quarterly and annual basis. +19. During this time, as described above, Bancorp failed to make and keep books, +records, and accounts, which in reasonable detail, accurately and fairly reflected its transactions and +the disposition of its assets. By his acts and omissions described above, including his supervision of + + 6 +and role in Loan Review and his estimation of the ALLL and PLLL using risk ratings and +impairment decisions that he knew or should have known were not fair and accurate, Hilty +contributed to Bancorp’s failure, and Hilty knew or should have known that his acts or omissions +would so contribute. +20. By his acts and omissions described above, including his supervision of and role in +Loan Review and his estimation of the ALLL and PLLL using risk ratings and impairment +decisions that he knew or should have known were not fair and accurate, Hilty, directly or +indirectly, falsified or caused to be falsified, Bancorp’s books, records, and accounts. +21. The annual and quarterly ALLL and PLLL estimations performed by Hilty were +used as specific line items in Bancorp’s financial statements included in its quarterly and annual +reports. +22. Accordingly, during this time, Bancorp made material misstatements regarding its +ALLL and PLLL in its requisite quarterly and annual reports. Bancorp thereby failed to file with +the Commission requisite quarterly and annual reports that were accurate in all material respects. +By his acts and omissions described above, including his estimation of the ALLL and PLLL using +risk ratings and impairment decisions that he knew or should have known were not fair and +accurate, Hilty contributed to Bancorp’s failure, and Hilty knew or should have known that his acts +or omissions would so contribute. + +G. Violations +23. As a result of the conduct described above, Respondent caused Bancorp’s violation +of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require +issuers 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. +24. As a result of the conduct described above, Respondent caused Bancorp’s violation +of Section 13(b)(2)(A) of the Exchange Act, which requires an issuer 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 issuer’s transactions and disposition of assets. +25. As a result of the conduct described above, Respondent violated Exchange Act +Rule 13b2-1 by, directly or indirectly, falsifying or causing to be falsified books, records, and +accounts required to be maintained by Bancorp. + + + 7 + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent James David Hilty’s Offer. + + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of +the Exchange Act and Rules 13a-1, 13a-13, and 13b2-1 thereunder. +B. Respondent 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). Payment shall be made in the following installments: +$20,000 to be paid within 10 days of the entry of this order, $10,000 to be paid within 120 days of +the entry of this order, $10,000 to be paid within 240 days of the entry of this order, and $10,000 to +be paid within 350 days of the entry of this order. Payments shall be applied first to post-order +interest, which accrues pursuant to 31 U.S.C. § 3717. Prior to making the final payment set forth +herein, Respondent shall contact the staff of the Commission for the amount due. If Respondent +fails to make any payment by the date agreed and/or in the amount agreed according to the +schedule set forth above, all outstanding payments under this Order, including post-order interest, +minus any payments made, shall become due and payable immediately at the discretion of the staff +of the Commission without further application to the Commission. + +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 +James David Hilty as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Carolyn M. Welshhans, + + 8 +Associate 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, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a debt +for the violation by Respondent of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§ 523(a)(19). + + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4097.txt b/raw/aaer/2019/AAER-4097.txt new file mode 100644 index 0000000000000000000000000000000000000000..d86423ef476dec3c47cde1daa322c0c73174985d --- /dev/null +++ b/raw/aaer/2019/AAER-4097.txt @@ -0,0 +1,880 @@ + 1 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87157 / September 30, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4097 / September 30, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19564 + + +In the Matter of + +SCHULMAN LOBEL ZAND +KATZEN WILLIAMS & +BLACKMAN, LLP A/K/A +SCHULMAN LOBEL LLP, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +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 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + 2 +Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman Lobel LLP +(“Respondent” or “SL”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +SUMMARY +1. This matter concerns violations of the federal securities laws and improper +professional conduct by SL in connection with the following audits and reviews of the financial +statements and interim financial information of Quadrant 4 System Corp. (“QFOR”): +a. the audit of QFOR’s financial statements for the year ended December 31, 2013 +(the “2013 Audit”), which were included in a Form 10-K filed with the +Commission on August 21, 2015 (the “2014 Form 10-K”); +b. the audit of QFOR’s financial statements for the year ended December 31, 2014 +(the “2014 Audit”), which were also included in the 2014 Form 10-K; +c. the review of QFOR’s interim financial information for the quarter ended June 30, +2016 (the “2Q2016 Review”), which was included in a Form 10-Q filed on August +15, 2016 (the “2Q2016 Form 10-Q”); and +d. the audit of QFOR’s amended financial statements for the year ended December 31, +2015 (the “2015 Form 10-K/A Audit”), which were included in a Form 10-K/A +filed on September 22, 2016 (the “2015 Form 10-K/A”). +2. SL failed to comply with the standards of the Public Company Accounting +Oversight Board (“PCAOB”) when conducting the 2013 Audit, 2014 Audit, 2Q2016 Review, and +2015 Form 10-K/A Audit. SL repeatedly engaged in improper professional conduct that resulted +in violations of professional standards and demonstrated a lack of competence to practice before +the Commission. As detailed in the Facts Section below, SL’s departures from professional +standards included the failure to: (1) identify and properly audit related party transactions; (2) +obtain sufficient appropriate audit evidence; (3) conduct appropriate procedures to obtain +reasonable assurance that the financial statements were free of material misstatements caused by +fraud; (4) conduct appropriate procedures upon the subsequent discovery of facts existing at the +date of a previous audit report; (5) conduct appropriate procedures in connection with a review of +interim financial information; (6) properly plan the audit and assess and respond to risks of + + 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 +material misstatement; (7) conduct proper engagement quality reviews; (8) exercise due +professional care and professional skepticism; and (9) maintain an adequate system of quality +control, including policies and procedures regarding engagement acceptance and continuance as +well as supervision, review, and approval. Additionally, SL willfully violated Section 10A(a)(2) of +the Exchange Act when it conducted the 2013 and 2015 Form 10-K/A Audits without including +procedures that were adequately designed to identify related party transactions. Finally, SL +willfully violated Rule 2-02(b)(1) of Regulation S-X when it stated that the 2013, 2014, and 2015 +Form 10-K/A Audits had been conducted in accordance with PCAOB standards, when the audits +had not been. +RESPONDENT +3. Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman +Lobel LLP (“SL”) is a PCAOB-registered audit firm based in Princeton, New Jersey. SL +served as QFOR’s auditor from April 2015 until it resigned in October 2016. SL completed +audits of QFOR’s financial statements for the years ended 2013, 2014, and 2015 and reviews of +QFOR’s interim financial information for each quarter of 2015 and the first two quarters of 2016. +SL also completed an audit of QFOR’s amended financial statements contained in the 2015 Form +10-K/A. +AUDITED ENTITY +4. Quadrant 4 System Corp. (CIK No. 878802) was an Illinois corporation +headquartered in Schaumburg, Illinois, that provided software products and IT consulting and +software development services. QFOR did not have any class of securities registered with the +Commission, but was a reporting company pursuant to Section 15(d) of the Exchange Act. +QFOR’s common stock was quoted on OTC Link (formerly “Pink Sheets”) operated by OTC +Markets Group, Inc. under the symbol “QFOR.” On June 29, 2017, QFOR filed for bankruptcy, +and its remaining assets are now under the control of a liquidating trustee. All equity interests in +QFOR, including its common stock, were extinguished on September 13, 2018. + +OTHER RELEVANT INDIVIDUALS3 + +5. Marla P. Manowitz, CPA, age 67, is a resident of Westbury, New York, and a +CPA licensed in the State of New York. She is employed by SL as a Principal. She served as the +engagement principal on the audit of QFOR’s amended financial statements contained in the 2015 +Form 10-K/A. She served as a co-engagement principal on the audits of QFOR’s 2013, 2014, and +2015 financial statements and reviews of QFOR’s interim financial information for each quarter of +2015 and the first two quarters of 2016. + +3 On September 30, 2019, the Commission instituted an Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Marla +P. Manowitz, CPA, Thomas R. Vreeland, CPA, and Kenneth J. Gralak, CPA, concerning their +conduct in audit and review engagements for QFOR (Exchange Act Re. No. 34-87159). + 4 +6. Thomas R. Vreeland, CPA, age 57, is a resident of Lambertville, New Jersey, and +a CPA licensed in the State of New York. During the relevant time frame, he was employed by SL +as a Principal. Vreeland served as a co-engagement principal on the audits of QFOR’s 2013, 2014, +and 2015 financial statements and reviews of QFOR’s interim financial information for each +quarter of 2015 and the first two quarters of 2016. +7. Kenneth J. Gralak, CPA, age 69, is a resident of Stormville, New York, and a +CPA licensed in the State of New York. He is employed by SL as a Principal and Director of +Quality Control. Gralak served as the engagement quality reviewer (“EQR”) on the review of +QFOR’s interim financial information for the second quarter of 2016 and the audit of QFOR’s +amended financial statements contained in the 2015 Form 10-K/A. +FACTS +Background of QFOR’s Fraud +8. Between at least June 2012 and November 2016, Nandu Thondavadi +(“Thondavadi”) and Dhru Desai (“Desai”) perpetrated a fraudulent scheme through QFOR, a +public company. Thondavadi, as CEO, and Desai, as CFO, used several fraudulent means to +overstate QFOR’s revenue, overstate its assets, understate its liabilities, and conceal their +misappropriation of at least $4.1 million. Among other things, they caused QFOR to enter into +undisclosed related party transactions, misstated the terms of various acquisitions, and concealed +liabilities through a variety of means. Between March 2013 and November 2016, Thondavadi and +Desai caused QFOR to file false and misleading Forms 10-Q, 10-K, and 8-K, which included +numerous material misstatements and omissions regarding QFOR’s revenue, acquisitions, assets, +liabilities, and related party transactions and Thondavadi’s and Desai’s misappropriation and stock +ownership. +SL’s Engagements for QFOR +9. On April 2, 2015, QFOR’s previous auditor resigned after discovering that QFOR +had issued fraudulent invoices and that unknown individuals affiliated with QFOR had returned +false audit confirmations to them. SL was engaged to perform the 2014 Audit the following day. +In June 2015, after being informed that QFOR’s previous auditor would not reissue its 2013 audit +report due to an inability to rely on management’s representations, SL was engaged to conduct the +2013 Audit. +10. SL’s engagement acceptance and planning workpapers for the 2013 and 2014 +Audits noted that QFOR had internal control deficiencies and characterized the audits as “high- +risk.” Manowitz and Vreeland served as co-engagement principals, sharing responsibility for the +engagements and the issuance of the firm’s report. SL completed the 2013 and 2014 Audits in +August 2015. Manowitz and Vreeland consented to the issuance of SL’s audit report that +contained an unqualified opinion, which was dated August 21, 2015, and incorporated in QFOR’s +2014 Form 10-K filed the same day. +11. SL performed the 2Q2016 Review with Manowitz and Vreeland again serving as +co-engagement principals, and Gralak serving as the EQR. Manowitz and Vreeland consented to, + 5 +and Gralak provided concurring approval of issuance of, the release of QFOR’s 2Q2016 Form 10- +Q, which was filed on August 15, 2016. +12. SL audited QFOR’s financial statements for the year ended December 31, 2015 (the +“2015 Audit”). In late August or early September 2016, QFOR told SL that QFOR intended to file +an amended Form 10-K for the year ended December 31, 2015, that would disclose, among other +things, new information about certain related party transactions. On September 6, 2016, SL was +engaged to audit the amended financial statements in the 2015 Form 10-K/A, which included +footnote disclosures regarding certain related party transactions. Manowitz served as the +engagement principal for the 2015 Form 10-K/A Audit, and Gralak served as the EQR. Manowitz +and Gralak consented to the issuance of SL’s audit report that contained an unqualified opinion, +which was dual-dated as of September 22, 2016, as to Notes 11 and 14 (which included the new +disclosures regarding related party transactions) and March 28, 2016, as to the remainder of the +financial statements, and was incorporated in QFOR’s 2015 Form 10-K/A filed on September 22, +2016. +13. SL resigned as QFOR’s auditor on October 21, 2016, citing concerns about the +firm’s ability to rely on management’s representations. Thondavadi and Desai were arrested on +federal charges including wire fraud and certifying false financial reports on November 30, 2016, +and resigned from QFOR shortly thereafter. After the arrests, QFOR filed a Form 8-K in +December 2016 announcing that the Board of Directors had concluded that QFOR’s financial +statements for the previous three years did not fairly present the financial condition of the +company, required restatement, and should no longer be relied upon. No restatement occurred, and +QFOR has since filed for bankruptcy and been liquidated. On June 29, 2017, the Commission filed +a civil injunctive action against QFOR, Thondavadi, and Desai alleging multiple violations of the +securities laws. +SL Failed to Perform Procedures to Identify and Comply with Relevant Audit Standards in +Connection with Related Party Transactions +14. Section 10A(a)(2) of the Exchange Act requires that the audit of the financial +statements of an issuer by a registered public accounting firm shall include procedures designed to +identify related party transactions that are material to the financial statements or otherwise require +disclosure therein. +15. PCAOB Standard AU Section 334, Related Parties (“AU § 334”),4 which applies to +the 2013 and 2014 Audits, provides guidance on procedures to consider in identifying related party +relationships and transactions and to satisfy the auditor concerning the required disclosure of +related party transactions. AU § 334.07 provides that the auditor should place “emphasis on +testing material transactions with parties he knows are related to the reporting entity,” and also +provides for specific audit procedures that may be included to determine the existence of related +party relationships that are not clearly evident. + +4 References to PCAOB standards refer to the standards in effect at the time of the relevant +conduct. + 6 +16. AU § 334.09 requires an auditor to test related party transactions by “obtaining and +evaluating sufficient appropriate evidential matter” which “should extend beyond inquiry of +management.” The standard also makes clear that, when necessary to fully understand a particular +transaction, the auditor should consider “inspect[ing] evidence in possession of the other party or +parties to the transaction” and “confirm[ing] or discuss[ing] significant information with +intermediaries, such as banks, guarantors, agents, or attorneys to obtain a better understanding.” +AU § 334.10. Additionally, the auditor should consider procedures to “obtain information about +the financial capability of the other party or parties to the transaction” when there are “material +uncollected balances, guarantees, and other obligations.” Id. +17. Finally, AU § 334.11 requires that, for each material related party transaction, the +auditor should consider whether the auditor has obtained sufficient appropriate evidential matter to +understand the relationship of the parties and the effects of the transaction on the financial +statements. The auditor should evaluate all of the available information and be satisfied on the +basis of the auditor’s professional judgment that the transaction is adequately disclosed in the +financial statements. +18. PCAOB Auditing Standard No. 18, Related Parties (“AS No. 18”), which applies +to the 2015 Form 10-K/A Audit, sets forth procedures the auditor should perform to “obtain +sufficient appropriate audit evidence to determine whether related parties and relationships and +transactions with related parties have been properly identified, accounted for, and disclosed in the +financial statements.” AS No. 18.2. Among other things, the standard requires the auditor to +“identify[] and assess[] the risks of material misstatement associated with related parties,” AS No. +18.10; perform various procedures for each related party transaction required to be disclosed or +determined to be a significant risk, including evaluating the terms of the transaction and the +circumstances under which it was authorized, AS No. 18.12; “evaluate whether the company has +properly identified” its related parties and transactions with related parties, AS No. 18.14; and +“evaluate whether related party transactions have been properly accounted for and disclosed in the +financial statements,” AS No. 18.17. +19. AS No. 18 provides that, when evaluating whether the company has properly +identified related parties and related party transactions, the auditor’s responsibility requires “more +than assessing the process used by the company,” and “requires the auditor to perform procedures +to test the accuracy and completeness” of the company’s identification of related parties and +related party transactions. AS No. 18.14. The standard provides that, if the auditor identifies +information that indicates that previously undisclosed related parties might exist, “the auditor +should perform the procedures necessary to determine whether previously undisclosed +relationships or transactions with related parties, in fact, exist,” and these procedures “should +extend beyond inquiry of management.” AS No. 18.15. Furthermore, the standard outlines a +number of procedures the auditor should perform if the auditor determines that a previously +undisclosed related party or related party transaction does exist, including, among other things, +evaluating why it was previously undisclosed and how this bears on the auditor’s ability to rely on +management’s representations relating to other aspects of the financial statements and evaluating +the implications for the audit if the nondisclosure indicates that fraud or an illegal act may have +occurred. AS No. 18.16. + 7 +20. Finally, AS No. 18 provides that, if the financial statements state that related party +transactions were conducted on an arm’s-length basis, the auditor should determine “whether +evidence supports or contradicts management’s assertion,” and express a qualified or adverse +opinion if the auditor “is unable to obtain sufficient appropriate audit evidence to substantiate +management’s assertion.” AS No. 18.18. +21. SL did not perform sufficient procedures designed to identify related party +transactions in connection with the 2013 and 2015 Form 10-K/A Audits. QFOR was involved in +transactions with certain significant shareholders, purported vendors, and customers that should +have been disclosed as related party transactions. These related party entities included, among +others: Global Technology Ventures Corp. (“Global Technology”); Congruent Ventures LLC and +Congruent Ventures Ltd. (collectively, “Congruent”); Stonegate Holdings, Inc. (“Stonegate”); Core +Information Technology Solutions, Inc. (“CITS”); and Surrex Solutions Corp. (“Surrex”). In its +2015 Form 10-K/A, QFOR made disclosures regarding related party transactions with CITS, +Surrex, and a vendor owned by Stonegate. However, the 2015 Form 10-K/A disclosures were +incomplete and materially misleading, and QFOR did not disclose other material related party +transactions with Stonegate, Global Technology, or Congruent in its 2014 Form 10-K or 2015 +Form 10-K/A. +22. Prior to the 2013 Audit, SL, in workpapers prepared and/or reviewed by Manowitz +and Vreeland, identified Stonegate and an affiliated entity as related parties of QFOR. The +engagement team also prepared and/or reviewed workpapers indicating that Stonegate and an +affiliated entity collectively owned 14.8% of QFOR’s common stock as of year-end 2013 and 13% +of QFOR’s common stock as of year-end 2014. The engagement team was aware that QFOR had +entered into two material transactions with Stonegate during 2013: the conversion of a $1.1 +million debt to equity and the purported assignment of a legal judgment to Stonegate in exchange +for approximately 1.8 million shares of QFOR common stock. These transactions were not +disclosed as related party transactions in the 2014 Form 10-K. SL failed to identify these +transactions as related party transactions and failed to conduct procedures to evaluate whether they +were adequately disclosed. +23. SL’s 2013 Audit workpapers also contained documents indicating that the judgment +that QFOR purportedly assigned to Stonegate was jointly owed by QFOR, Thondavadi, and Desai. +SL failed to identify this as a related party transaction, failed to identify this as a significant +unusual transaction, failed to obtain sufficient appropriate audit evidence to substantiate the +transaction and understand its business rationale, failed to consider whether Stonegate had the +capability to satisfy the judgment, and failed to evaluate whether the transaction was adequately +disclosed. +24. The 2015 Form 10-K/A disclosed that QFOR’s transactions with CITS, Surrex, and +a significant vendor were related party transactions. Among other things, the 2015 Form 10-K/A +stated that the vendor was owned by Stonegate, that Thondavadi and Desai had guaranteed certain +obligations of CITS, and that Thondavadi held signatory authority on CITS and Surrex bank +accounts. The 2015 Form 10-K/A also stated that Thondavadi and Desai had provided +management and consulting services to an affiliate of CITS and received compensation for those +services, which was paid to Global Technology and Congruent. Global Technology and +Congruent were described as inactive entities owned by Thondavadi and Desai, respectively. The + 8 +related party relationships disclosed in the 2015 Form 10-K/A were all described as being +structured on an arm’s-length basis. +25. SL failed to obtain sufficient appropriate audit evidence to support the disclosures +contained in the 2015 Form 10-K/A regarding the relationship between QFOR and Surrex and +CITS. The engagement team did not obtain any documentary evidence regarding Thondavadi’s +signatory authority over Surrex and CITS bank accounts or the nature and terms of the consulting +services Thondavadi and Desai provided to the affiliate of CITS. The engagement team requested +copies of Thondavadi’s and Desai’s consulting agreements and tax records regarding their +compensation for the purported consulting services, but Thondavadi told the engagement team that +QFOR did not have any such records. The engagement team relied solely upon management +representations regarding the nature of the services Thondavadi and Desai performed and the +amounts of the payments they received in lieu of obtaining any documentary evidence. +26. SL also failed to evaluate QFOR’s assertions that its relationships with the vendor, +CITS, and Surrex were structured on an arm’s-length basis. SL’s workpapers for the 2015 Form +10-K/A Audit do not contain any documentation regarding the terms of the transactions. Despite +failing to obtain sufficient appropriate audit evidence to substantiate these assertions, SL issued an +unqualified opinion on the 2015 Form 10-K/A. +27. Despite newly learning of previously undisclosed related party transactions, SL +failed to evaluate whether QFOR had properly identified and disclosed its related parties and +relationships and transactions with related parties, as required by AS Nos. 18.14-16. In addition to +the transactions that were disclosed in the 2015 Form 10-K/A, the engagement team learned of +other undisclosed related party transactions during the course of the 2015 Form 10-K/A Audit, +including a loan from Global Technology to QFOR that was issued and converted to QFOR +common stock during 2013. SL’s 2015 Form 10-K/A workpapers included a copy of the 2013 +promissory note issued to Global Technology, which included a note added by Manowitz reading: +“Entity owned by Nandu – related party not disclosed prior.” The engagement team did not +perform any procedures to evaluate why this past related party transaction was not previously +disclosed or whether it should be disclosed either in the 2015 Form 10-K/A or through an +amendment of prior filings. Additionally, after being notified once more that Stonegate was a +related party of QFOR, the engagement team did not evaluate whether past transactions with +Stonegate should be disclosed as related party transactions. +28. During the 2015 Form 10-K/A Audit, SL also failed to undertake any procedures, +beyond inquiry of management or its agents, to identify whether other previously undisclosed +relationships or transactions with related parties existed, as required by AS No. 18.15. SL’s +workpapers for prior periods contained a number of other documents evidencing past related party +transactions between QFOR and Global Technology and Congruent, including documents +regarding the conversion of the 2013 Global Technology debt to equity, a 2015 promissory note +issued to Global Technology, and general ledgers listing transactions with Global Technology and +Congruent in 2014 and 2015. The engagement team failed to perform any procedures to determine +whether QFOR had previously entered into transactions with Global Technology or Congruent. + 9 +SL Failed to Obtain Sufficient Appropriate Audit Evidence +29. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires the +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion.” AS No. 15.04. To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. See AS No. 15.6. The reliability of evidence depends on its nature and +source, and the circumstances under which it is obtained. Evidence obtained directly by the +auditor and from a knowledgeable independent third party is more reliable than evidence obtained +directly from the company. See AS No. 15.8. +30. PCAOB Standard AU Section 330, The Confirmation Process (“AU § 330”), +provides guidance about the audit confirmation process, including the relationship of confirmation +procedures to the assessment of audit risk and the performance of alternative procedures when +responses to confirmation requests are not received. AU § 330.28 requires an auditor to maintain +control over confirmation requests and responses, which means establishing direct communication +between the intended recipient and the auditor to minimize the possibility that the results will be +biased because of interception and alteration. When an auditor does not receive a response to +certain confirmations, AU § 330.31 provides that the auditor should apply alternative procedures to +obtain the evidence necessary to reduce audit risk to an acceptably low level. +31. Further, PCAOB Standard AU Section 333, Management Representations (“AU § +333”), states that management representations “are not a substitute for the application of those +auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial +statements under audit,” AU § 333.02, and requires conflicts between management +representations and other audit evidence to be investigated, AU § 333.04. +32. PCAOB Standard AU Section 337, Inquiry of a Client’s Lawyer Concerning +Litigation, Claims, and Assessments (“AU § 337”), provides guidance on procedures an auditor +should consider for identifying and evaluating the accounting and reporting for litigation, claims, +and assessments. For all material litigation, claims, and assessments, AU § 337.06 requires an +auditor to “request the client’s management to send a letter of inquiry to those lawyers with +whom management consulted concerning” such matters. +33. In connection with the 2013 and 2014 Audits, SL failed to obtain sufficient +appropriate audit evidence to support SL’s unqualified opinion included in the 2014 Form 10-K, +particularly regarding QFOR’s reported liabilities. Much of the deficient testing fell within audit +areas that SL determined were high-risk areas and identified in its planning workpapers as +requiring “extended procedures.” +34. SL failed to obtain sufficient appropriate audit evidence regarding a $1.1 million +debt to a hedge fund (“Lender A”) that was purportedly converted to equity in 2013. The +engagement team obtained extensive documentation of the convertible debenture giving rise to the +liability. However, the engagement team’s testing of the purported equity conversion, which +occurred only weeks later and did not satisfy the terms of the convertible debenture, was +inadequate. For example, the engagement team did not obtain any documentation signed by +Lender A consenting to or otherwise substantiating the conversion or confirming the liability had + 10 +been extinguished as of year-end 2013. In reality, Lender A had not consented to convert its debt +to equity in 2013, and a liability of least $885,045 was still owed to Lender A as of December 31, +2013. +35. SL also failed to obtain sufficient appropriate audit evidence regarding a debt to an +entity (“Lender B”). In documents provided by QFOR management to the engagement team, SL +learned that, during 2013, QFOR had made approximately $700,000 in payments on the debt and +converted $2 million to equity, leaving a liability of approximately $3.1 million as of year-end +2013. In reality, QFOR did not make any payments to Lender B during 2013, and the purported +loan payments were actually misappropriated by Thondavadi and Desai. The engagement team did +not obtain any documentation signed by Lender B authorizing the purported debt conversion or +substantiating the balance due at year-end 2013. The engagement team also did not conduct any +testing of the purported debt payments to Lender B in 2013. For example, had the engagement +team traced these payments to underlying transaction support from QFOR’s bank, it would have +discovered that Lender B was not the true recipient of the funds. +36. SL failed to adhere to the procedures set forth in AU § 330 in connection with the +testing of the Lender A and Lender B liabilities, as well as a material liability owed to an +individual. After receiving no response to initial debt confirmations sent to Lender A, Lender B, +and the individual, the engagement team failed to either follow up with a second request or apply +alternate procedures to reduce the audit risk to an acceptably low level, as required under AU §§ +330.30-31. +37. The 2014 Form 10-K contained material misrepresentations and omissions +regarding the resolution of a breach of contract suit filed by a New York-based lender (“Plaintiff +A”). The 2014 Form 10-K reported a $692,000 expense for “litigation settlement” in 2013, and the +notes to the financial statements included a disclosure that the lawsuit was settled for 1,870,270 +shares of QFOR stock valued at $692,000. QFOR told SL that, rather than issuing the stock to +Plaintiff A, QFOR had assigned the obligation it owed Plaintiff A to Stonegate in exchange for +1,870,270 shares of QFOR common stock. Though QFOR did issue the stock to Stonegate, +Stonegate never made any payments toward the settlement, and Plaintiff A did not consent to the +assignment of the liability owed to it. Instead, QFOR, Thondavadi, Desai, and a third individual +entered into a settlement agreement with Plaintiff A in December 2013. Between December 2013 +and March 2014, QFOR paid approximately $1.8 million pursuant to the settlement agreement, +largely through a series of wire transfers to Plaintiff A’s lawyers (“Law Firm A”). QFOR falsely +recorded many of these wire transfers as payments related to acquisitions completed earlier in +2013. As of year-end 2013, the outstanding liability on the settlement agreement was $1.25 +million, which was not reported on QFOR’s balance sheet in the 2014 Form 10-K. +38. SL failed to obtain sufficient appropriate audit evidence regarding the liability owed +to Plaintiff A. The engagement team failed to obtain a copy of the legal judgment, a settlement +agreement or other documentation signed by Plaintiff A, or any other evidence of the size of the +liability owed to Plaintiff A. It also failed to obtain any evidence that Plaintiff A consented to the +purported assignment to Stonegate, that Stonegate had performed under the purported assignment, +or that the liability owed to Plaintiff A had been extinguished. The engagement team also failed to +identify the law firm that represented QFOR in the Plaintiff A litigation and did not request that +QFOR management send a letter of inquiry to that law firm. + 11 +39. SL failed to obtain sufficient appropriate audit evidence in other areas. While +performing journal entry testing for the 2014 Audit, the engagement team examined a journal entry +for a $445,000 payment to Law Firm A. It did not obtain any evidence, aside from a representation +by management, regarding the purpose of this transaction. +40. Additionally, while testing earnouts associated with acquisitions that took place in +2013, the engagement team examined various wire transfers that were recorded as earnouts but +actually sent to Law Firm A in payment of the Plaintiff A settlement. Based on the supporting +schedules included in the workpapers: (1) two of the entities that received earnout payments had +not met the revenue targets entitling them to earnout payments; and (2) the earnout payments were +made piecemeal throughout the quarters, rather than in lump sum at the end of each quarter. Both +of these factors should have prompted the engagement team to further scrutinize the relevant +payments, but it failed to obtain sufficient appropriate audit evidence to support the recorded +earnout payments. Many of the recorded earnout payments were made by wire transfer, and the +engagement team tested them by tracing them to the bank statements. However, the bank +statements did not provide any information regarding the counterparty to wire transfers. Rather +than obtaining wire details, the engagement team relied solely on bank statement entries reading +“Outgoing Wire Transfer” as evidence that the earnout payments were made. +41. SL failed to obtain sufficient appropriate audit evidence regarding payroll tax +liabilities assumed in connection with an acquisition that took place in 2013. The engagement +team failed to obtain sufficient evidence to support the original accrual recorded for assumed +payroll tax liabilities, which was not consistent with the amount of assumed liabilities stated in the +purported asset purchase agreement. The engagement team obtained schedules from QFOR listing +purported payments on the tax liabilities, but did not trace them to any transaction support. After +noting a material remaining balance for the accrual as of year-end 2014, the engagement team +relied solely on management’s representation that this balance represented accounts payable +incorrectly included in the tax payable, without performing any procedures to test that assertion. +The engagement team also did not obtain documentation from the taxing authorities confirming +that the liabilities had been extinguished. In reality, as of year-end 2014, more than $500,000 in +payroll tax liability remained outstanding and was not reported as a liability in the 2014 Form 10- +K. +42. As discussed in paragraphs 24 to 28, SL failed to obtain sufficient appropriate audit +evidence regarding the related party transaction disclosures contained in the 2015 Form 10-K/A. +SL also inappropriately relied upon management’s representations, despite the engagement team’s +awareness that those representations conflicted with prior representations made by management +regarding their receipt of compensation. +SL Failed to Conduct Appropriate Procedures to Obtain Reasonable Assurance that the +Financial Statements were Free of Material Misstatements Caused by Fraud +43. PCAOB Standard AU Section 316, Consideration of Fraud in a Financial +Statement Audit (AU § 316), requires an auditor to perform procedures to address the risk of +fraud in a financial statement audit, including those fraud risks specifically arising from +management override of internal controls. The standard requires an auditor to examine journal +entries “for evidence of possible material misstatement due to fraud.” AU § 316.58. The auditor + 12 +should use professional judgment in determining the nature and extent of journal entry testing, +but “the auditor’s procedures should include selecting from the general ledger journal entries to +be tested and examining support for those items.” AU § 316.61. +44. Additionally, AU § 316, as in effect during the 2013 and 2014 Audits, requires an +auditor to evaluate significant transactions that are outside the normal course of business for the +entity, or that otherwise appear to be unusual. The auditor should gain an understanding of the +business purpose of each such transaction and consider whether the rationale for the transaction +suggests that it may have been entered into for fraudulent purposes. AU § 316.66. When +evaluating the business rationale for the transaction, an auditor should consider whether the +transaction involves previously unidentified related parties or parties that do not have the ability to +support the transaction without assistance from the entity under audit. AU § 316.67. +45. During the 2013 and 2014 Audits, SL failed to perform appropriate procedures to +obtain reasonable assurance that the financial statements were free of material misstatements +caused by fraud. It failed to appropriately perform journal entry testing, and failed to evaluate +significant unusual transactions, including a transaction with Stonegate, an undisclosed related +party. +46. Pursuant to PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of +Material Misstatement (“AS No. 12”), the auditor is required to identify the risk of management +override of controls as a fraud risk. AS No. 12.69. SL, through Manowitz and Vreeland, identified +management override of controls as a significant risk while planning the 2013 and 2014 Audits, yet +it failed to properly perform journal entry testing, one of the required procedures to address this +risk. As discussed in paragraph 39, the engagement team examined a journal entry for a $445,000 +payment to Law Firm A while performing journal entry testing for the 2014 Audit. The only +procedure the engagement team performed to test this journal entry was to ask Thondavadi about +the purpose of the payment. Thondavadi told the engagement team that it related to an acquisition +that took place in 2013, and the engagement team relied on this representation without performing +any procedures to verify it. The engagement team did not obtain any additional evidence of the +purpose of the payment, nor did it tie the payment to other workpapers in SL’s possession testing +acquisition-related payments. +47. SL also failed to identify the assignment of the Plaintiff A judgment to Stonegate, +an entity the engagement team had identified in planning workpapers as a related party, as a +significant unusual transaction, and evaluate whether it may have been entered into to engage in +fraudulent financial reporting. The transaction was outside the normal course of business for +QFOR, material, and completed near year-end 2013. The engagement team failed to obtain an +understanding of the substance of the transaction, particularly whether the purported assignment +effectively satisfied the liability owed to Plaintiff A. The engagement team also failed to identify +it as a transaction with a related party. +48. SL also failed to identify purported settlements of earnout obligations that took +place in December 2013 as significant unusual transactions and evaluate whether they may have +been entered into to engage in fraudulent financial reporting or conceal misappropriation. The +earnout settlements were outside the normal course of business for QFOR, material, and +completed as of December 31, 2013. They had the effect of materially increasing QFOR’s 2013 + 13 +net income while also reducing its liabilities. The engagement team failed to obtain a full +understanding of the transactions, including the business rationale for QFOR making substantial +payments to settle contingent obligations to two entities even though the acquired business units +had never met the revenue targets entitling them to earnout payments. +SL Failed to Conduct Appropriate Procedures upon the Subsequent Discovery of Facts +Existing at the Date of a Previous Audit Report +49. PCAOB Standard AU Section 561, Subsequent Discovery of Facts Existing at the +Date of the Auditor’s Report (“AU § 561”), sets forth procedures the auditor should follow when +the auditor becomes aware that facts may have existed at the date of a prior audit report that might +have affected the report if the auditor had been aware of such facts. AU § 561.04 requires that, +when an auditor becomes aware of information that relates to financial statements upon which the +auditor previously issued a report, and which the auditor would have investigated if the auditor had +been aware of it during the audit, the auditor should, “as soon as practicable, undertake to +determine whether the information is reliable and whether the facts existed at the date of his +report.” Upon determining that the information is reliable and existed at the date of the auditor’s +report, the auditor is required to undertake certain procedures, including evaluating whether the +information would have affected the audit report if it had been known but not reflected in the +financial statements, evaluating whether there are persons likely to rely on the financial statements, +and advising the client to make appropriate disclosure of the newly discovered facts and their +impact on the financial statements. AU §§ 561.05-.06. +50. During the 2Q2016 Review, SL failed to conduct appropriate procedures after +being provided with additional information relating to the assignment of the Plaintiff A liability +that was previously disclosed in the 2014 Form 10-K. During the planning for the review, QFOR +informed the engagement team that it had cancelled the approximately 1.8 million shares +previously issued to Stonegate because Stonegate had not performed on the assignment. QFOR +provided the engagement team with a memorandum containing extensive new material information +that was inconsistent with the disclosures contained in the 2014 Form 10-K related to the +resolution of the Plaintiff A lawsuit. Among other things, the memorandum stated that Plaintiff A +received a judgment that included reimbursement of legal fees and that QFOR actually ended up +paying the judgment and legal fees rather than satisfying the balances due through the issuance of +stock. The memorandum did not specify the amount of the legal fees or provide any information +on when or how QFOR paid the judgment and legal fees. The engagement team did not perform +any procedures to evaluate the value of the underlying liability to Plaintiff A; to determine +whether, when, or how the liability to Plaintiff A had been extinguished; or to evaluate or assess +the impact of the newly discovered facts on prior period financial statements and disclosures. +51. SL also failed to conduct appropriate procedures after learning that a 2013 loan +from Global Technology to QFOR was a related party transaction during the 2015 Form 10-K/A +Audit. Despite noting that the loan was a previously undisclosed related party transaction in a +workpaper, the engagement team did not perform any procedures to consider whether this +information would have affected SL’s report on the 2013 financial statements or whether the +information should be disclosed. + 14 +SL Failed to Conduct Appropriate Procedures in Connection with a Review of Interim +Financial Information +52. PCAOB Standard AU Section 722, Interim Financial Information (“AU § 722”), +provides that, if “the accountant becomes aware of information that leads him or her to believe that +the interim financial information may not be in conformity with generally accepted accounting +principles in all material respects, the accountant should make additional inquiries or perform other +procedures that the accountant considers appropriate to provide a basis for communicating whether +he or she is aware of any material modifications that should be made to the interim financial +information.” AU § 722.22. Additionally, “if information comes to the accountant’s attention that +leads him or her to question whether the interim financial information departs from generally +accepted accounting principles with respect to litigation, claims, or assessments,” it may be +appropriate to make an inquiry of the company’s legal counsel. AU § 722.20. +53. SL failed to conduct appropriate procedures after being provided with additional +information regarding the assignment of the Plaintiff A liability to Stonegate during the 2Q2016 +Review. After learning that Stonegate had not satisfied the Plaintiff A liability and being informed +that QFOR had paid it at some unspecified time, the engagement team had sufficient information +to question whether the interim financial information was in conformity with generally accepted +accounting principles (“GAAP”) in all material respects. The engagement team failed to make +additional inquiries or perform procedures to determine whether, when, and how the liability to +Plaintiff A had been extinguished, and thus did not have a sufficient basis to communicate whether +it was aware of any material modifications that should be made to the interim financial +information. +SL Failed to Properly Plan the Audit and Assess and Respond to Risks of Material +Misstatement +54. PCAOB Auditing Standard No. 9, Audit Planning (“AS No. 9”), requires the +auditor to properly plan the audit. The standard provides that planning is “a continual and iterative +process,” AS No. 9.5, and requires the auditor to modify the audit strategy and plan as necessary if +circumstances change significantly during the course of the audit, including due to the discovery of +a previously unidentified risk of material misstatement, AS No. 9.15. +55. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement (“AS No. 12”), requires the auditor to “perform risk assessment procedures that are +sufficient to provide a reasonable basis for identifying and assessing the risks of material +misstatement, whether due to error or fraud.” AS No. 12.4. The standard provides that risk +assessment should continue throughout the audit, and that the auditor should “revise the risk +assessment and modify planned audit procedures or perform additional procedures in response to +the revised risk assessments” when the auditor obtains evidence “that contradicts the audit +evidence on which the auditor originally based his or her risk assessment.” AS No. 12.74. +56. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement (“AS No. 13”), requires the auditor when responding to the assessed risks +of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and +evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to + 15 +obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters. AS No. 13.7. +57. SL failed to properly plan the 2015 Form 10-K/A Audit or perform sufficient risk +assessment procedures. The engagement team should have recognized that the newly disclosed +related party transactions constituted a significant change in circumstances from the 2015 Audit +and revealed previously unidentified risks of material misstatement. Additionally, the engagement +team was aware that the three newly disclosed related parties were QFOR’s most significant +vendor and QFOR’s second and third largest customers. The engagement team was also aware +that some of the information provided by management during the 2015 Form 10-K/A Audit, +particularly regarding management’s receipt of compensation for consulting services to an affiliate +of CITS, was inconsistent with prior management representations. Despite the inconsistencies in +management’s representations and the significance of the newly disclosed related parties to +QFOR’s business, the engagement team did not engage in any new risk assessment or planning +activities in connection with the 2015 Form 10-K/A Audit. +SL Failed to Conduct Proper Engagement Quality Reviews +58. PCAOB Audit Standard 7, Engagement Quality Review (“AS No. 7”), requires an +EQR conducting a review of an engagement to “evaluate the significant judgments made by the +engagement team and the related conclusions reached in forming the overall conclusion on the +engagement and in preparing the engagement report.” AS No. 7.2. For engagement quality +reviews of both audits and reviews of interim financial information, the EQR should “evaluate” +significant judgments as to planning, including consideration of “risks identified in connection +with the firm’s client acceptance and retention process” and the company’s “recent significant +activities.” AS Nos. 7.9-10 (audits), 7.14-15 (reviews). Additionally, the EQR should “evaluate +whether the engagement documentation” reviewed in connection with required procedures +“[s]upports the conclusions reached by the engagement team with respect to the matters reviewed.” +AS Nos. 7.11 (audits), 7.16 (reviews). +59. If the EQR becomes aware of a significant engagement deficiency, including that +the engagement team reached an inappropriate overall conclusion on the subject matter of the +engagement, he or she cannot provide concurring approval of issuance. AS Nos. 7.12 (audits), +7.17 (reviews). For an audit, a significant engagement deficiency includes the failure to obtain +sufficient appropriate evidence in accordance with PCAOB standards. AS No. 7.12. For a review +of interim financial information, a significant engagement deficiency includes a failure to perform +interim review procedures necessary in the circumstances of the engagement. AS No. 7.17. +60. SL, through Gralak, failed to perform an adequate engagement quality review in +connection with the 2Q2016 Review. The cancellation of the shares issued to Stonegate in +connection with the Plaintiff A lawsuit was identified as a recent significant activity, and Gralak +reviewed the workpapers related to that transaction. However, he failed to recognize that the +workpapers did not support the conclusions reached by the engagement team regarding that +transaction or that the engagement team had failed to perform necessary procedures after receiving +information that should have led them to believe that the interim financial information may not +have been presented in conformity with GAAP. + 16 +61. SL, through Gralak, also failed to perform an adequate engagement quality review +in connection with the 2015 Form 10-K/A Audit. First, the engagement team did not perform any +planning or risk assessment specific to the 2015 Form 10-K/A Audit, and Gralak did not review +any of the planning or risk assessment documentation associated with the 2015 Audit. Therefore, +Gralak failed to evaluate the significant judgments related to engagement planning or the +engagement team’s assessment of, and audit responses to, significant risks, as required by AS No. +7.10. +62. Additionally, Gralak provided concurring approval of the issuance of the audit +report on the 2015 Form 10-K/A Audit despite the fact that, based on the workpapers he reviewed, +he should have been aware that a significant engagement deficiency existed—namely, the failure +to obtain sufficient appropriate audit evidence supporting the accuracy and completeness of the +company’s disclosures regarding related party transactions. Gralak reviewed nearly all of the +workpapers related to the testing of the new disclosures regarding related party transactions, +including the copy of the 2013 promissory note to Global Technology. However, Gralak failed to +recognize that the workpapers did not support the audit team’s conclusions that QFOR’s related +party transactions were adequately tested and disclosed. +SL Failed to Exercise Due Professional Care and Professional Skepticism +63. PCAOB Standard AU Section 230, Due Professional Care in the Performance of +Work (“AU § 230”), requires an auditor to exercise due professional care throughout the audit. +Under this standard, an auditor “should possess ‘the degree of skill commonly possessed’ by other +auditors and should exercise it with ‘reasonable care and diligence.’” AU § 230.05. Due +professional care also requires that the auditor exercise professional skepticism, which is “an +attitude that includes a questioning mind and a critical assessment of audit evidence.” AU +§ 230.07. An auditor is required to “consider the competency and sufficiency of the evidence,” +AU § 230.08, and “should not be satisfied with less than persuasive evidence because of a belief +that management is honest,” AU § 230.09. +64. SL failed to exercise due professional care and professional skepticism in +connection with the numerous audit failures described above during the 2013 Audit, 2014 Audit, +2Q2016 Review, and 2015 Form 10-K/A Audit. +65. SL, through Vreeland, also failed to exercise due professional care while +performing the search for unrecorded liabilities during the 2013 Audit. Nine out of twenty-six +payments that fell within the testing parameters were erroneously excluded from testing. The +excluded payments included three of the Plaintiff A settlement payments (including a $445,000 +payment to Law Firm A), as well as a settlement payment for another undisclosed lawsuit. +SL’s Policies and Procedures were Deficient +66. PCAOB Standard QC Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice (“QC § 20”), requires a CPA firm to have a system of quality +control for its auditing practice. The standard requires the firm to adopt policies and procedures +that provide the firm with reasonable assurance that “the likelihood of association with a client +whose management lacks integrity is minimized,” QC § 20.14; “the firm . . . appropriately + 17 +considers the risks associated with providing professional services in the particular circumstances,” +QC § 20.15; and “the work performed by engagement personnel meets applicable professional +standards, regulatory requirements, and the firm’s standards of quality,” QC § 20.17. Firm policies +and procedures should also provide reasonable assurance that the policies and procedures +established for the elements of quality control described in the standard are “suitably designed and +are being effectively applied.” QC § 20.20; see also AU § 161. SL failed to adhere to QC § 20 in +several respects. +67. In 2014, SL hired Gralak as Director of Quality Control in response to a peer +review that found that SL’s system of quality control was not suitably designed or sufficiently +complied with to provide the firm with reasonable assurance of performing and/or reporting in +conformity with applicable professional standards in all material respects. Gralak, along with SL’s +Managing Partner, was responsible for administering and monitoring SL’s system of quality +control. However, Gralak had limited experience conducting public company audits, and SL’s +Managing Partner had no public company audit experience. Gralak and SL’s Managing Partner +lacked the experience and expertise necessary to provide reasonable assurance that SL complied +with the requirements of QC § 20. +68. SL’s policies and procedures regarding engagement acceptance and continuance +were deficient because they placed the ultimate authority for decisions on engagement acceptance +and resignation, as well as engagement staffing, with SL’s Managing Partner, who lacked the +experience and expertise necessary to make those decisions. +69. SL failed to adopt and implement adequate policies and procedures regarding audit +planning and risk assessment. Specifically, SL’s quality control document lacked policies and +procedures addressing the need to engage in planning and risk assessment procedures throughout +the course of an engagement or to modify engagement strategy to respond to changes in risk +assessment and previously unidentified risks of material misstatement. +70. SL failed to adopt and implement adequate policies and procedures governing +supervision, review, and approval. SL’s quality control document did not provide guidance on +supervision and review that addressed engagements staffed by two co-equal principals, as was the +case with most of the QFOR engagements. This contributed to a lack of clear lines of +responsibility for the overall conduct of the engagements and an overly deferential review by the +co-engagement principals of each other’s work. +71. SL also failed to adequately monitor the design and application of its system of +quality control. Gralak, in the exercise of his monitoring functions as Director of Quality Control, +reviewed the workpaper binder at the conclusion of each attest engagement to provide reasonable +assurance that it included all workpapers required by the firm’s quality control document. He +knew or should have known that the engagement team had not performed the engagement +acceptance and continuance, planning, and risk assessment procedures required by the firm’s +quality control document in connection with the 2015 Form 10-K/A Audit, yet he took no action. +72. Additionally, in the exercise of his monitoring functions as Director of Quality +Control, for every audit engagement, Gralak reviewed and maintained copies of workpapers that, +pursuant to the firm’s quality control document, the engagement partner or engagement principal + 18 +was required to sign to document his or her approval of the release of an audit report. These +workpapers were incomplete for each of the QFOR audit engagements. Gralak knew or should +have known that the engagement team had not documented the engagement principal’s approval of +the release of the audit report for any of the QFOR audits, as required by the firm’s quality control +document, yet he took no action. +VIOLATIONS +73. Section 10A(a)(2) of the Exchange Act requires each audit to include procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein. No showing of scienter is necessary to establish a violation of +Section 10A of the Exchange Act. As a result of the conduct described above, SL willfully +violated Section 10A(a)(2) of the Exchange Act. +74. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34- +49708 (May 14, 2004). No showing of scienter is necessary to establish a violation of Rule 2- +02(b)(1) of Regulation S-X. As a result of the conduct described above, SL willfully violated +Regulation S-X Rule 2-02(b)(1) when SL issued audit reports stating that it had conducted its +audits in accordance with PCAOB standards when it had not. +75. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission “[t]o have willfully violated, or willfully aided and abetted the violation of, any +provision of the Federal securities laws or the rules and regulations thereunder.” Through the +conduct described above, SL willfully violated the federal securities laws and rules and regulations +thereunder within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. +76. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons licensed +to practice as accountants, “improper professional conduct” includes “intentional or knowing +conduct, including reckless conduct that results in a violation of applicable professional standards.” +Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” includes either of the +following two types of negligent conduct: (1) a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in a violation of applicable professional standards, that +indicate a lack of competence to practice before the Commission. Rule 102(e)(1)(iv)(B). Through +the conduct described above, SL engaged in “improper professional conduct” within the meaning + 19 +of Section 4C(a)(2) 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: + +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 violations of and any future violations of +Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X; + +C. What, if any, remedial action is appropriate in the public interest against Respondent +pursuant to Section 21C of the Exchange Act including, but not limited to, disgorgement and civil +penalties pursuant to Section 21B of the Exchange Act; and + +D. What, if any, remedial action is appropriate in the public interest against Respondent +pursuant to Section 4C of the Exchange Act and Section 102(e) of the Commission’s Rules of +Practice. +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondent shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If Respondent fails to file the directed Answer, or fails to appear at a hearing or conference +after being duly notified, Respondent may be deemed in default and the proceedings may be +determined against it upon consideration of this Order, the allegations of which may be deemed to + 20 +be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, +17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent by any means permitted by the +Commission’s Rules of Practice. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all +papers (including those listed in the following paragraph) shall be filed with the Office of the +Secretary and all motions, objections, or applications will be decided by the Commission. The +Commission requests that an electronic courtesy copy of each filing should be emailed to +APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate +attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) The completion of post-hearing briefing in a proceeding where the public hearing +has been completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a +motion for summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.250, where the Commission has determined that no public hearing is necessary; or +(C) The determination that a party is deemed to be in default under Rule 155 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within + 21 +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4106.txt b/raw/aaer/2019/AAER-4106.txt new file mode 100644 index 0000000000000000000000000000000000000000..9177fa913f6d841bf5220a956559d6167e306339 --- /dev/null +++ b/raw/aaer/2019/AAER-4106.txt @@ -0,0 +1,496 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10731 / December 5, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87670 / December 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4106 / December 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19613 + + +In the Matter of + + JATINDAR KAPUR, CPA + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Jatindar +Kapur, CPA (“Kapur” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 +2 + +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Kapur 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 them and the subject matter of these proceedings, which are +admitted, Kapur consents to the entry of this Order Instituting Public Administrative and Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and +Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + On the basis of this Order and Kapur’s Offer, the Commission finds3 that: + +Summary + +1. Respondent Jatindar Kapur was, from April 2008 to April 2014, the Senior Vice +President, Finance and Corporate Controller for Hertz Global Holdings, Inc. (“Hertz Holdings”). + +2. From at least February 2012 through March 2014, the public filings of Hertz +Holdings and its wholly-owned subsidiary The Hertz Corporation (together, “Hertz”) materially +overstated pretax income by $235 million because of accounting errors made in a number of +business units, and over multiple reporting periods, as reflected in the Restatement that Hertz filed +on July 16, 2015. Among the accounting errors contributing to this total were misstatements + +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 by the Commission . . +. (1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations +issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before + it . . . to any person who is found by the Commission...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 + +concerning Hertz’s accrual for expenses related to “wrecks,” the amortization periods for Hertz +vehicle licenses and registrations, and an allowance for uncollectible amounts offsetting potential +recoveries from third parties (“subrogation” receivables) for rental related damages. Kapur +approved accounting methodology changes in each of those areas that contributed to errors that +overstated pretax income by approximately $21 million. + +3. Based on the foregoing and the conduct described herein below, Kapur willfully +violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 13(b)(5) of the Exchange Act +and Rule 13b2-1 thereunder, and willfully aided and abetted and caused Hertz Holdings’ 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, and Hertz Corp.’s violations of Sections 15(d), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 15d-1, 15d-11 and 15d-13 thereunder. + +Respondent + +4. Jatindar Kapur (“Kapur”) was, from April 2008 to April 2014, Senior Vice +President, Finance and Corporate Controller of Hertz Global Holdings, Inc. His CPA license in +Pennsylvania expired in 1990 and has not since been renewed. In his role as Corporate Controller, +Kapur, among other things, had substantial responsibility for Hertz’s accounting function. + +Other Relevant Entities + + 5. Hertz Global Holdings, Inc. (“Hertz Holdings”) is a Delaware corporation +headquartered in Estero, Florida. Its securities are registered pursuant to Section 12(b) of the +Exchange Act. Its common stock trades on the New York Stock Exchange, and Hertz Holdings +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. As of June 30, 2016, Hertz Holdings was +spun off from and designated as the accounting successor to a company with the same name, +whose securities had also been registered pursuant to Section 12(b) of the Exchange Act. + + 6. The Hertz Corporation (“Hertz Corp.”) is a Delaware corporation headquartered +in Estero, Florida. It filed registration statements with the Commission on Form S-4 that became +effective in February and October 2013. Accordingly, as required by Section 15(d) of the +Exchange Act, Hertz Corp. filed periodic reports, including Forms 10-K and 10-Q, respecting +fiscal year 2013 pursuant to Section 15(d) of the Exchange Act and related rules thereunder. Hertz +Corp. is the wholly-owned operating subsidiary of Hertz Holdings, and it previously was the +wholly-owned subsidiary of Hertz Holdings’ predecessor. + +Facts + +7. On July 16, 2015, Hertz restated its financial results for 2012, 2013 and prior +periods, including selected data for 2011 (unaudited). Including revisions made in early 2014, the +company reduced its previously reported GAAP pretax income by a total of $235 million. Part of +the misstated income resulted from errors made in various accounts that are subject to management +4 + +estimate. For years, Hertz’s allowance related expenses were understated and income was inflated +because Hertz relied on inappropriate estimation methodologies that resulted in inadequate +allowances and write-offs. The inappropriate methodologies occurred within a pressured corporate +environment where, in certain instances, there was an inappropriate emphasis on meeting internal +budgets, business plans, and earnings estimates. + +8. Among the accounting errors contributing to the restated amounts were +misstatements concerning Hertz’s accrual for wrecks expense, the amortization periods for Hertz +vehicle licenses and registrations, and estimated recoveries for vehicle damage expense, or +“subrogation.” Kapur approved changes to the models, calculations and/or methodologies for each +of those areas that, taken together, contributed to errors that overstated pretax income by +approximately $21 million. + +9. First, in late 2012 Kapur approved erroneous accounting methodology changes in +the accrual for expenses related to wrecks—cars that were damaged so extensively that they only +retained salvage value. Most notably, in October 2012, Kapur approved an accounting +methodology change that sharply reduced a key input into the wrecks reserve calculation – the rate +by which wrecks were incurred but not reported - from 32% to 3%. The new methodology Kapur +approved effectively assumed that a vehicle is not truly a wreck, and thus no reserve must be +recognized, until management identifies the vehicle as such. This approach, which was maintained +through May 2014, vitiated the function of an accrual for wrecks incurred but not reported, and so +significantly understated the wrecks reserve balance during that period. Hertz subsequently +identified this as an error and reversed this change in its restatement. + +10. Second, in the spring of 2013 Kapur approved an inappropriate extension of the +amortization period for the expenses incurred in obtaining licenses and registrations for the Hertz +U.S. rental car fleet’s vehicles. Although the vast majority of those cars were operated in states +that had annual licensing and registration requirements, the extension, first from 12 to 17 months +and then from 17 to 18 months, was based on the average holding period in the fleet – in other +words, useful life of the car, which is different from license length. The proposal to Kapur and +others clearly outlined the $1.5 million savings that would result from this extended amortization +period, but lacked adequate support for the change. Kapur was at least aware of the first extension, +and his approval of the second is reflected in a subordinate’s email on which he was copied, saying +“Jatindar is good with the move from 17 to 18 months. . . .” The proposal approved by Kapur did +not include or document any rationale but did highlight that moving to 18 months would improve +Hertz’s financial results by providing a “one-time pick-up of approx $700k in April” 2013. + +11. After the methodology change was made, several staff members in Hertz’s regions, +including some of the largest states in Hertz’s rental car fleet, noticed it and expressed the view +that it made no sense from an accounting perspective. Kapur, despite having been alerted by these +staff members to the accounting issue, took inadequate steps to follow up and ensure that the +matter was properly addressed. In fact, the erroneous accounting treatment was not changed +during 2013. Hertz reversed this change in its restatement. + +5 + +12. Third, Kapur participated in decisions by operations staff in charge of Hertz’s +subrogation unit, contrary to Hertz policy and GAAP, to make accounting methodology changes in +ways that improved the company’s financial results. + +13. Subrogation refers to Hertz’s claims to rights to offset expenses for vehicle damage +during rental periods by recovering money from renters and other third parties, depending on +whether there was applicable insurance or credit card coverage and, in some cases, whether the +renters purchased the loss damage waiver. Hertz accounted for subrogation by recording income +and a receivable for amounts subject to recovery, partially offset by an associated expense and +allowance for the possibility that some percentage of those amounts might not be recovered. +Amounts ultimately uncollected would be written off against the allowance. + +14. FASB Accounting Standards Codification Topic 450, “Contingencies” (ASC 450), +provides guidance on the accounting for collectability of receivables. ASC 450-20-25-2 requires +the accrual of losses from uncollectible receivables if a loss is probable and the amount of the loss +can be reasonably estimated. Hertz’s longstanding policy for calculating the allowance was based +on a rolling 12-month average, not of collections experience, but of write-offs, divided by monthly +billed receivables. + +15. During 2013, subrogation staff kept up to $10 million of aged and largely +uncollectible receivables on the company’s books, even though Hertz policy recited the GAAP +requirement for “an allowance for doubtful accounts if (1) it is probable that a receivable (or +portion thereof) is uncollectible, and (2) the amount of loss can be reasonably estimated.” +Contemporaneous documents indicate that subrogation staff understood company policy to require +a 100% reserve for receivables aged over 360 days, because at that point it was probable they were +uncollectible, so that the 2013 practice, of which Kapur was made aware no later than April 2013, +was a departure from that prior policy. However, Kapur took no corrective action, and the +defective methodology remained in place. For the next seven months, subrogation staff wrote off +uncollectible receivables only to the extent that doing so fit within company budget targets. This +practice, caused by financial performance pressures rather than application of Hertz’s accounting +policies, resulted in between $7.7 and $10.4 million in aged subrogation receivables remaining on +Hertz’s books from June to October 2013. + +16. The subrogation issue reemerged in late October 2013 when, with Kapur’s +knowledge, Hertz’s senior management team pressed for opportunities to “lower the reserve” in +subrogation and other parts of the U.S. rental car business in an effort to close another earnings +gap. In response to the gap-closing effort, Hertz staff proposed reducing certain non-subrogation +allowances, but recommended a corresponding increase in the subrogation allowance, to alleviate +the risk associated with the aged receivables. Staff emphasized to Kapur and others that existing +practice had been deviating from “current policy [which] expects a reserve of 100% for receivables +aged +360.” This again put Kapur on notice that Hertz’s subrogation accounts had been +inconsistent with GAAP during 2013. + +6 + +17. After internal review and discussion, the allowance for aged subrogation +receivables was increased, but the allowance applied to younger receivables was reduced, leaving +the total subrogation reserve in a “steady state,” thus avoiding any negative impact on Hertz’s +bottom line. The final methodology ultimately presented to Kapur reserved for receivables more +than a year old at the full 100% rate – restoring the old methodology that Kapur was on notice had +been ignored during 2013. However, to offset the cost of this change, the proposal lowered other +parts of the subrogation reserve in ways that Hertz later determined during the restatement to have +been improper. + + First, the proposal reserved for claims referred to attorneys and aged less than 360 days +at an arbitrary 50% rate “until we have experience,” thus indicating the proposal lacked +any historical basis or support. In fact, however, 2012-13 collection rates by attorneys +had thus far been about 3%, indicating that the appropriate reserve rate should have +been much higher than 50%. + + Receivables not referred to attorneys and less than a year old were reserved for at a +mere 4% rate, thus assuming a 96% recovery rate that was far above the company’s +historical average for such collections. + + The proposal reserved for receivables not yet billed at only a 1% rate. The calculation +used to determine that rate erroneously ignored the fact that the overall collection rate +for unbilled receivables was only 60-70%, dictating a much higher reserve. + +18. Despite the obvious flaws in these formulae, which had no basis in GAAP or +historical experience, Kapur approved these changes. Moreover, while staff asked Kapur several +times about consulting with Hertz’s auditor concerning the proposed accounting methodology +changes, Kapur did not do so, and no such consultation occurred. + +19. In each of the instances described above, Kapur knowingly or recklessly approved +accounting methodology changes that were not in accordance with GAAP. + +20. As set forth in the Restatement, and as reflected in the above description of +accounting errors, Hertz’s internal control over financial reporting suffered from a series of +material weaknesses, including inadequate controls over accounting estimates and changes to +accounting policies. + +21. In his capacity as Senior Vice President, Finance and Corporate Controller, Kapur +was the designated “owner” of accounting-related policies at Hertz and was in position to +implement proper internal accounting controls. As Kapur knew, the methodology changes +discussed above were implemented without uniform and consistent procedures documenting the +reviews and approvals of accrual and amortization methodologies. Not only were changes to and +rationales for such methodologies inadequately documented, but, as Kapur knew, at times Hertz’s +practices with respect to subrogation accruals did not follow what was understood to be the +company’s own prescribed methodology. +7 + + +Hertz’s Restatement + +22. On July 16, 2015, based on the results of an accounting review and an internal +investigation, Hertz restated its 2011, 2012 and 2013 financial statements. The restatement of +applicable accounts due to the three errors discussed above impacted, at least, Hertz Holdings’ FY +2012 and FY 2013 Forms 10-K, its Forms 10-Q for the third quarter of 2012 and the first quarter of +2013, and its earnings reports on Forms 8-K for the third and fourth quarters of 2012 and the first +and fourth quarters of 2013. They also affected Hertz Corp.’s parallel filing of Forms 10-K, Forms +10-Q and/or earnings reports on Forms 8-K, for the period during which they were required to be +filed, from at least February 2013 through March 2014. Kapur was the corporate controller for all +the periods restated. Kapur sold shares of Hertz Holdings stock during the relevant period, which +he acquired through the exercise of stock options. + +Violations + +23. As a result of the conduct described above, the Commission finds that: + +a. Respondent Kapur willfully violated Sections 17(a)(2) and 17(a)(3) of the +Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements +made, in light of the circumstances under which they made, not misleading, or +engaging in any transaction, practice, or course of business which operates or +would operate as a fraud or deceit upon the purchaser, in the offer or sale of +securities; +b. Respondent Kapur willfully violated Section 13(b)(5) of the Exchange Act, +which prohibits any person from knowingly circumventing or failing to +implement a system of internal accounting controls or knowingly falsifying +any book, record or account described in Section 13(b)(2) of the Exchange +Act; +c. Respondent Kapur willfully violated Rule 13b2-1, which prohibits any person, +directly or indirectly, from falsifying, or causing to be falsified, any book, +record or account subject to section 13(b)(2)(A) of the Exchange Act; +d. Respondent Kapur willfully aided and abetted and caused Hertz Holdings’ +violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a- +11, and 13a-13 thereunder, which require issuers with securities registered +under Section 12 of the Exchange Act to file annual, current, and quarterly +reports with the Commission containing such information as the Commission’s +rules may require and such further material information as may be necessary to +make the required statements, in light of the circumstances under which they +were made, not misleading; +8 + + +e. Respondent Kapur willfully aided and abetted and caused Hertz Corp.’s +violations of Section 15(d) of the Exchange Act and Rules 12b-20, 15d-1, 15d- +11 and 15d-13 thereunder, which require issuers which have filed a registration +statement with the Commission which has become effective pursuant to Section +15(d) of the Exchange Act to file annual, current, and quarterly reports with the +Commission containing such information as the Commission’s rules may +require and such further material information as may be necessary to make the +required statements, in light of the circumstances under which they were made, +not misleading; + +f. Respondent Kapur willfully aided and abetted and caused Hertz Holdings’ and +Hertz Corp.’s violations of Section 13(b)(2)(A) of the Exchange Act, which +requires issuers with securities registered under Section 12 of the Exchange +Act or which are required to file reports pursuant to Section 15(d) of the +Exchange Act to make and keep books, records and accounts which, in +reasonable detail, accurately and fairly reflect the transactions and dispositions +of assets of the issuer; + +g. Respondent Kapur willfully aided and abetted and caused Hertz Holdings’ and +Hertz Corp.’s violations of Section 13(b)(2)(B) of the Exchange Act, which +requires issuers with securities registered under Section 12 of the Exchange +Act or which are required to file reports pursuant to Section 15(d) of the +Exchange Act to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurance that, among other things, +transactions are recorded as necessary to permit preparation of financial +statements in conformity with GAAP; and + +h. Respondent Kapur willfully violated or willfully aided and abetted violations +of 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. + +IV. + + In view of the foregoing, the Commission deems it appropriate, in the public interest, to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Kapur 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), +9 + +13(b)(2)(B), 13(b)(5) and 15(d) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, +13b2-1, 15d-1, 15d-11 and 15d-13 thereunder. + +B. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, Kapur is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After two (2) years from the date of this order, Kapur 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 Kapur’s work in his practice +before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which he works or +in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Kapur, 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) Kapur, 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 Kapur will not receive appropriate supervision; +10 + + (c) Kapur 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) Kapur acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Kapur 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 Kapur’s character, +integrity professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +E. Respondent Kapur shall, within 30 days of the entry of this Order, pay +disgorgement of $18,610.67, prejudgment interest thereon of $3,997.64, and a civil money penalty +in the amount of $75,000.00 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to 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. + +Payment must be made in one of the following ways: + +(1) Kapur may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Kapur 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) Kapur may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +11 + +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Kapur 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, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, Brookfield Place, 200 Vesey Street, New York, NY 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, Kapur 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 Kapur’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Kapur 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 Kapur 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 civil penalty or other amounts due by +Respondent under this Order or any other judgment, order, consent order, decree or settlement +agreement entered in connection with this proceeding, is a debt for the violation by Respondent of +the federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Vanessa A.Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4108.txt b/raw/aaer/2019/AAER-4108.txt new file mode 100644 index 0000000000000000000000000000000000000000..61a6f010573ec6f314174f34045758cea9fb86e6 --- /dev/null +++ b/raw/aaer/2019/AAER-4108.txt @@ -0,0 +1,622 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87750 / December 16, 2019 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5418 / December 16, 2019 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 33715 / December 16, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4108 / December 16, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19619 + + +In the Matter of + +TIM LEISSNER, + +Respondent . + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 15(b) AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +SECTION 203(f) OF THE INVESTMENT +ADVISERS ACT OF 1940, AND SECTION +9(b) OF THE INVESTMENT COMPANY +ACT OF 1940, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND +A CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), Section 203(f) of the Investment Advisers Act of 1940 (“Advisers Act”), and Section 9(b) of +the Investment Company Act of 1940 (“Investment Company Act”) against Tim Leissner +(“Respondent” or “Leissner”). + + + + + + + +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 Sections 15(b) and +21C of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of +1940, and Section 9(b) of the Investment Company Act of 1940, Making Findings, and Imposing +Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter relates to a massive corruption scheme perpetrated by Leissner while +acting as a senior executive of The Goldman Sachs Group, Inc. (“Goldman Sachs” or the +“Company”). Leissner, in coordination with other Goldman Sachs senior executives, authorized +and paid bribes and kickbacks to government officials in Malaysia and the Emirate of Abu Dhabi +(“Abu Dhabi”) in order to secure lucrative business for Goldman Sachs. Leissner’s actions +resulted in violations of the antibribery, books and records and circumvention of internal +accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”). + +2. 1Malaysia Development Berhad (“1MDB”) is a Malaysian state-owned and +controlled investment fund created to pursue projects for the economic benefit of Malaysia and its +people. Between approximately 2009 and 2014, as 1MDB raised capital to fund its projects, +billions of dollars were diverted from 1MDB. The diverted funds included a substantial portion of +the approximately $6.5 billion in capital that 1MDB raised in 2012 and 2013 through three bond +offerings that it executed with Goldman Sachs (the “bond deals”). As part of the scheme, Leissner +and others bribed government officials in Malaysia and in Abu Dhabi to obtain and retain lucrative +business for Goldman Sachs, including the 2012 and 2013 bond deals, from which Goldman Sachs +earned approximately $600 million. + +3. Leissner willfully violated Section 30A of the Exchange Act by directly +participating in the bribery scheme. He also caused Goldman Sachs’s books and records to not, in +reasonable detail, accurately or fairly reflect the transactions and dispositions of the company’s +assets in violation of Section 13(b)(2)(A) of the Exchange Act, and he willfully aided and abetted +violations of that Section. Additionally, Leissner willfully violated Section 13(b)(5) 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 +Exchange Act and Rule 13b2-1 thereunder by knowingly circumventing what internal accounting +controls Goldman Sachs had in place in order to both advance and conceal the corrupt scheme. + +Respondent + +4. Tim Leissner, age 50, was employed by Goldman Sachs between April 1998 and +March 2016. Prior to his separation from Goldman Sachs, Leissner was a Participating Managing +Director, Vice Chairman of the Investment Banking Division for Asia Ex-Japan, and Chairman of +South East Asia. Leissner was a coverage banker for various clients in the Asia Ex-Japan region, +including 1MDB. Leissner was at all relevant times an associated person of the Company’s U.S. +registered broker-dealer and investment adviser, Goldman Sachs & Co. LLC. + +Related Entities + +5. The Goldman Sachs Group, Inc. (“Goldman Sachs” or the “Company”) is a U.S. +based global investment banking, securities, and investment management firm headquartered in +New York, New York. The common stock of the Company is registered pursuant to Section 12(b) +of the Exchange Act and is listed for trading on the New York Stock Exchange. The Company is +an “issuer” within the meaning of the FCPA. + +6. Goldman Sachs & Co. LLC (“GS&Co.”), a subsidiary of Goldman Sachs, is +registered as a broker-dealer and as an investment adviser with the Commission. GS&Co.’s +principal business operations are located in New York, New York. Leissner was associated with +GS&Co. from April 1998 until March 2016. + +7. 1MDB was a strategic investment and development company wholly-owned by the +Malaysian government through the Malaysian Ministry of Finance. It was formed in 2009 when +the Malaysian government took control of a municipal entity called Terengganu Investment +Authority (“TIA”). 1MDB was created to pursue investment and development projects for the +economic benefit of Malaysia and its people, primarily relying on debt to fund these investments. +1MDB's development projects were focused in the areas of energy, real estate, tourism and +agribusiness. 1MDB was overseen by senior Malaysian government officials, was controlled by +the Malaysian government, and performed a government function on behalf of Malaysia. + +8. The Middle Eastern Sovereign Wealth Fund was an investment fund wholly- +owned by the government of Abu Dhabi. It was established by the government of Abu Dhabi +pursuant to an Emiri Decree in or around 1984 with a mandate to advance Abu Dhabi’s natural +petroleum wealth for the development of the emirate. The Middle Eastern Sovereign Wealth Fund +was overseen by senior Abu Dhabi government officials, was controlled by the Abu Dhabi +government, which appointed all the members of the Middle Eastern Sovereign Wealth Fund’s +board of directors, and performed a government function on behalf of Abu Dhabi. + +9. The Middle Eastern Investment Firm, a subsidiary of the Middle Eastern +Sovereign Wealth Fund, was a public joint stock company incorporated under the laws of Abu +Dhabi. + + + +4 + +10. Jho Low, age 38, is a Malaysian national who advised on the creation of TIA, +1MDB’s predecessor entity. Jho Low has never held a formal position at 1MDB. Jho Low +nevertheless exercised significant control over 1MDB during the time period relevant to this Order. +Jho Low worked as a finder and intermediary in relation to 1MDB officials and other government +officials on numerous financial transactions and projects involving Goldman Sachs. + +11. Roger Ng, age 47, is a Malaysian national who was employed as a Managing +Director and acted as an agent of Goldman Sachs. He worked with Leissner at Goldman Sachs +from approximately 2009 to May 2014. + +12. Najib Razak, age 66, was the Prime Minister of Malaysia from 2009 to 2018 who +held a position of authority with 1MDB. + +FACTS + +Background +13. 1MDB was formed in or around 2009, when the Malaysian government asserted +federal control over TIA, which previously had been a development fund controlled by the +Malaysian state of Terengganu. + +14. 1MDB was created for the stated purpose of pursuing investment projects for the +economic benefit of Malaysia and its people, relying mainly on debt to support these projects. +1MDB was supervised by senior Malaysian government officials, controlled by the Malaysian +government, and performed a government function on behalf of Malaysia. Upon 1MDB’s +formation, Najib Razak assumed a position of authority with 1MDB. Najib Razak had the +authority to approve all appointments to, and removals from, 1MDB’s Board of Directors and +1MDB’s Senior Management Team. In addition, any financial commitments by 1MDB, including +investments, that were likely to affect a guarantee given by the government of Malaysia for the +benefit of 1MDB or any policy of the Malaysian government, required the approval of Najib +Razak. + +Malaysian Intermediary Jho Low + +15. Low had advised on the creation of TIA, 1MDB’s predecessor entity. Although he +did not hold a formal title with 1MDB or the Malaysian government, Low worked as a finder and +intermediary in relation to 1MDB officials and other government officials on multiple financial +transactions and projects, including transactions involving Goldman Sachs. + +16. Goldman Sachs, through its participating managing director Leissner, was retained +to provide financial advice to the government of Malaysia in connection with the 2009 federal +takeover of TIA (“Project Tiara”). Notwithstanding Low’s public denials about any involvement +with 1MDB during this time, while working on this project, Leissner and other senior executives at +Goldman Sachs knew that Low worked as a finder and intermediary in relation to 1MDB, and + + + +5 +began to actively work to conceal Low’s involvement in Goldman Sachs-related transactions from +others at the firm. Leissner and others, including Goldman Sachs Managing Director Roger Ng, at +the time knew that Low remained close to 1MDB officials and other government officials in +Malaysia, including Najib Razak, and Abu Dhabi. During this time, Low also specifically +requested that Leissner, Ng and others conceal his involvement in Goldman Sachs’s business. + +17. Goldman Sachs’s various internal FCPA and accounting controls were overseen +and enforced by its compliance function (the “Compliance Group”) and its legal department (the +“Intelligence Group”). These groups worked in conjunction with, and as part of, various Goldman +Sachs committees (“GS Committees”) in reviewing transactions for approval. + +18. Goldman Sachs’s written policies required bankers who submitted transactions to +GS Committees for approval, such as Leissner, to broadly disclose information relevant to the +matters at issue, including “a full assessment of the transaction risks.” Nevertheless, while +working on Project Tiara and thereafter, Leissner selectively concealed from other employees of +Goldman Sachs, including the GS Committees and their members, that he was working with Low +as an intermediary to secure the deals. Leissner did this in an effort to avoid potential heightened +scrutiny of the bond deals by the GS Committees, the Compliance Group or the Intelligence +Group. + +19. Between in or around September 2009 and in or around March 2011, Leissner and +others, including Ng, supported at least three attempts to make Low a formal client of Goldman +Sachs. Leissner and Ng supported these efforts because, in part, they believed that Low would +work to deliver lucrative business deals, including from 1MDB, for the ultimate benefit of +Goldman Sachs, Leissner, Ng and others. These attempts were unsuccessful because certain +personnel within Goldman Sachs’s Compliance Group and Intelligence Group had previously +refused to approve any business relationship with Low. Their refusal was based, in part, on +concerns that these groups had concerning the source of Low’s wealth. Personnel within the +Compliance Group and the Intelligence Group communicated the rejection of Low’s application to +Leissner and others within Goldman Sachs. Notwithstanding their knowledge of the concerns that +had been raised about Low not being a suitable client for Goldman Sachs, Leissner and other +employees and agents of Goldman Sachs continued to work with Low based upon their belief that +Low would help ensure that government officials in Malaysia and Abu Dhabi would deliver +lucrative business deals to Goldman Sachs. + +The Bond Deals + +20. Later, when Goldman Sachs was retained by 1MDB to assist it with three large debt +financings in 2012 and 2013 – the “bond deals” – Leissner and other senior executives of Goldman +Sachs knew that Low was playing a central role in these transactions, including by acting as an +intermediary between Goldman Sachs, 1MDB and other Malaysian and Abu Dhabi government +officials. Leissner and other senior executives of Goldman Sachs also knew that Low promised to +pay bribes and kickbacks to these officials to secure 1MDB business for Goldman Sachs. + + + + +6 +21. Throughout 2012 and 2013, Leissner and other senior executives of Goldman Sachs +actively worked to obtain and retain business from 1MDB for the benefit of Goldman Sachs +through the promise and payment of bribes and kickbacks to government officials in Malaysia and +Abu Dhabi using, in part, misappropriated and embezzled proceeds from the bond deals. During +this time, through the course of the scheme, Leissner and others paid millions of dollars in bribes +and kickbacks to government officials, and obtained 1MDB business for Goldman Sachs, in +particular, the three bond deals. These three bond financing transactions were referred to internally +at Goldman Sachs as “Project Magnolia,” “Project Maximus” and “Project Catalyze.” + +22. Goldman Sachs’s role as underwriter for the bond deals meant that the firm would +be using its own capital to fund the initial purchase of the 1MDB bonds. Accordingly, the +transactions were formally reviewed and approved by multiple GS Committees including the +Firmwide Capital Committee (“Capital Committee”). The Capital Committee’s charter states as +follows: + +The Committee provides approval and oversight globally of debt-related +transactions, including principal commitments of the Firm’s capital. The +Committee aims to ensure that business, reputational and suitability standards for +underwritings and capital commitments are maintained on a global basis. + +23. Although the purported purpose of the approximately $6.5 billion raised by the +three bond transactions was to support 1MDB projects for the benefit of the Malaysian people, +Leissner and others instead planned and executed a scheme to misappropriate more than $2.7 +billion and distribute the money as bribes and kickbacks to government officials in Malaysia and +Abu Dhabi, including but not limited to Najib Razak, as well as to other participants in the scheme +and their families, including Leissner. + +Goldman Sachs Obtains Project Magnolia from Malaysian Sovereign Wealth Fund + +24. In or around early 2012, Leissner and other senior executives of Goldman Sachs +met in Malaysia with others, including Low and other 1MDB officials. A purpose of the meeting +was to discuss 1MDB’s proposed purchase of a Malaysian energy company (“Malaysian Energy +Company A”) and Goldman Sachs’s preparedness to help obtain financing for the purchase. + +25. During that meeting, Leissner and other senior executives of Goldman Sachs +discussed with Low the type of financial guarantee that 1MDB needed to obtain for the bond +issuance to meet Goldman Sachs’s underwriting requirements. They ultimately agreed on a +guarantee from the Middle Eastern Sovereign Wealth Fund. Leissner, Ng and another senior +executive of Goldman Sachs understood that Low was acting as an intermediary between 1MDB, +Najib Razak and other government officials from Abu Dhabi. + +26. In late February 2012, Leissner and other senior executives of Goldman Sachs met +with Low and other 1MDB officials in London to discuss the proposed financing. During this +meeting, Low explained that in order to secure the guarantee from the Middle Eastern Sovereign +Wealth Fund discussed at the prior meeting with Leissner and others, they would have to pay + + + +7 +bribes and kickbacks to government officials, including to certain officials in Malaysia and Abu +Dhabi. After the February 2012 meeting, Leissner discussed this information with other senior +executives of Goldman Sachs. + +27. In or around March 2012, 1MDB formally engaged Goldman Sachs to be the sole +underwriter for the $1.75 billion debt financing transaction designed, in part, to pay for the +acquisition of Malaysian Energy Company A, which was guaranteed by the Middle Eastern +Sovereign Wealth Fund. + +28. In or around March 2012, Leissner and certain other senior executives of Goldman +Sachs traveled to Abu Dhabi along with Low and certain other 1MDB officials +to meet with officials of the Middle Eastern Sovereign Wealth Fund and its subsidiary the Middle +Eastern Investment Firm to discuss the contemplated guarantee for Project Magnolia. Throughout +that time, Leissner knew Low had arranged the meetings with the officials of the Middle Eastern +Sovereign Wealth Fund and the Middle Eastern Investment Firm, and that some of these officials, +among others, would be paid bribes by Low to secure the guarantee. + +29. Leissner and other senior executives of Goldman Sachs also knew that Low would +pay bribes and kickbacks to influence Malaysian officials to obtain the necessary approvals to +execute Project Magnolia for Goldman Sachs. During the months leading up to the issuance of +Project Magnolia, Leissner knew that Low enlisted 1MDB officials to assist him in ensuring that +all necessary approvals were obtained from 1MDB officials and others to complete the transaction, +in exchange for bribes and kickbacks to those 1MDB officials. + +30. In or around the end of May 2012, near the closing of Project Magnolia, Leissner +actively worked with another senior executive of Goldman Sachs and Low to divert some of the +bond proceeds that Goldman Sachs raised from Project Magnolia into the bank accounts of shell +companies that Leissner, the other Goldman Sachs senior executive and Low beneficially owned +and controlled. These individuals understood and expected to keep some of the diverted funds for +their personal use, and that other funds would be used to pay bribes and kickbacks to government +officials in Malaysia and Abu Dhabi and elsewhere in exchange for their assistance in obtaining +and retaining business for Goldman Sachs in connection with Project Magnolia. + +31. On or about May 21, 2012, Project Magnolia closed, earning approximately $193 +million in fees for Goldman Sachs. + +32. Goldman Sachs transferred the proceeds of the Magnolia bond offering via wire to +the 1MDB entity designated to receive the payment. At the time, Leissner, Low and others knew +that a large portion of the proceeds of the bond offering would be diverted to themselves and +others, including government officials, through shell companies beneficially owned and controlled +by Low, Leissner and others. + +33. Goldman Sachs’s documentation of the wire transfer – including a signed payment +authorization and instruction, an executed agreement between Goldman Sachs and its client, and +the Project Magnolia offering circular (collectively, the “Magnolia Bond Documents”) – falsely + + + +8 +stated that the proceeds would be used only to pay for the acquisition of Malaysian Energy +Company A or for “general corporate purposes.” Leissner knowingly caused these records to be +false. + +34. Within three months of the closing of Project Magnolia, millions of dollars of bond +proceeds were transferred through shell companies beneficially owned and controlled by Low and +other participants in the scheme into a Hong Kong bank account in the name of shell companies +incorporated in the British Virgin Islands and controlled by Leissner. Leissner also used a portion +of these funds for his personal use and enjoyment. Leissner also knew that other bond funds from +Project Magnolia were transferred through shell company accounts beneficially owned and +controlled by Low and other participants in the scheme and ultimately into accounts of shell +companies beneficially owned and controlled by Abu Dhabi government officials with influence +over the transaction. + +Goldman Sachs Obtains Project Maximus from Malaysian Sovereign Wealth Fund + +35. In or about May 2012, Leissner, Low and others began to plan a second bond +transaction, known internally at Goldman Sachs as “Project Maximus,” which was designed, in +part, to raise capital for 1MDB to purchase a second Malaysian power generation company +(“Malaysian Energy Company B”). Leissner and certain other senior executives of Goldman +Sachs intended that Low and others would pay bribes and kickbacks to influence Malaysian and +Abu Dhabi officials to obtain the necessary approvals to execute the bond offering. The mandate +to underwrite this bond offering was also awarded by 1MDB to Goldman Sachs, and it was +structured similarly to the first bond issuance but only with an indirect guarantee from the Middle +Eastern Sovereign Wealth Fund. + +36. Although the Middle Eastern Sovereign Wealth Fund did not provide a direct +financial guarantee of the Project Maximus bonds as it had with Project Magnolia, it nevertheless +agreed to privately secure the bonds on a bilateral basis with Goldman Sachs. As with Project +Magnolia, Leissner and others continued to work with Low to acquire this business for Goldman +Sachs. + +37. Leissner knew that a large portion of the proceeds of Project Maximus would be +illegally diverted to himself and others, including government officials, through shell companies +beneficially owned and controlled by Leissner and others. Leissner also knew at the time that +Najib Razak and government officials from Abu Dhabi and 1MDB officials would receive money +from the proceeds of Project Maximus that passed through various shell companies beneficially +owned and controlled by himself, Low and others. Moreover, along with Low and others, it was +Leissner’s intended purpose that the payments were to flow to these government officials to +influence the officials to execute the bond transaction with Goldman Sachs. A close relative of +Najib Razak and a senior official with the Middle Eastern Sovereign Wealth Fund, among others, +received some of these funds. + +38. On or about October 10, 2012, Leissner participated in a GS Committee meeting +that included senior Goldman Sachs executives participating from multiple locations globally, + + + +9 +including New York City, New York. The meeting was convened for the purpose of approving +Goldman Sachs’s role in Project Maximus. During the meeting, Leissner was directly asked +whether Low was involved in Project Maximus. Leissner told the GS Committee affirmatively +that Low was not involved in Project Maximus, though Leissner and other senior executives of +Goldman Sachs knew at the time that this statement was false. + +39. Project Maximus closed on or about October 17, 2012, raising approximately $1.75 +billion for the designated 1MDB entity and resulting in approximately $188 million in fees for +Goldman Sachs. + +40. Leissner knew that some of the proceeds from Project Maximus were transferred by +or per Low to Leissner in furtherance of the scheme. Thereafter, Leissner, Low and others caused +some of these funds to be transferred to the accounts of 1MDB officials or relatives of such +officials, or to the accounts of shell companies beneficially owned by 1MDB officials, in exchange +for their assistance in obtaining and retaining business for Goldman Sachs. + +41. Goldman Sachs’s documentation of its transfer of funds to purchase the bonds – +including a signed payment authorization and instruction, an executed agreement between +Goldman Sachs and its client, and the Project Maximus offering circular (collectively, the +“Maximus Bond Documents”) – falsely stated that the bond proceeds would be used solely to pay +for the acquisition of Malaysian Energy Company B or for “general corporate purposes.” Leissner +knowingly caused these records to be false. + +42. In 2012, 1MDB issued a total of $3.5 billion in bonds that were underwritten by +Goldman and indirectly guaranteed by the Middle Eastern Sovereign Wealth Fund. + +Goldman Sachs Obtains Project Catalyze from Malaysian Sovereign Wealth Fund + +43. In or about November 2012, despite having raised over $3 billion in the prior 11 +months, 1MDB sought to raise an additional $3 billion through a bond issuance known internally +at Goldman Sachs as “Project Catalyze.” This debt financing was purportedly designed to fund +1MDB’s portion of a joint venture with the Middle Eastern Investment Firm. Goldman Sachs was +engaged to underwrite the project in or around early 2013. + +44. As they had with the two prior 1MDB bond issuances, Leissner and other senior +executives of Goldman Sachs continued to work with Low as an intermediary between Goldman +Sachs, 1MDB officials, Najib Razak and other Malaysian government officials. Further, although +required by internal compliance policies of Goldman Sachs, Leissner failed to disclose that (a) he +had received a portion of the funds diverted from the prior bond transactions via Low and (b) that +Leissner, Low and others paid bribes and kickbacks to 1MDB officials and others who were +involved in the transactions. + +45. The Project Catalyze bond issued on or about March 19, 2013, resulting in +approximately $186 million in fees to Goldman Sachs from this deal. A portion of the + + + +10 +approximately $3 billion raised by this bond issuance was transferred to Leissner by or at the +direction of Low. + +46. Goldman Sachs’s documentation of the transaction – including a signed payment +authorization and instruction, an executed agreement between Goldman Sachs and its client, and +the Project Catalyze offering circular (collectively, the “Catalyze Bond Documents”) – falsely +stated that the bond proceeds would be used solely to fund Malaysia’s contribution to a joint +venture investment vehicle with Abu Dhabi or for “general corporate purposes.” Leissner +knowingly caused these records to be false. + +Leissner and Goldman Sachs Seek to Obtain Further Business from Malaysia Post-Catalyze + +47. Following the closing of Project Catalyze, through the end of 2014, Leissner and +Goldman Sachs sought, obtained and worked to execute several additional transactions with +1MDB, particularly focusing on a proposed initial public offering of 1MDB's energy assets +(“Energy IPO”). + +48. Throughout the time period of these additional transactions, Leissner and other +participants in the scheme continued to pay bribes and kickbacks to certain Malaysian government +officials, including from the proceeds of the Project Catalyze bond and other 1MDB transactions, +to influence those officials to award a role for Goldman Sachs in the Energy IPO. + +49. These bribes and kickbacks included transferring millions of dollars to the accounts +of shell companies beneficially owned and controlled by 1MDB officials, and transferring +approximately $1.3 million to the account of a New York jeweler to pay for jewelry for the spouse +of Najib Razak. + +50. Between in or around June 2012 and October 2014, more than $200 million of the +proceeds of the three 1MDB bond deals and other 1MDB business was transferred by Low or at +his direction into accounts beneficially owned and controlled by Leissner. + +LEGAL STANDARDS AND VIOLATIONS + +51. Under Section 21C(a) of the Exchange Act, the Commission, after making certain +required findings, 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. + +Leissner Violated Exchange Act Section 30A + +52. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, make it +unlawful for any issuer with a class of securities registered pursuant to Section 12 of the Exchange +Act, or any employee or agent of such issuer, to make use of the mails or any means or +instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to + + + +11 +pay, or authorization of the payment of any money, or offer, gift or promise to give anything of +value to any foreign official for purposes of influencing any act or decision of such foreign official +in his official capacity in order to assist such issuer in obtaining or retaining business for or with +any person. 15 U.S.C. § 78dd-1. + +53. As described above, while acting as Goldman Sachs’s employee and agent, +Leissner made use of interstate commerce by, among other things, sending wire transfers from a +foreign bank account to a U.S. bank account in furtherance of his corrupt offers and promises to +bribe foreign officials, through which Leissner intended that the officials would use their official +positions to assist Goldman Sachs in obtaining the bond deals and other business. By this conduct +Leissner willfully violated Exchange Act Section 30A. + +Leissner Aided and Abetted and Caused Violations of Exchange Act Section 13(b)(2)(A) + +54. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange +Act, requires every issuer with a class of securities registered pursuant to Section 12 of the +Exchange Act to make and keep books, records, and accounts, which, in reasonable detail, +accurately and fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. +§ 78m(b)(2)(A). + +55. As described above, Leissner knowingly actively concealed highly relevant +information from financial, legal and compliance executives, including by making misstatements +to these executives regarding Low’s role as an intermediary in the bond deals. This caused +Goldman Sachs to improperly record transactions in the Magnolia Bond Documents, the Maximus +Bond Documents, and the Catalyze Bond Documents (collectively, the “1MDB Bond +Documents”) so as to misstate the actual intended uses of bond proceeds. By this conduct Leissner +willfully aided and abetted and caused violations of Section 13(b)(2)(A). + +Leissner Violated Exchange Act Section 13(b)(5) and Rule 13b2-1 + +56. Exchange Act Section 13(b)(5) provides that no person shall “knowingly +circumvent . . . a system of internal accounting controls or knowingly falsify any book, record, or +account.” 15 U.S.C. § 13(b)(5). Exchange Act Rule 13b2-1 further provides that “no person shall, +directly or indirectly, falsify or cause to be falsified, any book, record, or account.” 17 CFR +§ 240.13b2-1. + +57. As described above, Leissner knowingly circumvented those internal accounting +controls that Goldman Sachs had in place and caused the company’s books, records and accounts +to be falsified through the misrepresentations that he made to Goldman Sachs’s executives and +committees. Leissner’s conduct caused Goldman Sachs to improperly record in the 1MDB Bond +Documents payments that it made in connection with the bond deals. The bond proceeds were in +fact used in part to make bribes and other illicit payments. By this conduct, Leissner willfully +violated Exchange Act Section 13(b)(5) and Rule 13b2-1 thereunder. + + + + + +12 + + +Criminal and Other Regulatory Dispositions + +58. Respondent has pleaded guilty to criminal conduct relating to the findings in the +Order. Specifically, in United States v. Leissner, Cr. No. 18-CR-439 (MKB) (E.D.N.Y. 2018) +Respondent pleaded guilty to one count of Conspiracy to Violate the FCPA and one count of +Conspiracy to Commit Money Laundering. As part of his guilty plea, Leissner agreed to forfeit +$43,700,000. + +59. Respondent has also entered into a parallel civil settlement with the Board of +Governors of the Federal Reserve System (the “Federal Reserve Board”) concerning some of the +findings in the Order. Specifically, in In the Matter of Tim Leissner, Docket No. 19-008-E-I (Mar. +11, 2019), Leissner agreed to pay a civil money penalty of $1,425,000. + +Non-Imposition of a Civil Penalty + +60. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon (a) Respondent’s guilty plea as part of his resolution with the United States Department +of Justice, and (b) the imposition of a civil money penalty as part of the settlement with the Federal +Reserve Board. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondent’s Offer. + +Accordingly, pursuant to Sections 15(b) and 21C of the Exchange Act, Section 203(f) +of the Advisers Act, and Section 9(b) of the Investment Company Act, it is hereby ORDERED +that: + +A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 30A, 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rule +13b2-1 thereunder. + +B. Respondent 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; and + + + +13 + +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. 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, compliance with the Commission’s +order and payment of any or all of the following: (a) any disgorgement or civil penalties +ordered by a Court against the Respondent in any action brought by the Commission; (b) any +disgorgement amounts ordered against the Respondent for which the Commission waived +payment; (c) any arbitration award related to the conduct that served as the basis for the +Commission order; (d) any self-regulatory organization arbitration award to a customer, +whether or not related to the conduct that served as the basis for the Commission order; and (e) +any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +D. Respondent shall pay to the Commission disgorgement of $43,700,000. The +amount of this obligation shall be reduced and deemed satisfied by the amount of Respondent’s +criminal forfeiture in United States v. Leissner, Cr. No. 18-CR-439 (MKB) (E.D.N.Y. 2018) up +to and including the entire amount of this obligation. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4111.txt b/raw/aaer/2020/AAER-4111.txt new file mode 100644 index 0000000000000000000000000000000000000000..37e34465b2f5d3750815eae7f05585d87fc0129f --- /dev/null +++ b/raw/aaer/2020/AAER-4111.txt @@ -0,0 +1,115 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87884 / January 3, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4111 / January 3, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19634 + + + + +In the Matter of + +Robert A. Karmann, 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 Robert +A. Karmann (“Respondent” or “Karmann”) 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: (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, Respondent admits the Commission’s +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +paragraph III.2 below, and consents to the entry of this Order Instituting Public Administrative +Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and +Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Karmann, age 53, is and has been a certified public accountant licensed to practice +in the State of California. He served as the chief financial officer of a private California +corporation headquartered in Benicia, California from 2015 through 2018, and as the controller +from 2014 to 2015. + +2. On December 20, 2019, a judgment was entered by consent against Karmann, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +(“Securities Act”), and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) +and Rule 10b-5 thereunder, in the civil action entitled Securities and Exchange Commission v. +Robert A. Karmann, Civil Action Number 2:19-cv-2531, in the United States District Court for the +Eastern District of California. + +3. The Commission’s complaint alleged, among other things, that Karmann engaged +in a course of conduct designed to deceive investors in securities offered by certain solar energy +companies in which, among other things, Karmann: (1) transferred or arranged for the transfer of +funds among companies to deceive investors about the source of purported revenue; and (2) +provided reports and financial statements that he knew contained materially false and misleading +information to investors and prospective investors. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Karmann’s Offer. + + + + + + + + + + 3 +Accordingly, it is hereby ORDERED, effective immediately, that: + + Robert A. Karmann is suspended from appearing or practicing before the Commission as +an accountant. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4112.txt b/raw/aaer/2020/AAER-4112.txt new file mode 100644 index 0000000000000000000000000000000000000000..646867e815e27642b0c629996b060c06e845dbfc --- /dev/null +++ b/raw/aaer/2020/AAER-4112.txt @@ -0,0 +1,67 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87969 / January 15, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4112 / January 15, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +DAVID MIDDENDORF, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of David Middendorf 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. Middendorf is a certified public accountant in Georgia, New York, and Ohio. + +2. On September 11, 2019, a judgment of conviction was entered against +Middendorf in United States v. David Middendorf, et al, No. 18-Cr.-36, in the United States +District Court for the Southern District of New York, finding him guilty of one count of +conspiracy to commit wire fraud and three counts of wire fraud. + +3. As a result of this conviction, Middendorf was sentenced to imprisonment of one +year and one day in a federal penitentiary. + + +1 Rule 102(e)(2) provides in pertinent part that “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 Middendorf 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 David Middendorf is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4113.txt b/raw/aaer/2020/AAER-4113.txt new file mode 100644 index 0000000000000000000000000000000000000000..6199acd929a2a088b0d334c5963d83740527239e --- /dev/null +++ b/raw/aaer/2020/AAER-4113.txt @@ -0,0 +1,67 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87970 / January 15, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4113 / January 15, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +JEFFREY WADA, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Jeffrey Wada 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. Wada is a certified public accountant in California. + +2. On October 11, 2019, a judgment of conviction was entered against Wada in +United States v. David Middendorf, et al, No. 18-Cr.-36, in the United States District Court for +the Southern District of New York, finding him guilty of one count of conspiracy to commit wire +fraud and two counts of wire fraud. + +3. As a result of this conviction, Wada was sentenced to imprisonment of nine +months in a federal penitentiary. + + +1 Rule 102(e)(2) provides in pertinent part that “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 Wada 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 Jeffrey Wada is forthwith suspended from appearing +or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4114.pdf b/raw/aaer/2020/AAER-4114.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bc6f8dd94e9c70fdc8d74bed6812b6db7e6f205c Binary files /dev/null and b/raw/aaer/2020/AAER-4114.pdf differ diff --git a/raw/aaer/2020/AAER-4114.txt b/raw/aaer/2020/AAER-4114.txt new file mode 100644 index 0000000000000000000000000000000000000000..d3dd6c22a67a35f99e480b82d966a0a980383bc6 --- /dev/null +++ b/raw/aaer/2020/AAER-4114.txt @@ -0,0 +1,66 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION +January 16, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88001 / January 16, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4114 / January 16, 2020 + +Admin. Proc. File No. 3-18994 + + + +In the Matter of + +JOSEPH S. AMUNDSEN, CPA, +MICHAEL T. REMUS, CPA, and +MICHAEL REMUS CPA + + +CORRECTED ORDER +GRANTING +PETITIONS +FOR REVIEW +AND SCHEDULING +BRIEFS + + + +Pursuant to Commission Rule of Practice 411, +1 the petitions of Joseph S. Amundsen, +CPA, Michael T. Remus, CPA, and Michael Remus CPA for review of the administrative law +judge's initial decision2 is granted. Pursuant to Rule of Practice 411(d), 3 the Commission will +determine what sanctions, if any, are appropriate in this matter. +Accordingly, IT IS ORDERED, pursuant to Rule of Practice 450(a),4 that briefs in +support of the petitions for review shall be filed by February 18, 2020. A brief in opposition + + +1 17 C.F.R. § 201.411. +2 Joseph S. Amundsen, CPA, Michael T. Remus , CPA, and Michael Remus CPA, Initial +Decision Release No. 1391 (Dec. 5, 2019), 2019 WL 6683122. +3 17 C.F.R. § 201.411(d). +4 17 C.F.R. § 201.450(a). +2 + + +shall be filed by March 19, 2020, and any reply briefs shall be filed by April 2, 2020.5 Pursuant +to Rule of Practice 180(c),6 failure to file a brief in support of the petition may result in dismissal +of this review proceeding. + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + +Vanessa A. Countryman +Secretary + + +5 As provided by Rule of Practice 450(a), no briefs in addition to those specified in this +schedule may be filed without leave of the Commission. Attention is called to Rules 150 – 153, +17 C.F.R. § 201.150 – 153, with respect to form and service, and Rules of Practice 450(b) and +(c), 17 C.F.R. § 201.450(b), 201.450(c), with respect to content and length limitations. Requests +for extensions of time to file briefs are disfavored. +6 17 C.F.R. § 201.180(c). \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4115.txt b/raw/aaer/2020/AAER-4115.txt new file mode 100644 index 0000000000000000000000000000000000000000..994344f102f71631465bacf1d518104e5ce9bd97 --- /dev/null +++ b/raw/aaer/2020/AAER-4115.txt @@ -0,0 +1,110 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88048 / January 27, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4115 / January 27, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-14624 + +In the Matter of +Steven M. Des Champs, +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 16, 2011, Steven M. Des Champs, CPA (“Des Champs”) was suspended +from appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against him pursuant to Rule 102(e)(3) +of the Commission’s Rules of Practice.1 This order is issued in response to Des Champs’ +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 Des Champs had been permanently enjoined by a United +States District Court from future violations of Section 17(a)(2) and (3) of the Securities Act of +1933 and Rule 13a-14 under the Securities Exchange Act of 1934 (“Exchange Act”), 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 an action brought by the +Commission. In its complaint in the injunctive action, the Commission alleged that Des +Champs, as the Chief Accounting Officer and Chief Financial Officer of Bally Technologies, +Inc. (“Bally”), was responsible for the improper recognition of revenue from certain bill and hold +transactions and for the improper recognition of revenue on sales of gaming machines for which +collectability was not reasonably assured. This conduct resulted in misstatements in filings that + +1 See Accounting and Auditing Enforcement Release No. 3336 dated November 16, 2011. Des Champs was +permitted, pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +Bally made with the Commission for periods between the fourth quarter of fiscal year 2003 and +the third quarter of fiscal year 2005. + +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, Des +Champs 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. Des Champs 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, Des Champs 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 Des Champs, it appears that he has complied with the terms of the November 16, 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 Des Champs, 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 +Steven M. Des Champs, CPA is hereby reinstated to appear and practice before the Commission +as an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Vanessa Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4116.txt b/raw/aaer/2020/AAER-4116.txt new file mode 100644 index 0000000000000000000000000000000000000000..2350d22f090588ebf7e43de9e7b402fc27560c44 --- /dev/null +++ b/raw/aaer/2020/AAER-4116.txt @@ -0,0 +1,512 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88140 / February 6, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4116 / February 6, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-18967 + + + +In the Matter of + +LBB & ASSOCIATES LTD., +LLP and +CARLOS LOPEZ, CPA, + +Respondents. + + + +ORDER MAKING FINDINGS AND IMPOSING +REMEDIAL SANCTIONS PURSUANT TO +SECTION 4C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) OF +THE COMMISSION’S RULES OF PRACTICE + + +I. + + On January 14, 2019, the Securities and Exchange Commission (“Commission”) issued an +Order Instituting Administrative Proceedings against LBB & Associates Ltd., LLP (“LBB”) and +Carlos Lopez, CPA (“Lopez”) (collectively, “Respondents”) pursuant to Section 4C1 of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) 2 of the Commission’s Rules of +Practice. + + + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person is +found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + 2 +II. + + In connection with 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 Making Findings and Imposing Remedial Sanctions +Pursuant to Section 4C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s +Rules of Practice (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +A. SUMMARY + +1. For annual audits of years 2012, 2013 and 2014, Respondents engaged in a pattern of +improper professional conduct as auditors. Specifically, Respondents failed to comply with Public +Company Accounting Oversight Board (“PCAOB”) standards in their audit of Behavioral +Recognition Systems, Inc. (now known as Giant Gray, Inc.) (“BRS”) for fiscal year 2012 and in +their engagement quality reviews (“EQR”) of the 2013 and 2014 fiscal year audits. Lopez, LBB’s +managing partner and majority owner, served as LBB’s engagement partner for the 2012 audit and +as its EQR partner for the 2013 and 2014 audits. + +2. During the 2012 audit, Lopez did not comply with PCAOB standards regarding: (i) +the identification of related party transactions or (ii) the audit procedures required when examining +known related party transactions. + +3. First, Lopez relied exclusively on BRS’s management to disclose related party +transactions to him, despite the fact that he was aware of certain red flags indicating that additional +related party transactions existed. As a result, although Blackstone Group, Inc. (“Blackstone”) +received payments of approximately $1.5 million in 2012 and was one of BRS’s largest vendors +that year, Lopez failed to apply the audit procedures set forth in AU § 334 and failed to identify +those payments as transactions involving a related party controlled by BRS’s then-CEO, Ray Davis +(“Davis”). + +4. Second, Lopez also failed to comply with PCAOB standards in Respondents’ 2012 +audit of known related party transactions because, among other things, he did not (i) properly assess +the risks associated with those transactions; (ii) complete audit procedures designed to confirm the +business purpose, nature, and extent of the payments made; or (iii) exercise due professional care in +performing his audit work. Here, again, Lopez relied exclusively on BRS management to explain +an almost three-fold increase in expenses to an individual he knew was related to Davis (“Related +Party A”) without, for example, reviewing any invoices or taking any other steps to determine the +purpose, nature, and extent of the expenses and their effect on the financial statements. + + 3 +5. Respondents also failed to comply with PCAOB standards in connection with their +EQRs for both the 2013 and 2014 BRS audits. In particular, PCAOB standards prohibit a person +who served as the engagement partner on either of the two preceding audits from serving as the +EQR partner on an audit. Thus, because Lopez served as the engagement partner on the 2012 BRS +audit, Respondents failed to comply with these PCAOB standards when Lopez served as the EQR +partner on the 2013 and 2014 audits. + +6. By failing to conduct the BRS audits in accordance with PCAOB standards, LBB +and Lopez engaged in improper professional conduct. + +B. RESPONDENTS + +7. LBB & Associates Ltd., LLP, is a PCAOB-registered accounting and auditing firm +based in Houston, Texas with approximately 28 public company clients. LBB has two partners and +approximately eight accountants on staff. + +8. Carlos Lopez, age 56, is LBB’s managing partner and majority owner. He is a +Certified Public Accountant (“CPA”) licensed in Texas and resides in Houston. Lopez served as +the engagement partner for BRS’s 2012 audit and as the EQR partner for its 2013 and 2014 audits. + +C. OTHER RELEVANT ENTITIES + +9. Behavioral Recognition Systems, Inc., now known as Giant Gray, Inc., is a private, +Texas corporation with its principal place of business in Houston, Texas and has never had an +obligation to file audited financial statements with the Commission. BRS was founded in 2005 and +sold video analytic software that allowed linked video cameras or other systems to recognize certain +abnormal or suspicious events chosen by the user. For all three fiscal years relevant to this Order, +Ray Davis served as BRS’s CEO and Chairman. On December 14, 2017, the Commission filed a +complaint against BRS, Davis, and several relief defendants alleging that BRS and Davis engaged +in a fraudulent scheme to divert BRS investor funds for Davis’s personal use, including millions of +dollars paid to Blackstone, a company controlled by Davis. SEC v. Davis et al., No. 17-cv-03774 +(S.D. Tex. Dec. 14, 2017). Davis is now deceased, and Giant Gray was forced into Chapter 7 +bankruptcy proceedings in April 2018. + +D. FACTS + +i. Background +10. Lopez first met Davis when he was working for another audit firm and was assigned +to the team responsible for auditing a company for which Davis served as CEO. + +11. Years later, after Lopez formed LBB in 2004, Davis hired LBB to conduct a review +of BRS’s 2009 financial statements. Subsequently, Davis hired LBB to conduct audits for BRS, +which LBB did for the years 2010 through 2014. Lopez served as the engagement partner for the +2010 through 2012 audits and, as noted, as the EQR partner for the 2013 and 2014 audits. + + 4 +ii. Respondents Were Aware that BRS Audits Were High Risk and that BRS Planned to +Provide Its Audited Financial Statements to Investors +12. For the 2012 audit, Respondents were aware that BRS was a high-risk audit client +based in part on their prior audit work for BRS. BRS had no chief financial officer and relied on a +single part-time bookkeeper to maintain its accounting records. BRS never had an audit committee, +and the board of directors consisted only of Davis and another BRS executive. As Lopez knew, +BRS’s board did not hold a single meeting in 2012. + +13. At the time of the 2012 audit, Respondents were also aware of control deficiencies in +BRS’s internal controls, including a lack of any controls over Davis’s unrestricted ability to +authorize, approve, and direct payments and expenses. Respondents noted in the 2012 audit’s Risk +Assessment Summary Form that management override of internal controls presented a significant +risk in connection with the audit. Respondents further indicated that they would not test or rely on +BRS’s internal controls during the audit, but rather would base the audit on substantive audit +procedures.3 + +14. Respondents knew when they conducted the 2012 audit and EQRs for the 2013 and +2014 audits that BRS planned to provide its investors with the audited financial statements. +Moreover, in each of the signed audit reports for the 2012 through 2014 audits, Respondents stated: +“We conducted our audits in accordance with the standards of the Public Company Accounting +Oversight Board (United States).” + +iii. Respondents Failed to Conduct the 2012 BRS Audit in Accordance with PCAOB +Standards + +a. Failure to Conduct Audit Steps for Identifying Related Party Transactions + +15. PCAOB audit standard (“AU”) § 334.07 provided that determining the existence of +related party relationships that are not clearly evident required the application of specific audit +procedures.4 Such procedures may include evaluating the client’s process for identifying related +parties, requesting names of related parties from management, and reviewing stockholder lists. (AU +§ 334.07.) The standard also outlined audit procedures designed to provide guidance for identifying +material transactions with unidentified related parties, including reviewing the nature of transactions + +3 Under PCAOB standards, the audit procedures performed in response to the assessed risks +of material misstatement can be classified into two categories: “test of controls” and “substantive +procedures.” (AS § 13.10.) For significant risks, the substantive procedures should be specifically +responsive to the assessed risks and include tests of details. (AS § 13.11.) On the other hand, if the +auditor plans to assess control risk (at less than the maximum) by relying on controls, the auditor +must obtain evidence that the controls selected for testing are designed effectively and operated +effectively for the entire period during which those controls were relied upon. (AS § 13.16.) + +4 Citations to “AU” and “AS” refer to PCAOB standards in effect at the time of the conduct +discussed herein. + + 5 +with major customers for indications of previously undisclosed relationships and reviewing +accounting records for large, unusual, or nonrecurring transactions, particularly those transactions +recognized at or near the end of the reporting period. (AU § 334.08(e) and (g).) + +16. During the 2012 audit, Lopez was aware of several red flags indicating the possible +existence of unidentified related party transactions. In particular, in response to an audit +questionnaire, BRS claimed that there were no related party transactions in 2012, but Lopez knew +that response was not accurate because he was aware of recurring transactions with at least two +related parties from his work on prior BRS audits. Lopez also identified control deficiencies +concerning BRS’s authorization of payments, including Davis’s unrestricted ability to direct +payments. + +17. Despite his awareness of these red flags, Lopez did not take any audit steps during +the 2012 audit to identify whether material transactions were with related parties. Rather, Lopez +relied exclusively on BRS management to identify related party transactions and did not evaluate +BRS’s procedures for identifying related parties. In fact, BRS had no policies for identifying +related parties. + +18. In 2012, BRS paid Blackstone approximately $1.5 million – comprising +approximately 9.2% of BRS’s total operating expenses – making Blackstone one of BRS’s largest +vendors for the year. Yet, Lopez did not perform the relevant audit steps outlined in AU § 334 to +evaluate whether BRS’s payments to Blackstone, which were purportedly for “web site +optimization,” involved a related party. For example, Lopez did not review stockholder lists or +examine the nature of the transactions between BRS and Blackstone by reviewing the accounting +records for large transactions. Similarly, Lopez never requested or reviewed any contract between +BRS and Blackstone. + +19. Had Lopez conducted the relevant audit steps outlined in AU §§ 334.07 and 334.08, +he may have identified that these material transactions involved a corporation created, owned, and +controlled by BRS’s CEO and Chairman, Ray Davis. + +b. Respondents Also Failed to Conduct Appropriate Audit Steps for Known Related +Party Transactions + +20. For known related party transactions, the PCAOB standards required the auditor to +apply the procedures he or she considered necessary to obtain satisfaction regarding the purpose, +nature, and extent of the transactions and their effect on the client’s financial statements. The +procedures should be directed towards obtaining and evaluating sufficient appropriate evidence to +support BRS’s accounting treatment and were required to extend beyond simply an inquiry of +management. Specifically, the audit procedures that Respondents should have considered included: +obtaining an understanding of the business purpose of the transaction; examining invoices, +contracts, and other pertinent documents; determining whether the transactions had been approved +by the board of directors; and testing the amounts for reasonableness. (AU § 334.09.) + + 6 +21. For the BRS audit in 2012, Respondents knew about the related party transactions +involving Related Party A and were aware of significant red flags surrounding those transactions. +Yet, Respondents failed to take appropriate audit steps to understand their purpose, nature, or effect +on BRS’s financial statements and simply relied on BRS management’s representations. + +22. In particular, Lopez was aware that Davis approved the payments to Related Party A, +who he knew was related to Davis. Although BRS management disclosed in its notes to its +financial statements that Related Party A was paid for consulting services and for efforts selling +BRS securities to investors, Lopez knew that there was no written agreement outlining the services +to be provided by, or the fees to be paid to, this related party. Lopez also was aware that BRS’s +board of directors did not hold any board meetings in 2012, calling into question whether the board +had approved payments to Related Party A. + +23. Moreover, during the 2012 audit, Lopez conducted an analysis showing that BRS’s +consulting expenses had increased almost ten-fold from 2011 to 2012, including a three-fold +increase in expenses for Related Party A. Specifically, consulting expenses increased from +approximately $113,000 in 2011 to approximately $1.17 million in 2012 (approximately 7.2% of +BRS’s total operating expenses for the year). In both years, the majority of BRS’s consulting +expenses concerned Related Party A. The results of this analysis should have prompted Lopez to +conduct additional audit steps, including gathering additional evidence so that Lopez could +understand what caused such a significant increase in consultant expenses. Lopez, however, did not +complete any such steps. + +24. In fact, notwithstanding the red flags outlined above, Lopez failed to obtain any +invoices, contracts, or other documents related to payments from BRS to Related Party A. Lopez +never determined whether BRS’s board of directors had approved the payments. Again, Lopez +relied exclusively on BRS’s management to explain the nature of the payments to Related Party A, +noting in his audit work papers as part of substantive analytical procedures performed that: “Per +inquiry, the increase of consulting fee is mostly due to BRS utilized [Related Party A] more this +year to help out with investor relations. Appears reasonable as the revenue is not enough to cover +the operating expenses and company needs funding through out [sic] the year.” + +25. In short, Lopez failed to perform any of the audit procedures outlined in AU § +334.09, or any other procedures, and, thus, failed to obtain an adequate understanding of the +approximately $951,000 in 2012 consulting expenses for Related Party A—which comprised +approximately 7.7% of BRS’s net loss for that year. Accordingly, Respondents had no basis for +concluding that the consulting expenses regarding Related Party A were fairly presented in BRS’s +2012 financial statements. + +c. Other 2012 Audit Failures + +26. Respondents failed to comply with other PCAOB audit standards in connection with +their work on the 2012 BRS audit. + + 7 +27. Audit standard AU § 9334 provided that the risk associated with management’s +assertions about related party transactions is often assessed higher than many other types of +transactions because of the possibility that the parties to the transaction are motivated by reasons +other than those that exist for most business transactions. (AU § 9334.18.) That audit standard +further noted that, the higher the assessment of risk, the more extensive or effective the audit tests +should be. (AU § 9334.19.) In addition, AU § 9334 provided: “In assessing the risk of the related +party transactions the auditor obtains an understanding of the business purpose of the transactions. +Until the auditor understands the business sense of material transactions, he cannot complete his +audit.” (Id.) + +28. For significant risks, the PCAOB auditing standard § 13.11 explained that the auditor +should perform substantive procedures, including tests of details that are specifically responsive to +the assessed risks. (AS §13.11.) + +29. Respondents failed to comply with both AU § 9334 and AS § 13.11. Lopez did not +assess the audit risk associated with related party transactions at BRS as high during the 2012 audit +despite the fact that he was aware of the significant red flags described above, including the lack of +contracts and controls regarding management override of payments. Payments to Related Party A, +for example, could have been motivated by Davis’s desire to funnel money to a relative. Under +these circumstances, Respondents should have expanded procedures to obtain audit evidence +regarding the services Related Party A performed and how the amounts paid for each service were +determined. Had Lopez reviewed invoices from Related Party A, he would have seen that they only +generically described the services provided as “Consulting” or “Financial Services” with no other +details or descriptions of what services, if any, were performed or how the amounts invoiced were +determined. Respondents also failed to conduct audit steps that would have allowed them to +understand the nature of the transactions. + +30. Moreover, the PCAOB standards memorialized in AU § 329 provided that, when an +auditor performs substantive analytical review procedures, its expectations should be “precise +enough to provide the desired level of assurance that differences that may be potential material +misstatements, would be identified for the auditor to investigate.” (AU § 329.17.) The standards +also noted that expectations developed at a detailed level generally have a greater chance of +detecting misstatement of a given amount than do broad comparisons. (AU §§ 329.17 and 329.19.) +Accordingly, the auditor should evaluate significant unexpected differences, and management’s +responses should ordinarily be corroborated with other evidence. (AU § 329.21.) + +31. Respondents failed to comply with AU § 329. In particular, Respondents failed to +perform audit steps with sufficient precision to adequately evaluate unexpected differences, +including, for example, the significant increase in consulting expenses from 2011 to 2012 that was +identified through the analysis described above. For the same reason, Lopez also failed to +corroborate management’s assertions that significant payments for two related parties (Related +Party A and an entity associated with a BRS executive) were made for legitimate business purposes. +In fact, Lopez did not apply any substantive audit procedures at all. Rather, he only compared year- +over-year changes in total expenses. Establishing expectations and analysis of those changes at a + 8 +more precise level was required, however, in order for the analytics to be considered substantive +audit tests. + +32. Additionally, AS § 15 required that the auditor plan and perform audit procedures to +obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion. +(AS § 15.04.) Notably, as the risk in an audit increases, the amount of evidence that the auditor +should obtain also increases. Ordinarily, more evidence is needed to respond to significant risks. +(AS § 15.05.) + +33. Respondents did not obtain sufficient appropriate audit evidence in their 2012 audit +of BRS and therefore failed to comply with AS § 15. As noted, rather than gather evidence +sufficient to understand the above-described transactions, Lopez instead relied on management’s +assertions. + +34. Lastly, AU § 230 required auditors to exercise due professional care when +conducting an audit and preparing a report. (AU § 230.01.) Under AU § 230, auditors were +required to maintain an attitude of professional skepticism, which included “a questioning mind and +a critical assessment of audit evidence.” (AU § 230.07.) The standard noted that gathering and +objectively evaluating audit evidence required the auditor to consider the competency and +sufficiency of the evidence. (AU § 230.08.) + +35. By failing to gather and objectively evaluate audit evidence as described above, +however, Respondents also demonstrated their failure to conduct the 2012 BRS audit with due +professional care and an attitude of professional skepticism. Therefore, Respondents violated AU § +230. + +iv. Respondents Failed to Conduct the 2013 and 2014 BRS EQRs in Accordance with +PCAOB Standards +36. As noted, after serving as the engagement partner for the 2012 audit, Lopez served as +the EQR partner for both the 2013 and 2014 audits. In order to maintain the objectivity of the EQR +partner, PCAOB standards do not permit a person to serve as the EQR partner on an audit if they +served as the engagement partner on either of the two prior audits. (AS §7.8.) Thus, Respondents +failed to comply with AS § 7.8 in connection with the EQRs of the 2013 and 2014 BRS audits. + +E. VIOLATIONS + +37. 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. Section 4C of the Exchange Act and Rule +102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who is +found by the Commission to have engaged in improper professional conduct. Exchange Act +Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect to persons +licensed to practice as accountants. + 9 + +38. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly unreasonable +conduct in circumstances for which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct that indicate a lack of competence. + +39. Respondents’ failures in the 2012 BRS audit to abide by the applicable professional +standards concerning the identification of related party transactions and audit of known related party +transactions (articulated in AU §334 and AU § 9334) constitute multiple instances of highly +unreasonable conduct in circumstances that warranted heightened scrutiny. Those violations, +Respondents’ other failures during the 2012 audit to conform to applicable professional standards +(articulated in AU § 230, AU § 329, AS § 7, AS § 13, and AS § 15), and their failures in connection +with the EQRs for the 2013 and 2014 BRS audits (articulated in AS § 7) also constitute repeated +instances of unreasonable conduct. + +F. FINDINGS + +40. Based on the foregoing, the Commission finds that 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. + +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. LBB and Lopez are denied the privilege of appearing or practicing before the +Commission as accountants. + +B. After two (2) years from the date of this order, Lopez 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 Lopez’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 + 10 +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) Lopez, or the public accounting firm with which he is associated, is +registered with the Public Company Accounting Oversight Board (“PCAOB”) in accordance with +the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Lopez, 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 Lopez’s or the firm’s quality control system that would indicate that Lopez +will not receive appropriate supervision; + (c) Lopez 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) Lopez 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. +C. The Commission will consider an application by Lopez 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 +Lopez’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. +D. After two (2) years from the date of this order, LBB may request that the +Commission consider its reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the + 11 +Securities Exchange Act of 1934). Such an application must satisfy the Commission that LBB’s +work in its practice before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which it works or in some other +acceptable manner, as long as it practices before the Commission in this capacity; and/or +2. an independent accountant. + Such an application must satisfy the Commission that: +(a) LBB is registered with the PCAOB in accordance with the Sarbanes- +Oxley Act of 2002, and such registration continues to be effective. However, if registration with the +PCAOB is dependent upon reinstatement by the Commission, the Commission will consider the +application on its other merits; +(b) LBB hired an independent CPA consultant (“consultant”), who is not +unacceptable to staff of the Commission and is affiliated with a public accounting firm registered with +the PCAOB, that has conducted a review of LBB’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 LBB’s employees will not receive appropriate supervision. LBB agrees +to require the consultant, if and when retained, to enter into an agreement that provides that for the +period of review and for a period of two years from the completion of the review, the consultant shall +not enter into any employment, consultant, attorney-client, auditing or other professional relationship +with LBB, or any of its present or former affiliates, directors, officers, employees or agents acting in +their capacity. The agreement will also provide that the consultant will require that any firm with which +he/she is affiliated or of which he/she is a member shall not, without prior written consent of the staff, +enter into any employment, consultant, attorney-client, auditing or other professional relationship with +LBB, or any of its present or former affiliates, directors, employees, or agents acting in their capacity +as such for a period of two years after the review; +(c) LBB 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) LBB acknowledges its responsibility, as long as it appears or practices +before the Commission as an independent accountant, to comply with all requirements of the +Commission and the PCAOB, including, but not limited to, all requirements relating to registration, +inspections, engagement quality reviews and quality control standards. +E. The Commission will consider an application by LBB to resume appearing or +practicing before the Commission provided that its state CPA license is current and it has +resolved any disciplinary issues with the applicable state boards of accountancy. However, if +state licensure is dependent on reinstatement by the Commission, the Commission will consider +an application on its other merits. The Commission’s review may include consideration of, in + + 12 +addition to the matters referenced above, any other matter relating to LBB’s character, integrity, +professional conduct, or qualifications to appear before the Commission as an accountant. + Whether an application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + By the Commission. + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4117.txt b/raw/aaer/2020/AAER-4117.txt new file mode 100644 index 0000000000000000000000000000000000000000..26cd41bad6da5ba80edb52cdec345dbbd4cf68ee --- /dev/null +++ b/raw/aaer/2020/AAER-4117.txt @@ -0,0 +1,806 @@ + + + + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88287 / February 26, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4117 / February 26, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19710 + + + +In the Matter of + +RSM US LLP +(f/k/a/ McGladrey LLP), + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against RSM US LLP (“Respondent” or +“RSM”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to 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 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 certain deficiencies in RSM’s system of quality control for +staffing certain private investment fund financial statement audits for the calendar years ended +2013, 2014, and 2015. For each of those years, RSM performed audits of a series of private pooled +investment funds (“Private Funds”) managed by SBB Research Group, LLC (“SBB”), an SEC- +registered investment adviser (the “SBB Audits”).4 The Private Funds invested almost exclusively +in structured notes linked to equity indices and valued those investments for purposes of its +financial statements using a proprietary valuation model. Due to insufficient quality controls, +RSM failed to staff the SBB Audits with appropriate personnel with the necessary competence and +capabilities to perform the engagements in accordance with professional standards. The RSM +audit team, including assigned internal valuation specialists, lacked the appropriate competence +and capabilities to evaluate SBB’s valuation model and the resulting valuations of the structured +notes. As a result, RSM’s audit team repeatedly violated professional standards by failing to +properly assess, test, and document risks of material misstatement associated with SBB’s valuation +of the structured notes. + +2. In 2019, RSM resigned as the Private Funds’ auditor and recalled its previously +issued audit reports on the Private Funds’ financial statements. + + +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 This Order references the American Institute of Certified Public Accountants (“AICPA”) +standards in effect at the time of the 2013, 2014, and 2015 audits. These standards are +encompassed in the Generally Accepted Auditing Standards. + +3 + + +RESPONDENT +3. RSM US LLP (formerly known as McGladrey, LLP) (“RSM”), is an accounting +and advisory firm headquartered in Chicago, Illinois. Through approximately 80 offices across the +country, RSM provides audit, tax, and consulting services. RSM is registered with the Public +Company Accounting Oversight Board (“PCAOB”). + +OTHER RELEVANT PARTIES + +4. SBB Research Group, LLC (“SBB”), an Illinois limited liability company +headquartered in Northbrook, Illinois, is a registered investment adviser that provides investment +advisory services to pooled investment vehicles, private funds, and separately managed accounts. + +FACTS + +A. SBB’s Private Funds + +5. Since 2011, SBB has provided investment advisory services to the Private Funds. +SBB implemented similar investment strategies across the Private Funds with structured notes as +the primary investment.5 The notes had varying maturity dates but were generally tied to the +performance of the S&P 500 Index and the Russell 2000 Index. + +6. The Private Funds represented to prospective and existing investors, and to RSM, +that their financial statements were presented, and books of account were maintained, in +accordance with generally accepted accounting principles (“GAAP”) and that their investments +were record at fair value; which SBB 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.” + +7. ASC 820 sets forth a fair value measurement framework and defines fair value as +an “exit price,” 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 +ASC 820, fair value is a “market-based measurement, not an entity-specific measurement” and is +measured “using the assumptions that market participants would use when pricing the asset.” ASC +820-10-05-1B, 1C. + +8. From approximately December 2011 through November 2016, SBB used an +internally developed model to value the structured notes held by the Private Funds (the “Valuation +Model”). Contrary to GAAP, SBB knowingly used a valuation methodology and assumptions that +resulted in valuations that were inconsistent with the price a market participant would pay to +acquire the assets, and were therefore inconsistent with ASC 820. + +5 Structured notes are unsecured debt securities with payouts that depend on the values of +one or more underlying assets. The underlying assets can be individual stocks, indexes, or other +calculated values. Structured notes have a fixed maturity and include two components—a bond +component and an embedded derivative. + +4 + + + +9. The modifications introduced inappropriate bias into SBB’s model and inflated note +values and smoothed returns. Since structured notes constituted more than 90% of the Private +Funds’ assets, the Valuation Model materially overstated the Private Funds’ net asset value +(“NAV”) and fund performance, and increased SBB’s fees. + +10. To satisfy the Custody Rule,6 SBB retained RSM to audit the Private Funds’ +financial statements for years ended December 31, 2013, 2014, 2015, 2016, 2017, and 2018. RSM +completed audits for each year from 2013 through 2017. In each of these audited financial +statements distributed to investors, SBB represented that its financial statements were presented in +accordance with GAAP. During each audit, SBB’s management represented to RSM that they +prepared the financial statements in accordance with GAAP and that their structured notes were +stated at fair value (e.g. in accordance with ASC 820). + +11. RSM stated in each of the Private Fund audit reports for years ended December 31, +2013 through 2017 that its audits were conducted in accordance with generally accepted auditing +standards (“GAAS”) and opined that each of the Private Funds’ financial statements “present +fairly, in all material respects, the financial position of [the Private Funds] … in accordance with +accounting principles generally accepted in the United States of America.” + +B. RSM’s Staffing of the Private Fund Audits + +12. During the relevant time period through September 2016, RSM used the RSM Risk +Assessment Model (“MRAM”), an RSM-developed system to evaluate risk for new and continuing +engagements. The MRAM considered several risk-rating factors, such as industry, financial +condition, governance, management, control environments, size, complexity, and international +reach. The MRAM also identified potential risks of material misstatement, the need for the +involvement of subject matter experts, and other engagement risks. All new and continuing +engagements received a MRAM “score” ranging from 1 to 7, with scores between 5 and 7 +indicating high risk audit. The score indicated the required level at which RSM must obtain +approval to accept the engagement and the required staffing for the engagement. For example, all +engagements with scores of 5+ required a consultation with and approval by RSM’s National +Professional Standards Group (“NPSG”) Industry Leader and Financial Services Client +Acceptance, and Re-Evaluation Committee (“FSCAR”). The Private Funds engagements typically +received risk scores of 4 or 5. + + +6 The Custody Rule requires, among other things, that registered investment advisers with +custody of client assets maintain those funds and securities with a qualified custodian, who must +provide account statements to investors at least quarterly, and requires client assets to be verified +through an annual surprise examination by an independent public accountant. An adviser does +not have to comply with certain Custody Rule requirements if, in connection with a limited +partnership, it completes and distributes annual audited financial statements prepared in +accordance with GAAP to each limited partner within 120 days of the end of the partnership’s +fiscal year (the “Audit Exception”). See Rule 206(4)-2(b)(4) under the Advisers Act. + +5 + + +13. During the relevant period, RSM’s National Office of Risk Management +(“NORM”), in consultation with RSM’s Regional Professional Practice Office, maintained a list of +individuals by industry and engagement risk rating who were authorized to serve as engagement +partners, managers, and engagement quality reviewers for particular audits. + +14. Engagement Partner, a partner in RSM’s Financial Service Group, was assigned as +the engagement partner for all of RSM’s Private Fund audits. Although Engagement Partner was +authorized to work on audit engagements of all risk levels, prior to the Private Fund audits, +Engagement Partner had no experience auditing or valuing structured notes. In addition, the audit +team had virtually no experience auditing or valuing structured notes, which constituted more than +90% of the Private Funds’ total assets. RSM staffing policy at the time was not designed to +adequately address deficiencies in the audit team’s competence and capabilities regarding +structured note valuation. + +15. In planning each of the Private Fund audits, the audit team identified the valuation +of structured notes as a “significant risk” of a material misstatement and as involving “significant +accounting estimates with high estimation uncertainty.” Under AICPA’s standards for performing +risk assessment procedures related to accounting estimates, auditors should, among other things, +obtain an understanding of how management made its accounting estimates and the data on which +they were based, including: (i) the methods and model used in making fair value estimates; (ii) +relevant controls; (iii) the assumptions underlying the fair value estimates; and (iv) whether there +had been any changes from the prior period in the methods or assumptions for making fair value +estimates. AU-C § 540.08.7 And because the audit team identified SBB’s accounting estimates as +a “significant risk,” the audit team should have evaluated how SBB considered alternative +assumptions or outcomes and why it had rejected them and whether SBB’s assumptions were +reasonable. AU-C § 540.15. + +16. RSM’s Audit Policies, modeled after AU-C § 540.13, provided for three methods +of testing the fair value of an investment security when, like SBB’s approach, the fair value is +determined based on a model: (i) “Subsequent Events and Transaction” Approach (determining +whether events occurring up to the date of the auditor’s report provide audit evidence regarding the +fair value estimate); (ii) “Test Management’s Method” Approach (testing how management made +the fair value estimate, the data on which it is based, and the model’s assumptions and +methodology); and (iii) “Independent Estimate” Approach (developing a point estimate or range to +evaluate management’s point estimate). + +C. 2013 Private Fund Audits + +17. For the 2013 Private Fund audits, RSM used the Independent Estimate approach to +test the reasonableness of SBB’s fair value estimates. The third-party valuation provider’s +software that RSM utilized to perform this approach, however, was only approved by RSM for +assets valued using “Level 1” and “Level 2” inputs, not for assets that were valued using “Level 3” + +7 AU-C § 540, titled “Auditing Accounting Estimates, Including Fair Value Accounting +Estimates, and Related Disclosures,” addresses the auditor’s responsibilities relating to fair value +accounting estimates. + +6 + + +inputs, such as the structured notes owned by the Private Funds.8 SBB had mischaracterized the +Private Funds’ structured notes as “Level 2” in its financial statements, and the audit team, +including the assigned valuation specialists, did not uncover this mischaracterization, in part due to +the team’s inexperience with the assets and lack of understanding of SBB’s valuation techniques. + +18. The audit team priced each SBB structured note using a third-party valuation +service provider’s valuation software, and compared, on a note-by-note basis and a fund basis, the +third party’s fair value estimate against SBB’s fair value estimate. The audit team concluded that +SBB’s estimates appeared reasonable because the variance between the third-party estimate and +SBB’s estimate fell below RSM’s internal allowable variance threshold. + +19. The audit team, however, failed to obtain an understanding of the inputs, methods, +and assumptions underlying the Valuation Model, as required by AU-C § 540.08. No one assigned +to the audit had the appropriate competence and capabilities to evaluate the Valuation Model. As +discussed above, SBB’s valuation policy clearly reflected that SBB was eschewing industry +standards and that its inputs and methodologies were inconsistent with the valuation practices of +market participants. Moreover, the results of RSM’s Independent Estimate testing showed that +SBB’s Valuation Model consistently valued the structured notes higher than the third-party +valuation service provider, revealing potential inappropriate bias in the model. + + + +8 Whereas Level 2 inputs are observable, Level 3 inputs are unobservable. Unobservable inputs +are 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. See ASC 820. + +7 + + +D. 2014 Private Fund Audits + +20. Like the 2013 audits, RSM began the 2014 audits using the Independent Estimate +approach and priced the SBB’s structured notes through the same third-party valuation service +provider that had been used in connection with the 2013 audits. This time, the variance between +the third-party’s estimate and SBB’s estimate exceeded, on a fund level, RSM’s allowable variance +threshold for three of the Private Funds. The SBB’s estimates were uniformly higher than the +third-party’s estimates. + +Fund SBB Value Third-Party +Value +Variance $ Variance % RSM +Allowable +Variance +Threshold +Fund I $48,661,637 $46,060,824 $2,600,814 5.34% $858,299 +Fund II $21,346,747 $20,058,901 $1,287,846 6.00% $311,298 +Fund III $15,069,189 $14,353,902 $715,286 4.75% $353,023 + +21. Under RSM’s Audit Policies, unresolved valuation variances exceeding firm +thresholds may indicate that the financial statements are materially misstated and must be +documented in the work papers. The audit team was unable to resolve the differences in valuation. +The audit team consulted with RSM’s NPSG, which is responsible for RSM’s audit training, for +preparing audit manuals and audit programs, and for providing audit guidance to engagement +teams. After the consultation, the audit team switched to a Test Management’s Method approach. + +22. Under RSM’s Test Management’s Methods approach, consistent with AU-C § +540.13, the auditor should evaluate whether the valuation model is appropriate, management’s +inputs are sufficiently reliable, and assumptions are reasonable. To be reasonable, management’s +assumptions should reflect and be consistent with “what knowledgeable, willing arm’s length +parties (sometimes referred to as market participants or equivalent) would use in determining fair +value when exchanging an asset.” AU-C § 540.A33 (emphasis in original). The Test +Management’s Methods approach would also require consideration as to whether specialized skills +or knowledge is required in order to obtain sufficient appropriate audit evidence. See AU-C § +620.07 (“If expertise in a field other than accounting or auditing is necessary to obtain sufficient +appropriate audit evidence, the auditor should determine whether to use the work of an auditor’s +specialist.”) + +23. Here, Engagement Partner concluded that Engagement Partner lacked the +competence and capabilities to adequately assess the reasonableness of SBB’s Valuation Model +inputs and assumptions and that a valuation specialist was necessary to obtain sufficient +appropriate audit evidence to evaluate whether SBB’s inputs and assumptions were reasonable and +appropriately supported. + +24. At the time, RSM lacked sufficient quality controls, policies, and procedures for +staffing internal valuation specialists on audits and lacked sufficient firm oversight to provide +reasonable assurance that the assigned valuation specialists possessed the necessary competence +and experience to render reasonableness opinions on particular products or classes of securities at + +8 + + +issue in the audit. Instead, it was incumbent upon each individual valuation specialist to determine +whether he/she had the requisite competence and experience to work on a particular engagement. +And it was incumbent upon the audit team to find a specialist with the competencies and +capabilities that were necessary and appropriate in the individual engagement circumstances. + +25. With the audit deadline 13 days away, a member of the audit team sent an email to +Valuation Specialist 1, who at the time was a valuation manager, asking if he had any experience +with structured notes, and explaining that SBB estimates fair value using pricing models that take +into account various terms that were laid out in the email. Valuation Specialist 1 said that he did. +In documenting its satisfaction with Valuation Specialist 1’s qualifications, reputation, and +objectivity, the audit team stated: “He has several years of industry experience prior to joining +[RSM]. He has been with the firm for 10.5 years and is a manager.” + +26. In reality, Valuation Specialist 1 had no experience with structured notes: he had +never valued a structured note or assessed the reasonableness of a structured note pricing model. +Valuation Specialist 1’s experience with options valuation was limited to assessing the +reasonableness of employee stock ownership plans valuations. Valuation Specialist 1 lacked the +competence and capabilities to evaluate the reasonableness of SBB’s assumptions and therefore +could not properly assess whether the assumptions were reasonable in light of the measurement +objectives, such as (1) whether SBB’s assumptions were consistent with observable market +assumptions, (2) whether SBB incorporated market-specific inputs into the development of its +assumptions, (3) how SBB selected certain assumptions which deviated from the assumptions of +market participants, and (4) the characteristics of market participants relevant to the accounting +estimate. AU-C § 540.A83-84. + +27. Compounding Valuation Specialist 1’s lack of experience and competence on the +2014 Private Fund audits was the fact that Valuation Specialist 2, who was assigned to review +Valuation Specialist 1’s work, also had no experience valuing structured notes and had never +worked on an audit involving structured notes. + +28. Valuation Specialist 1 was unfamiliar with, and in some cases misunderstood, +several of SBB’s valuation techniques and assumptions, which jeopardized his and the audit team’s +ability to assess the reasonableness of SBB’s valuation assumptions, possible inappropriate +management bias, the reliability of SBB’s inputs, and the appropriateness of SBB’s valuation +methodology. + +29. Instead of evaluating significant inputs and assumptions, Valuation Specialist 1 and +the audit team focused exclusively on SBB’s volatility input, based on Valuation Specialist 1’s +assumption that the volatility input that would be the primary driver of the overall valuation. +Valuation Specialist 1 did not perform any analysis of other non-standard inputs in SBB’s model +that increased and smoothed returns. + +30. Because Valuation Specialist 1 had never seen anything like SBB’s volatility +calculation—nor had four other RSM valuation specialists consulted on the Private Fund audits— +Valuation Specialist 1 asked SBB for additional support for management’s atypical method of + +9 + + +calculating volatility, including academic or theoretical support for the method, but management +did not have any support for its method of determining volatility. + +31. Valuation Specialist 1 and the audit team, after consultation with the NPSG and +managers in RSM valuation group, conducted two tests to assess the reasonableness of SBB’s +volatility input. Under applicable AICPA standards, auditors should obtain sufficient appropriate +audit evidence to reduce audit risk to an acceptably low level and to enable the auditor to draw +reasonable conclusions on which to base the auditor’s opinion. AU-C § 200.19, § 500.06. The +tests failed to provide the audit team with sufficient appropriate audit evidence of the +reasonableness of SBB’s valuations. Nevertheless, Valuation Specialist 1 concluded based solely +on the two flawed volatility tests that SBB’s “methodologies are appropriate and the assumptions +appear to be reasonable” and that SBB’s note valuations “are reasonable.” Valuation Specialist 1’s +work was reviewed and approved by Valuation Specialist 2. + +32. The audit team relied on Valuation Specialist 1’s assessment of the reasonableness +of the assumptions and the appropriateness of the methods used by SBB and their application in +concluding that SBB’s note valuations were reasonable. + +E. 2015 Private Fund Audits + +33. The audit team and Valuation Specialist 1 performed similar audit procedures to +assess the reasonableness of SBB’s fair value estimates for the 2015 Private Fund audits. + +34. The audit team, in consultation with Valuation Specialist 1, again designed no audit +procedures to assess the reasonableness of certain significant assumptions, the reliability of certain +of SBB’s inputs, or the appropriateness of certain of SBB’s methods. Like the 2014 audits, they +focused on testing one input, volatility, to assess the reasonableness of SBB’s fair value estimates. +The volatility testing suffered from the same deficiencies as in 2014. + +35. Based on the volatility testing alone, Valuation Specialist 1 concluded that SBB’s +valuation methodologies and key assumptions appeared reasonable. Valuation Specialist 1’s work +was reviewed and approved by Valuation Specialist 2. + +36. Once again, Valuation Specialist 1 and the audit team failed to sufficiently +understand or evaluate the reasonableness of SBB’s valuation assumptions, the reliability of SBB’s +inputs, and the appropriateness of SBB’s methods. Nevertheless, Valuation Specialist 1 concluded +that SBB’s “methodologies are appropriate and the assumptions appear to be reasonable” and that +SBB’s note valuations “are reasonable.” + +37. The audit team relied on Valuation Specialist 1’s assessment of the reasonableness +of the assumptions and the appropriateness of the methods used by SBB and their application and +relied on Valuation Specialist 1’s conclusion that SBB’s note valuations were reasonable. + +10 + + + +F. 2016 and 2017 Private Fund Audits + +38. RSM, citing the SEC’s pending enforcement investigation, delayed completing the +2016 and 2017 Private Fund audits until May 2018. During that time gap, RSM also became +aware of an SEC exam deficiency letter issued to SBB citing numerous flaws in SBB’s Valuation +Model, fair valuation estimates, and net asset values and fees calculated based on those estimates. + +39. Beginning in December 2016, SBB abandoned its Valuation Model and retained a +third-party valuation service provider (“Provider”) to value its structured notes. Provider generated +retrospective note valuations, on a monthly basis, for all structured notes held by the Private Funds +from January 2013 through November 2016. Provider’s valuations were uniformly lower than +SBB’s valuations. + +40. Upon receiving Provider’s valuations, RSM evaluated the materiality of SBB’s +revised valuations to determine whether the Private Funds’ prior financial statements were +materially misstated. For nearly all of the Private Funds, the difference between Provider’s values +and SBB’s values exceeded RSM’s quantitative materiality thresholds. + +41. Despite the fact that SBB’s revised note valuations resulted in reduced NAVs that +exceeded RSM’s quantitative materiality thresholds for nearly all the Private Funds in 2014 and +2015, RSM concluded that restatement of prior periods was unnecessary. + +G. RSM Resigns and Recalls its Prior Private Fund Audit Reports + +42. On April 12, 2019, weeks before the close of the 2018 Private Fund audits, RSM +resigned as the Private Funds’ auditor and recalled its 2013 through 2017 Private Fund audit +reports. RSM, citing multiple inconsistencies between (i) what SBB’s management communicated +to RSM during prior audits, and (ii) documents and testimony management provided to the SEC in +connection with an enforcement investigation, concluded that it could “no longer rely on +management representations” and resigned as the Private Funds’ auditor. Specifically, + + SBB witnesses testified that they believed they had communicated to RSM the +criticisms the SEC’s exam staff raised with SBB’s proprietary model in a timely +manner. RSM claimed this was not accurate. SBB did not disclose the exam +staff’s (1) October 2014 concerns or (2) March 2016 deficiency letter until +December 2016. + + SBB was providing different sets of performance figures to existing and potential +investors during the same time period in which SBB represented to RSM that SBB +“had not implemented another [valuation] model.” + + SBB’s model was not designed to be GAAP compliant or reflect an exit price for +the structured notes. + + +11 + + + SBB never disclosed to RSM that at least two different consulting firms expressed +significant concerns about the reasonableness of SBB’s proprietary model. The two +consulting firms shared several of the concerns expressed by the SEC exam team to +SBB in October 2014. This is further evidence that SBB knew its model was not +GAAP-compliant, contrary to SBB’s representations to RSM. + +43. Because RSM could no longer rely on management representations, it recalled all +of the audit reports it prepared for SBB and the Private Funds. + +RSM’s VIOLATIONS OF PROFESSIONAL STANDARDS + +44. The American Institute of Certified Public Accountants (“AICPA”) established +Quality Control standards for public accounting firms’ accounting and auditing practice. QC § 10. +A system of quality control consists of policies designed to achieve the following objectives and +the procedures necessary to implement and monitor compliance with those policies. QC § 10.04. +The objective of a public accounting firm is to establish and maintain a system of quality control to +provide it with reasonable assurance that (1) the firm and its personnel comply with professional +standards and applicable legal and regulatory requirements and (2) reports issued by the firm are +appropriate in the circumstances. QC § 10.12. In relevant part, a firm should establish policies and +procedures requiring that the engagement partner has the appropriate competence and capabilities +to perform the role. QC § 10.33. In addition, a firm should establish policies and procedures for +the acceptance and continuance of client relationships and specific engagements, designed to +provide the firm with reasonable assurance that the firm will undertake engagements only where, +among other things, it is competent to perform the engagement and has the capabilities, including +time and resources, to do so. QC § 10.27. A firm should also 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 and to enable the firm to issue reports that are appropriate in the circumstances. +QC § 10.34. This includes consideration of the team’s technical knowledge and experience. +QC § 10.A31. As a result of the conduct described above, RSM failed to meet the standards that +required competence and proficiency in client acceptance and continuance, staffing, and +supervision on the Private Fund audits. +VIOLATIONS +45. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides that the +Commission may censure a person or deny a person the privilege of appearing or practicing before +the Commission, if it finds that such person has engaged in improper professional conduct. +Improper professional conduct includes either of the following two types of negligent conduct: (i) +a single instance of highly unreasonable conduct that results in a violation of applicable +professional standards in circumstances in which an accountant knows, or should know, that +heightened scrutiny is warranted; or (ii) repeated instances of unreasonable conduct, each resulting +in violations of applicable professional standards, that indicate a lack of competence to practice +before the Commission. Rule 102(e)(1)(iv)(B)(1) and (2). RSM engaged in improper professional +conduct as defined in Rule 102(e)(1)(iv). + +12 + + +FINDINGS + +46. Based on the foregoing, the Commission finds that RSM engaged in improper +professional conduct within the meaning of Exchange Act Section 4(C)(a)(2) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +RSM’s REMEDIAL EFFORTS + +47. In determining to accept the Offer, the Commission considered remedial efforts +undertaken by RSM to review and evaluate the sufficiency and adequacy of RSM’s quality +controls and policies and procedures regarding: (1) client acceptance / risk evaluation; (2) rating +and assignment of specialists; (3) auditor oversight of specialists, including planning, +communication, and documentation; (4) valuation training; and (5) exercise of professional due +care relating to audits of fair value measurements and disclosure of financial and non-financial +assets. In particular, RSM (i) performed an internal review and evaluation of the sufficiency and +adequacy of certain quality controls, policies, and procedures for audits of private funds within its +financial services practice, (ii) made certain enhancements to its quality controls, policies, and +procedures, including enhancements that have been implemented since April 2016, and (iii) +proposed additional initiatives (collectively, the “RSM Enhancements”). The undertakings set +forth below are designed to test the effectiveness, post-implementation, of the RSM Enhancements +and to ensure that RSM’s quality controls, including the RSM Enhancements, are designed to +provide reasonable assurance of compliance with Commission regulations and PCAOB standards +and rules. + +UNDERTAKINGS + +48. Respondent RSM undertakes to complete the following actions: + +1. Notification. RSM shall provide all audit personnel a copy of this Order within +ten (10) business days after entry of the Order. + +2. RSM Policies Report and Validation Plan. + +Within one hundred eighty (180) days after the entry of this Order, RSM shall +submit to the Commission staff a report (the “RSM 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 RSM’s quality controls and its audit and interim review +procedures regarding the subject areas specified below (hereinafter referred to +as “Specified RSM Policies”). The RSM Policies Report shall also describe in +reasonable detail RSM’s methodology and work plan, including the internal +quality inspection processes administered by RSM, to review, test, and assess +whether the Specified RSM 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 + +13 + + +in the RSM Policies Report and Validation Plan, and RSM agrees to provide +such evidence. The Validation Plan, not unacceptable to the Commission staff, +shall describe RSM’s review, testing, and assessment of the following Specified +RSM Policies: + +a. Staffing evaluation and decision-making as part of the client acceptance and +continuance process for audits of SEC registrants and private funds within +RSM’s Financial Services Practice, including policies and procedures +designed to provide reasonable assurance that (i) the engagement partner +has the competence and capabilities to perform the role based on the nature +of the client engagement (e.g., industry, balance sheet items/asset classes, +significant risks), and (ii) such engagements are staffed with appropriate +personnel with the necessary competence and capabilities to perform the +engagements; + +b. Identification of the need for assignment and the actual assignment of +valuation specialists to engagements for audits of SEC registrants and +private funds within RSM’s Financial Services Practice, including policies +and procedures designed to provide reasonable assurance that assigned +valuation specialists have the necessary competence, capabilities, technical +knowledge, and experience to perform such engagements; and + +c. Professional education in engagement staffing and in working with, and +reviewing and evaluating the work of, such valuation specialists. + +3. Validation Report and Certification. + +a. Validation Report. Within two hundred seventy (270) days after the +issuance of the RSM Policies Report and Validation Plan, RSM shall +submit to the Commission staff a written report setting forth a description of +the testing, analysis, and results of its Validation Plan (“Validation +Report”). In particular, the Validation Report shall describe (i) the results of +the processes identified in Paragraph 48.2 as they relate to the Specified +RSM Policies identified in the RSM Policies Report, (ii) any deficiencies +involving the Specified RSM Policies identified as a result of such +processes, and (iii) any remedial actions taken in response thereto. + +b. Validation Certification. The Validation Report shall include a certification +executed by RSM’s (i) Chief Risk Officer and (ii) National Audit Leader +that the Specified RSM Policies are designed to provide reasonable +assurance of compliance with Commission regulations and PCAOB +standards and rules, and if significant deficiencies in the design or operation +of the Specified RSM Policies are identified, shall report such significant +deficiencies to the Commission staff (“Validation Certification”). The +Commission staff may make reasonable requests for further evidence of +compliance, including the testing results, and RSM agrees to provide such + +14 + + +evidence. If RSM identifies significant deficiencies that are not remediated +as of the date of the Validation Report and Certification (“Unremediated +Specified Policies”), RSM shall state that it cannot certify compliance as to +those Unremediated Specified Policies but shall otherwise certify +compliance as to all other Specified RSM Policies. If RSM can certify +compliance as to all Specified RSM Policies, then no further validation or +certification is necessary pursuant to these Undertakings provided that there +are no objections from the Commission staff within ninety (90) days of +receipt of the Validation Certification. + +4. Remediation Plan. In the event that RSM cannot certify compliance pursuant to +Paragraph 48.3.b above as to all Specified RSM Policies, then, within ninety +(90) days after the issuance of the Validation Report and Certification, RSM +shall submit to the Commission staff a plan not unacceptable to the +Commission staff: (a) to review, test, and assess, where applicable, including +through the internal quality inspection processes administered by RSM, whether +the Unremediated Specified 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 schedule of remedial +measures to correct the Unremediated Specified Policies (collectively, the +“Remediation Plan”). + +5. Remediation Report and Certification. + +a. Remediation Report. Within two hundred seventy (270) days after the +issuance of the Remediation Plan (if one is required under Paragraph 48.4), +RSM shall submit to the Commission staff a written report setting forth a +complete description of the testing, analysis, and results, where applicable, +of its Remediation Plan (“Remediation Report”). In particular, the +Remediation Report shall describe (i) the results of the processes identified +in Paragraph 48.4 as they relate to the Unremediated Specified Policies +identified in the RSM Policies Report, and (ii) any remedial actions taken in +response thereto. + +b. Remediation Certification. The Remediation Report shall include a +certification executed by RSM’s (i) Chief Risk Officer and (ii) National +Audit Leader that, as of the date of the Remediation Report, the +Unremediated Specified Policies are designed to provide reasonable +assurance of compliance with Commission regulations and PCAOB +standards and rules, and if significant deficiencies in the design or operation +of the Unremediated Specified Policies are identified, shall report such +significant deficiencies to the Commission staff (“Remediation +Certification”). The Commission staff may make reasonable requests for +further evidence of compliance, including the testing results, where +applicable, and RSM agrees to provide such evidence. If RSM identifies +significant deficiencies that are not remediated as of the date of the + +15 + + +Remediation Report and Certification, RSM shall state that it cannot certify +compliance. If RSM can certify compliance, then no further validation or +certification is necessary pursuant to these Undertakings, provided that there +are no objections from the Commission staff within ninety (90) days of +receipt of the Remediation Certification. + +6. Subsequent Remediation Plans, Reports, and Certifications. In the event that +RSM cannot certify compliance pursuant to Paragraph 48.5.b above, RSM shall +repeat the undertakings described in Paragraphs 48.4 and 48.5 annually until +such time that no Unremediated Specified Policies are identified. + +7. Internal Team Leader. RSM 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, or his/her successor as approved the SEC staff, +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 RSM +controls subject to review not unacceptable to Commission staff. The ITL shall +also oversee testing. The ITL shall engage RSM 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. RSM shall provide the ITL +with staffing and other resources as necessary to accomplish these undertakings +in a timely manner. RSM shall not obstruct the ITL in the execution of his or +her duties 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, RSM personnel, and/or meetings with RSM, 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 RSM any questions regarding the Reports, Plans, or +Certifications, and RSM agrees to address all such questions 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 +Jeffrey A. Shank, Assistant Regional Director, Securities and Exchange +Commission, 175 W. Jackson Blvd., Suite 1450, Chicago, IL 60604, or such +other address as the Commission may provide, with a copy to the Office of +Chief Counsel of the Enforcement Division (the “Designees”). RSM 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 + +16 + + +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, Plans, +Certifications, and other documents, 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 is required in furtherance of the +Commission’s discharge of its duties and responsibilities, or (d) is otherwise +required by law. + +9. Satisfaction of Undertakings. Unless otherwise notified by the Division of +Enforcement, these undertakings are deemed satisfied ninety (90) days after +RSM’s submission of a certification of compliance pursuant to Paragraphs +48.3.b, 48.5.b, or 48.6. + +10. Recordkeeping. RSM 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 RSM’s Offer, the +Commission has considered these undertakings. RSM agrees that if the +Division of Enforcement believes that RSM has not satisfied these +undertakings, it may petition the Commission to reopen the matter to determine +whether additional sanctions are appropriate. + +49. Cooperation with the Commission’s Investigation and Related Litigations. RSM +(including its partners, principals, officers, agents, and employees) shall cooperate fully with the +Commission in any and all investigations, litigations, administrative and other proceedings +commenced by the Commission or to which the Commission is a party relating to or arising from +the matters described in this Order. In connection with such investigation, litigation, +administrative or other proceedings, RSM: (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, facsimile transmission, or email of notices or subpoenas issued by the Commission for +documents or testimony at depositions, hearing, or trials, or in connection with any related +investigation by Commission staff; (iii) appoints counsel Christopher Kearney of Keker Van Nest +& Peters, 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 Procedures and any applicable local rules, provided that the party requesting the +testimony reimburses RSM’s travel, lodging, and subsistence expenses at the then-prevailing U.S. +Government per diem rates; and (v) consents to personal jurisdiction over RSM in any United + +17 + + +States District Court for purposes of enforcing any such subpoena. The foregoing obligations are +subject to RSM’s reservation of rights (i) to claim that documents or information requested are +subject to appropriate and applicable evidentiary objections and privileges, including the attorney- +client privilege, attorney work product protection, or other applicable privileges or protections, and +(ii) to seek entry of a confidentiality order as to sensitive business documents or information, +sensitive personnel documents or information, or other confidential information (including +information pertaining to clients other than the client identified in this Order). + +50. In determining whether to accept RSM’s Offer, the Commission has considered the +undertakings in Paragraphs 48 and 49. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent RSM’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. RSM is censured; and + +B. RSM shall comply with the undertakings enumerated in paragraph 48 above. + + +By the Commission. + + + + Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4118.txt b/raw/aaer/2020/AAER-4118.txt new file mode 100644 index 0000000000000000000000000000000000000000..7896019e9e29ffe49aaf7210904a693c6470fcd6 --- /dev/null +++ b/raw/aaer/2020/AAER-4118.txt @@ -0,0 +1,385 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88303 / February 28, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4118 / February 28, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19718 + + + +In the Matter of + +Cardinal Health, 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 Cardinal Health, Inc. (“Cardinal” 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 Cardinal’s violations of the internal accounting +controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 (the +“FCPA”) through the operations of its former subsidiary in China. + +2. In November 2010, Cardinal entered the Chinese market by acquiring the +Chinese subsidiaries of an established pharmaceutical distribution company. Cardinal +rebranded the acquired entities as “Cardinal China” after the acquisition. Prior to the +acquisition, the pharmaceutical distribution company had longstanding distribution agreements +with a number of global manufacturers of prescription medications, medical devices, and +consumer health products. + +3. In addition to its role as a distributor for the products sold by its business partners, +Cardinal China also operated and maintained on its own books, financial accounts that certain +distribution customers used to fund their operations and marketing efforts in China. These +accounts largely consisted of excess distribution margin that Cardinal China generated from +distributing customers’ products, and Cardinal China was obligated to return these funds to the +customers in accordance with its contractual agreements. Cardinal China authorized and made +payments from these marketing accounts as directed by the employees of its distribution +customers. + +4. After it was acquired by Cardinal, Cardinal China terminated most of the +marketing accounts due in part to known FCPA-related compliance risks associated with +channeling the marketing expenses of third parties through its own books and records. But +despite these risks, until 2016, Cardinal China maintained and operated marketing accounts +for a European supplier of non-prescription, over-the-counter dermocosmetic products for +which Cardinal China served as the exclusive product distributor in China. + +5. In addition to maintaining and operating marketing accounts for the +dermocosmetic company, Cardinal China also formally employed approximately 2,400 +employees for the dermocosmetic company pursuant to an administrative and HR services +agreement. The 2,400 employees reported to the dermocosmetic company, and while Cardinal +China administratively managed the employees pursuant to its contractual agreement, it did not +supervise their day-to-day activities. Most of these employees were beauty assistants and +supervisors, who worked in retail stores and interacted with individual consumers. The remaining +approximately 100 employees were sales, marketing, management, and back office employees. +The sales and marketing employees were responsible for marketing and selling 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 +dermocosmetic company’s products in China, and regularly drew down funds from the marketing +accounts to pay third parties for marketing-related expenses. + +6. Although Cardinal determined that other marketing accounts should be +terminated because of their significant FCPA-related compliance risks, Cardinal +inaccurately assessed the risks of the arrangements with the dermocosmetic company as +minimal. Cardinal thus did not apply its full internal accounting controls to these accounts, or +to the conduct of the marketing employees Cardinal China employed for the company. +Cardinal China regularly authorized and made payments from the marketing accounts at the +direction of the dermocosmetic company without controls sufficient to provide reasonable +assurance that the transactions were executed in accordance with management’s general or +specific authorization, and failed accurately to record on its books and records payments made +from the accounts. + +7. In 2016, Cardinal China learned that the marketing employees and the +dermocosmetic company had hidden the purpose of certain purported marketing payments, +which were redirected to healthcare professionals who provided marketing services to the +dermocosmetic company, and to other employees of state-owned retail entities who had +influence over purchasing decisions related to the dermocosmetic company’s products. Upon +learning of the misconduct, Cardinal and Cardinal China took action to cease these payments in +2016. + +8. Cardinal benefitted from its arrangement with the dermocosmetic company. +As the company’s exclusive distributor in China, Cardinal China directly profited from the +distribution, administrative, and HR services it provided to the dermocosmetic company, and +Cardinal was unjustly enriched by approximately $5,400,000 between March 1, 2013, and +December 31, 2016, as a result of its deficient internal accounting controls relating to the +marketing accounts. + +Respondent + +9. Cardinal is a global, integrated healthcare services and products company, +incorporated and headquartered in Ohio, specializing in the distribution of pharmaceuticals and +other medical products. Cardinal’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. Cardinal +operates in forty-six countries and has over 50,000 employees worldwide. + +10. Between November 2010 and February 2018, Cardinal China was owned and +controlled by Cardinal, and distributed pharmaceuticals, medical devices, and consumer health +products into the Chinese market. Cardinal China’s books and records were consolidated into +Cardinal’s financial statements. + + + + + +4 +Facts + +Cardinal China Failed to Implement Sufficient Controls Over Marketing Accounts it +Administered and Marketing Employees that it Hired on Behalf of a Customer + +11. Between 2010 and 2016, Cardinal China acted as the exclusive distributor in the +Chinese market for a large European dermocosmetic company. As part of its commercial +agreement with the company, Cardinal China administered marketing accounts on the +company’s behalf. As part of an administrative and HR service agreement with the +dermocosmetic company, Cardinal Health also retained approximately 2,400 employees on the +company’s behalf. Most of these employees were beauty assistants and supervisors, who worked +in retail stores and interacted with individual consumers. The remaining approximately 100 +employees were sales, marketing, management and back office employees. The sales and +marketing employees were responsible for promoting the sale of the dermocosmetic company’s +products and interacted with employees of state-owned hospitals and retailers. + +12. Although the marketing employees were managed day-to-day by, and reported to +the dermocosmetic company, Cardinal China entered into employment contracts with the +marketing employees, administered their payroll, and assumed other human resource and +administrative functions for them. Because Cardinal China received a distribution margin +from the sales of the dermocosmetic company’s products, Cardinal China profited from the +marketing employees’ successful marketing efforts, including through improper payments made +from the marketing accounts. + +13. Despite these facts, Cardinal assessed the risk of the arrangements with the +dermocosmetic company as minimal, and as a result, Cardinal China did not subject the +marketing employees, who it employed on behalf of the dermocosmetic company, to its full +internal accounting controls, such as providing FCPA and anti-bribery training, or providing any +oversight of their interactions with third parties in China. In addition, as Cardinal China knew +from its business arrangement with the dermocosmetic company, a large portion of the marketing +employees conducted some of their business using e-mail accounts and computer systems that +belonged to the dermocosmetic company and were inaccessible to Cardinal’s and Cardinal +China’s compliance personnel, and Cardinal China had no ability to review the full scope of the +marketing employees’ activities. + +14. From at least March 2013 through December 2016, Cardinal failed to apply +sufficient internal accounting controls to the marketing employees and the marketing accounts. +For example, Cardinal China executed payments requested by the marketing employees without +requiring sufficient supporting documentation to verify the purpose of the transactions. Over the +four-year period from 2013 through 2016, Cardinal China authorized and paid more than $250 +million from the marketing accounts, but had insufficient policies and procedures in place +concerning the payments. + +15. Without the authorization of Cardinal’s management, Cardinal China, at the +request of the marketing employees, regularly made payments from the marketing accounts that +were improperly redirected to government-employed healthcare providers and employees of +Chinese state-owned retailers to promote the sale of the dermocosmetic company’s products. + +5 +The improper payments took varied forms, including cash, luxury goods, gift cards, and travel. + +16. Due to Cardinal’s insufficient internal accounting controls, the marketing +employees were able to easily disguise these payments by channeling funds through complicit +third-party vendors and by characterizing transactions with healthcare providers as payments to +printing companies for “production fees,” and they were also reimbursed for high-value gifts +based on falsified or incomplete documentation. + +Cardinal Did Not Properly Evaluate Red Flags and Failed to Resolve Known +Internal Control Deficiencies + +17. At the time that it operated the marketing accounts on behalf of the +dermocosmetic company, Cardinal and Cardinal China were aware of the compliance risks posed +by marketing accounts in China. + +18. Shortly after it acquired Cardinal China in November 2010, Cardinal determined +that Cardinal China’s practice of administering marketing accounts for its suppliers created +excessive FCPA-compliance risks because the accounts could be used by suppliers to facilitate +surreptitious payments to government officials without Cardinal China’s knowledge. By July +2011, Cardinal directed Cardinal China to wind down all of its pharmaceutical marketing +accounts due to these risks. Nevertheless, Cardinal China continued to administer marketing +accounts for certain large suppliers for several years. + +19. After it was acquired by Cardinal, on at least two occasions, Cardinal China +abruptly terminated third-party marketing accounts amid allegations that they had been used +to facilitate improper payments: + Cardinal China terminated a marketing account it administered for an +Italian pharmaceutical manufacturer after receiving an internal report in 2012 +that Chinese authorities had fined the Chinese subsidiary of the Italian +pharmaceutical manufacturer for violating China’s Pharmaceutical +Administration Law by providing certain benefits to hospitals. + + Cardinal China terminated a marketing account it administered for a U.K.- +based pharmaceutical manufacturer after Cardinal’s CEO received an internal +report in 2013 alleging that Cardinal China employees were using the account +to bribe employees of China’s Center for Disease Control. + +20. Despite these events, Cardinal failed to assess whether Cardinal China followed its +instruction to wind down the pharmaceutical marketing accounts, or implement stricter controls to +reduce the compliance risks for the marketing accounts that it administered for the dermocosmetic +company. + +21. In December 2012, Cardinal received a report from a Cardinal China employee +raising questions about the legality of the marketing accounts and the marketing employees. The +report recommended that Cardinal China hire an external auditor to assess its business +arrangement with the dermocosmetic company. In response to the 2012 report, neither Cardinal + +6 +nor Cardinal China took sufficient steps to enhance their compliance practices concerning the +marketing accounts or the marketing employees. + +22. In September 2014, Cardinal China was fined by the Shanghai Administration of +Industry and Commerce (“AIC”) for providing luxury dermocosmetic products to employees of a +Chinese retailer equal to a percentage of the retailer’s sales of the dermocosmetic company’s +products. The AIC found that Cardinal China had provided a “secret commission” to employees +of the retailer in violation of Chinese unfair competition law. Cardinal China had engaged in the +practice at the request of the dermocosmetic company, and the products were funded by the +marketing accounts that Cardinal China administered on behalf of the dermocosmetic company. +Cardinal and Cardinal China, again, failed to sufficiently enhance the supervision of the +marketing employees and oversight of the marketing accounts. + +23. In July 2015, after discovering that the marketing employees had recently used +the marketing accounts to purchase smart phones for undisclosed reasons, Cardinal China’s Vice +President of Compliance emailed a colleague, copying Cardinal China’s President, +acknowledging that the dermocosmetic company was unlikely to allow Cardinal China to +implement its standard compliance protocols to the marketing employees, and observing that this +gap in controls had created an “enormous compliance risk” for Cardinal China. Another Cardinal +China employee highlighted that, “This is a big exposure indeed as we have no control [over] +how [the marketing employees] may be gifting and spending on entertaining.” Neither Cardinal +nor Cardinal China took steps to enhance the controls associated with the marketing account or +marketing employees until 2016. + +24. As a result of the conduct described above, Cardinal violated Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act. Cardinal violated Section 13(b)(2)(A), which requires +every issuer with a class of securities registered pursuant to Exchange Act Section 12 to make and +keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and disposition of the assets of the issuer. Cardinal also violated Section 13(b)(2)(B) +of the Exchange Act, which requires every issuer with a class of securities registered pursuant +to Exchange Act Section 12 to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that (i) transactions are executed in accordance with +management’s general or specific authorization; (ii) transactions are recorded as 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. + +25. Cardinal China directly profited from the distribution, administrative, and HR +services it provided to the dermocosmetic company, and Cardinal was unjustly enriched by +approximately $5,400,000 between March 1, 2013, and December 31, 2016. + + + + +7 +Cardinal’s Self-Disclosure, Cooperation, and Remedial Efforts + +26. In determining to accept the Offer, the Commission considered Cardinal’s +self-disclosure, cooperation, and remedial efforts. + +27. In May to June 2016, Cardinal China compliance conducted an audit of the +marketing account’s expenses, which identified evidence that payments from the marketing +accounts did not comply with Cardinal China’s compliance policy requirements. Also, in +June 2016, Cardinal executives in the United States received an internal report stating that +the marketing employees were using the marketing accounts to channel payments to +government officials in China. + +28. In December 2016, Cardinal voluntarily disclosed the results of its +investigation to the Commission staff and subsequently cooperated with its investigation. + +29. Cardinal China also undertook significant remedial measures, including +terminating the marketing accounts and its employment contracts with the marketing +employees, adding anti-bribery representations and obligations to the relevant contracts, and +strictly limiting the use of the remaining balance of the dermocosmetic company’s funds to +low-risk expenses, such as salary payments, with robust controls and monitoring from +Cardinal China’s legal and compliance personnel. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cardinal’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Cardinal 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 Cardinal shall, within ten days of the entry of this Order, pay +disgorgement of $5,400,000 and prejudgment interest of $916,887 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange +Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to +SEC Rule of Practice 600. + +C. Respondent Cardinal shall, within ten 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 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: + +8 + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; +or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Cardinal Health, 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 Anita Bandy, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, 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 thirty days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4119.txt b/raw/aaer/2020/AAER-4119.txt new file mode 100644 index 0000000000000000000000000000000000000000..89c9823bc1da7591673fafe5e36700e7aedec465 --- /dev/null +++ b/raw/aaer/2020/AAER-4119.txt @@ -0,0 +1,114 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88377 / March 12, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4119 / March 12, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19729 + +In the Matter of + +DAVID G. DRESLIN, 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 David +G. Dreslin (“Respondent” or “Dreslin”) 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 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. Dreslin resides in Seminole, Florida and holds an active certified public +accountant license in Florida. Dreslin provides tax preparation and accounting services for +individuals and small businesses. + + 2. Anglesea Enterprises, Inc. (“Anglesea Enterprises”) was incorporated in Nevada +in 2011 and had its principal place of business in Tampa, Florida. It was sold in a reverse merger +in June 2014, after which, it changed its name. Anglesea’s common stock was registered with +the SEC in 2013 pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange +Act”). + +3. On March 3, 2020, the District Court entered Final Judgment against Dreslin, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +and Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder, and from aiding +and abetting violations of Section 13(a) 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. David G. +Dreslin, et al., Civil Action Number 18-cv-02934, in the United States District Court for the +Middle District of Florida. The Final Judgment also barred Dreslin from serving as officer and +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, +barred him from participating in any offering of a penny stock, and ordered him to pay $183,438 in +disgorgement, $30,197 of prejudgment interest, and a $160,000 civil money penalty. + + 4. The Commission’s Complaint alleged, among other things, that Dreslin and +others, carried out a fraudulent scheme to form Anglesea Enterprises and sell it as a public shell +company in a reverse merger. Dreslin and another defendant created a phony business plan to +make it appear as though Anglesea Enterprises was a legitimate Internet marketing company, and +they conducted a sham private placement to fake investor interest in the venture. On behalf of +Anglesea Enterprises, Dreslin and another defendant orchestrated the creation and filing of +twenty SEC filings that contained material false and misleading statements and omissions + 3 +regarding, among other things, the company’s control and business operations. Dreslin further +drafted materially false and misleading management representation letters + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Dreslin’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Dreslin is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4120.txt b/raw/aaer/2020/AAER-4120.txt new file mode 100644 index 0000000000000000000000000000000000000000..3490e7ea3164b87341e5314a4a74a84b892579e5 --- /dev/null +++ b/raw/aaer/2020/AAER-4120.txt @@ -0,0 +1,107 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88432 / March 20, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4120 / March 20, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19732 + +In the Matter of +RONALD EMMA, 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 Ronald +Emma (“Respondent” or “Emma”) 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 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. Emma, age 68, is and has been a certified public accountant licensed to +practice in the State of New Jersey. He served as Chief Accounting Officer of Hill International, +Inc. (“Hill”) from 1980 until February 2017. + + 2. Hill was, at all relevant times, a Delaware corporation with its principal place +of business in Philadelphia, Pennsylvania. Hill is in the project and construction management +consulting business, and has operations worldwide. Since 2006, Hill has been registered +pursuant to Section 12(g) and then 12(b) of the Securities Exchange Act of 1934 (“Exchange +Act”). Hill has been quoted on the NYSE since 2008 under the ticker “Hill.” + + 3. On January 16, 2020, the Commission filed a Complaint against Emma in +SEC v. Hill International, Inc., et al. (Civil Action No. 20-cv-00447) (S.D.N.Y.). On February +11, 2020, the court entered an order permanently enjoining Emma, by consent, from future +violations of Section 17(a)(3) of the Securities Act of 1933 (“Securities Act”) and Section +13(b)(5) of the Exchange Act and Rule 13b2-1 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-11, and 13a-3 thereunder. Emma was also ordered to pay a $75,000 civil money +penalty. + + 4. The Commission’s Complaint alleged, among other things, that Emma +engaged in a scheme resulting in the improper accounting for certain intercompany +transactions involving foreign currency fluctuations, which caused Hill to materially overstate +its net income in the company’s annual report on Form 10-K for each of the years ended +December 31, 2014, 2015, and 2016 and in the company’s quarterly reports on Form 10-Q for +each of the quarters ended March 31, June 30, and September 30 in 2015 and 2016, and for the +quarter ended March 31, 2017. The Complaint alleged that Emma negligently engaged in a +number of improper accounting practices that materially increased Hill’s Accumulated Other +Comprehensive Loss (“AOCL”) on its balance sheet and decreased expenses on its income +statement in a departure from generally accepted accounting principles (“GAAP”). + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Emma’s Offer. + + 3 + Accordingly, it is hereby ORDERED, effective immediately, that: + + Emma is suspended from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4121.txt b/raw/aaer/2020/AAER-4121.txt new file mode 100644 index 0000000000000000000000000000000000000000..0925bb8e776592b51ded77c049d0589ab6878445 --- /dev/null +++ b/raw/aaer/2020/AAER-4121.txt @@ -0,0 +1,1403 @@ + + + + + + + + + + + + + + + + SEC.gov | Jeffrey D. Cordes 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\/524456","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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Cordes et al. + + + + + + + + + + + + Jeffrey D. Cordes et al. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Former Executives of Apparel Company with Accounting Fraud + + Litigation Release No. 24792 / April 8, 2020 + + Accounting and Auditing Release No. 4121 / April 8, 2020 + + Securities and Exchange Commission v. Jeffrey D. Cordes et al. , No. 3:20-cv-00822 (N.D. Tex. filed April 8, 2020) + + + + + + + + + The Securities and Exchange Commission today charged three former executives of Ironclad Performance Wear Corp. with fraud for allegedly inflating the company's revenues through a series of manipulative and deceptive accounting gimmicks. Ironclad's former CEO and CFO have agreed to settle the Commission's claims. + + The SEC's complaint alleges that from at least December 2015 through June 2017, Ironclad's senior executives, CEO Jeffrey D. Cordes of Michigan, CFO William M. Aisenberg of Texas, and Senior VP Thomas J. Felton of Texas, collaborated to inflate Ironclad's revenues by prematurely recognizing revenue before it was earned and recognizing revenue that was never earned, including booking nearly $1 million in revenues from a single client for gloves the client never bought, and that Ironclad never shipped. The complaint further alleges that the defendants took affirmative steps to hide their conduct by, among other things, moving products to a warehouse across the street, delaying moving returned product back into inventory, shipping product to different clients, and altering documents, which inflated the quarterly revenues Ironclad publicly reported during the relevant period by as much as 24 percent. + + The SEC's complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that Cordes, Aisenberg, and Felton violated the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5(a) and 10b-5(c) thereunder, or in the alternative that Felton aided and abetted these violations by Cordes and Aisenberg. The complaint further alleges that Cordes and Aisenberg violated Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder. The complaint also charges Cordes, Aisenberg, and Felton with violating the reporting, books and records, and internal accounting control provisions of 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, 13b2-1, and 13b2-2 thereunder, and Cordes and Aisenberg with violating Section 13(b)(2)(B) of the Exchange Act and Rule 13a-14 thereunder. + + Cordes and Aisenberg have, without admitting or denying the allegations, consented to the entry of final judgments that impose permanent injunctions and officer and director bars, and require each to pay a $173,437 civil penalty. The settlements are subject to court approval. + + The SEC's litigation against Felton is ongoing. + + The SEC's investigation was conducted by Jennifer Turner and Laura Bennett and was supervised by David Reece and Eric Werner of the SEC's Forth Worth office. Jason Reinsch will lead the litigation, under B. 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Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2020/AAER-4122.txt b/raw/aaer/2020/AAER-4122.txt new file mode 100644 index 0000000000000000000000000000000000000000..18f7bb60468ea5592a3c86a23108dd186a4d4a44 --- /dev/null +++ b/raw/aaer/2020/AAER-4122.txt @@ -0,0 +1,1012 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88653 / April 15, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4122 / April 15, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19564 + + +In the Matter of + +SCHULMAN LOBEL ZAND +KATZEN WILLIAMS & +BLACKMAN, LLP A/K/A +SCHULMAN LOBEL LLP, + +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 September 30, 2019, 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)(ii) and 102(e)(1)(iii) +of the Commission’s Rules of Practice2 against Schulman Lobel Zand Katzen Williams & +Blackman, LLP a/k/a Schulman Lobel LLP (“Respondent” or “SL”). + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + +In connection with 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 Making Findings and Imposing Remedial Sanctions +and a Cease-and-Desist Order Pursuant to Sections 4C and 21C of the Securities Exchange Act of +1934 and Rule 102(e) of the Commission’s Rules of Practice (“Order”), as set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +SUMMARY +1. These proceedings arise out of deficient audit and review engagements performed +by SL in connection with the following audits and reviews of the financial statements and interim +financial information of Quadrant 4 System Corp. (“QFOR”): +a. the audit of QFOR’s financial statements for the year ended December 31, 2013 +(the “2013 Audit”), which were included in a Form 10-K filed with the +Commission on August 21, 2015 (the “2014 Form 10-K”); +b. the audit of QFOR’s financial statements for the year ended December 31, 2014 +(the “2014 Audit”), which were also included in the 2014 Form 10-K; +c. the review of QFOR’s interim financial information for the quarter ended June 30, +2016 (the “2Q2016 Review”), which was included in a Form 10-Q filed on August +15, 2016 (the “2Q2016 Form 10-Q”); and + + 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 +d. the audit of QFOR’s amended financial statements for the year ended December 31, +2015 (the “2015 Form 10-K/A Audit”), which were included in a Form 10-K/A +filed on September 22, 2016 (the “2015 Form 10-K/A”). +2. SL failed to comply with the standards of the Public Company Accounting +Oversight Board (“PCAOB”) in connection with the above engagements when it did not: (1) +identify and properly audit related party transactions; (2) obtain sufficient appropriate audit +evidence; (3) conduct appropriate procedures to obtain reasonable assurance that the financial +statements were free of material misstatements caused by fraud; (4) conduct appropriate +procedures upon the subsequent discovery of facts existing at the date of a previous audit report; +(5) conduct appropriate procedures in connection with a review of interim financial information; +(6) properly plan the audit and assess and respond to risks of material misstatement; (7) conduct +proper engagement quality reviews; (8) exercise due professional care and professional skepticism; +and (9) maintain an adequate system of quality control, including policies and procedures +regarding engagement acceptance and continuance as well as supervision, review, and approval. +Additionally, SL willfully4 violated Section 10A(a)(2) of the Exchange Act when it conducted the +2013 and 2015 Form 10-K/A Audits without including procedures that were adequately designed +to identify related party transactions. Finally, SL willfully violated Rule 2-02(b)(1) of Regulation +S-X when it stated that the 2013, 2014, and 2015 Form 10-K/A Audits had been conducted in +accordance with PCAOB standards, when the audits had not been. +RESPONDENT +3. Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman +Lobel LLP (“SL”) is an audit firm based in Princeton, New Jersey. SL was registered with the +PCAOB during the relevant time period, but it withdrew its registration effective March 10, +2020. SL served as QFOR’s auditor from April 2015 until it resigned in October 2016. SL +completed audits of QFOR’s financial statements for the years ended 2013, 2014, and 2015 and +reviews of QFOR’s interim financial information for each quarter of 2015 and the first two +quarters of 2016. SL also completed an audit of QFOR’s amended financial statements +contained in the 2015 Form 10-K/A.5 + +4 “Willfully,” for purposes of imposing relief under Section 4C(a)(3) of the Exchange Act +and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, “‘means no more than that the +person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 +(D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). +5 On September 30, 2019, the Commission instituted an Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order against Marla +P. Manowitz, CPA, Thomas R. Vreeland, CPA, and Kenneth J. Gralak, CPA, concerning their +conduct in audit and review engagements for QFOR performed as employees of SL (Exchange +Act Rel. No. 34-87159). +4 +AUDITED ENTITY +4. Quadrant 4 System Corp. (CIK No. 878802) was an Illinois corporation +headquartered in Schaumburg, Illinois, that provided software products and IT consulting and +software development services. QFOR did not have any class of securities registered with the +Commission, but was a reporting company pursuant to Section 15(d) of the Exchange Act. +QFOR’s common stock was quoted on OTC Link (formerly “Pink Sheets”) operated by OTC +Markets Group, Inc. under the symbol “QFOR.” On June 29, 2017, QFOR filed for bankruptcy, +and its remaining assets are now under the control of a liquidating trustee. All equity interests in +QFOR, including its common stock, were extinguished on September 13, 2018. +FACTS +Background of QFOR’s Fraud +5. Between at least June 2012 and November 2016, Nandu Thondavadi +(“Thondavadi”) and Dhru Desai (“Desai”) perpetrated a fraudulent scheme through QFOR, a +public company. Thondavadi, as CEO, and Desai, as CFO, used several fraudulent means to +overstate QFOR’s revenue, overstate its assets, understate its liabilities, and conceal their +misappropriation of at least $4.1 million. Among other things, they caused QFOR to enter into +undisclosed related party transactions, misstated the terms of various acquisitions, and concealed +liabilities through a variety of means. Between March 2013 and November 2016, Thondavadi and +Desai caused QFOR to file false and misleading Forms 10-Q, 10-K, and 8-K, which included +numerous material misstatements and omissions regarding QFOR’s revenue, acquisitions, assets, +liabilities, and related party transactions and Thondavadi’s and Desai’s misappropriation and stock +ownership. +SL’s Engagements for QFOR +6. On April 2, 2015, QFOR’s previous auditor resigned after discovering that QFOR +had issued fraudulent invoices and that unknown individuals affiliated with QFOR had returned +false audit confirmations to them. SL was thereafter engaged to perform the 2014 Audit. In June +2015, after being informed that QFOR’s previous auditor would not reissue its 2013 audit report +due to an inability to rely on management’s representations, SL was engaged to conduct the 2013 +Audit. +7. SL’s engagement acceptance and planning workpapers for the 2013 and 2014 +Audits noted that QFOR had internal control deficiencies and characterized the audits as “high- +risk.” SL completed the 2013 and 2014 Audits in August 2015. SL issued an audit report that +contained an unqualified opinion, which was dated August 21, 2015, and incorporated in QFOR’s +2014 Form 10-K filed the same day. +8. SL performed the 2Q2016 Review and consented to the release of QFOR’s 2Q2016 +Form 10-Q, which was filed on August 15, 2016. +9. SL audited QFOR’s financial statements for the year ended December 31, 2015 (the +“2015 Audit”). In late August or early September 2016, QFOR told SL that QFOR intended to file +an amended Form 10-K for the year ended December 31, 2015, that would disclose, among other +5 +things, new information about certain related party transactions. On September 6, 2016, SL was +engaged to audit the amended financial statements in the 2015 Form 10-K/A, which included +footnote disclosures regarding certain related party transactions. SL issued an audit report that +contained an unqualified opinion, which was dual-dated as of September 22, 2016, as to Notes 11 +and 14 (which included the new disclosures regarding related party transactions) and March 28, +2016, as to the remainder of the financial statements, and was incorporated in QFOR’s 2015 Form +10-K/A filed on September 22, 2016. +10. SL resigned as QFOR’s auditor on October 21, 2016, citing concerns about the +firm’s ability to rely on management’s representations. Thondavadi and Desai were arrested on +federal charges including wire fraud and certifying false financial reports on November 30, 2016, +and resigned from QFOR shortly thereafter. After the arrests, QFOR filed a Form 8-K in +December 2016 announcing that the Board of Directors had concluded that QFOR’s financial +statements for the previous three years did not fairly present the financial condition of the +company, required restatement, and should no longer be relied upon. No restatement occurred, and +QFOR has since filed for bankruptcy and been liquidated.6 +SL Failed to Perform Procedures to Identify and Comply with Relevant Audit Standards in +Connection with Related Party Transactions +11. 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. +12. PCAOB Standard AU Section 334, Related Parties (“AU § 334”),7 which applies to +the 2013 and 2014 Audits, provides guidance on procedures to consider in identifying related party +relationships and transactions and to satisfy the auditor concerning the required disclosure of +related party transactions. AU § 334.07 provides that the auditor should place “emphasis on +testing material transactions with parties he knows are related to the reporting entity,” and also +provides for specific audit procedures that may be included to determine the existence of related +party relationships that are not clearly evident. +13. AU § 334.09 requires an auditor to test related party transactions by “obtaining and +evaluating sufficient appropriate evidential matter” which “should extend beyond inquiry of +management.” The standard also makes clear that, when necessary to fully understand a particular +transaction, the auditor should consider “inspect[ing] evidence in possession of the other party or + +6 On June 29, 2017, the Commission filed a civil injunctive action against QFOR, +Thondavadi, and Desai alleging multiple violations of the securities laws. SEC v. Quadrant 4 +System Corp. et al., Case No. 1:17-cv-04883 (N.D. Ill. 2017). QFOR, Thondavadi, and Desai +consented the entry of final judgments that included permanent injunctions against all of them, +officer and director bars and orders of disgorgement and prejudgment interest against +Thondavadi and Desai, and a civil penalty against Desai. +7 References to PCAOB standards refer to the standards in effect at the time of the relevant +conduct. +6 +parties to the transaction” and “confirm[ing] or discuss[ing] significant information with +intermediaries, such as banks, guarantors, agents, or attorneys to obtain a better understanding.” +AU § 334.10. Additionally, the auditor should consider procedures to “obtain information about +the financial capability of the other party or parties to the transaction” when there are “material +uncollected balances, guarantees, and other obligations.” Id. +14. Finally, AU § 334.11 requires that, for each material related party transaction, the +auditor should consider whether the auditor has obtained sufficient appropriate evidential matter to +understand the relationship of the parties and the effects of the transaction on the financial +statements. The auditor should evaluate all of the available information and be satisfied on the +basis of the auditor’s professional judgment that the transaction is adequately disclosed in the +financial statements. +15. PCAOB Auditing Standard No. 18, Related Parties (“AS No. 18”), which applies +to the 2015 Form 10-K/A Audit, sets forth procedures the auditor should perform to “obtain +sufficient appropriate audit evidence to determine whether related parties and relationships and +transactions with related parties have been properly identified, accounted for, and disclosed in the +financial statements.” AS No. 18.2. Among other things, the standard requires the auditor to +“identify[] and assess[] the risks of material misstatement associated with related parties,” AS No. +18.10; perform various procedures for each related party transaction required to be disclosed or +determined to be a significant risk, including evaluating the terms of the transaction and the +circumstances under which it was authorized, AS No. 18.12; “evaluate whether the company has +properly identified” its related parties and transactions with related parties, AS No. 18.14; and +“evaluate whether related party transactions have been properly accounted for and disclosed in the +financial statements,” AS No. 18.17. +16. AS No. 18 provides that, when evaluating whether the company has properly +identified related parties and related party transactions, the auditor’s responsibility requires “more +than assessing the process used by the company,” and “requires the auditor to perform procedures +to test the accuracy and completeness” of the company’s identification of related parties and +related party transactions. AS No. 18.14. The standard provides that, if the auditor identifies +information that indicates that previously undisclosed related parties might exist, “the auditor +should perform the procedures necessary to determine whether previously undisclosed +relationships or transactions with related parties, in fact, exist,” and these procedures “should +extend beyond inquiry of management.” AS No. 18.15. Furthermore, the standard outlines a +number of procedures the auditor should perform if the auditor determines that a previously +undisclosed related party or related party transaction does exist, including, among other things, +evaluating why it was previously undisclosed and how this bears on the auditor’s ability to rely on +management’s representations relating to other aspects of the financial statements and evaluating +the implications for the audit if the nondisclosure indicates that fraud or an illegal act may have +occurred. AS No. 18.16. +17. Finally, AS No. 18 provides that, if the financial statements state that related party +transactions were conducted on an arm’s-length basis, the auditor should determine “whether +evidence supports or contradicts management’s assertion,” and express a qualified or adverse +opinion if the auditor “is unable to obtain sufficient appropriate audit evidence to substantiate +management’s assertion.” AS No. 18.18. +7 +18. SL did not perform sufficient procedures designed to identify related party +transactions in connection with the 2013 and 2015 Form 10-K/A Audits. QFOR was involved in +transactions with certain significant shareholders, purported vendors, and customers that should +have been disclosed as related party transactions. These related party entities included, among +others: Global Technology Ventures Corp. (“Global Technology”); Congruent Ventures LLC and +Congruent Ventures Ltd. (collectively, “Congruent”); Stonegate Holdings, Inc. (“Stonegate”); Core +Information Technology Solutions, Inc. (“CITS”); and Surrex Solutions Corp. (“Surrex”). In its +2015 Form 10-K/A, QFOR made disclosures regarding related party transactions with CITS, +Surrex, and a vendor owned by Stonegate. However, the 2015 Form 10-K/A disclosures were +incomplete and materially misleading, and QFOR did not disclose other material related party +transactions with Stonegate, Global Technology, or Congruent in its 2014 Form 10-K or 2015 +Form 10-K/A. +19. Prior to the 2013 Audit, SL identified Stonegate and an affiliated entity as related +parties of QFOR. The engagement team also prepared and/or reviewed workpapers indicating that +Stonegate and an affiliated entity collectively owned 14.8% of QFOR’s common stock as of year- +end 2013 and 13% of QFOR’s common stock as of year-end 2014. The engagement team was +aware that QFOR had entered into two material transactions with Stonegate during 2013: the +conversion of a $1.1 million debt to equity and the purported assignment of a legal judgment to +Stonegate in exchange for approximately 1.8 million shares of QFOR common stock. These +transactions were not disclosed as related party transactions in the 2014 Form 10-K. SL did not +identify these transactions as related party transactions and did not conduct procedures to evaluate +whether they were adequately disclosed. +20. SL’s 2013 Audit workpapers also contained documents indicating that the judgment +that QFOR purportedly assigned to Stonegate was jointly owed by QFOR, Thondavadi, and Desai. +SL did not identify this as a related party transaction, did not identify this as a significant unusual +transaction, did not obtain sufficient appropriate audit evidence to substantiate the transaction and +understand its business rationale, did not consider whether Stonegate had the capability to satisfy +the judgment, and did not evaluate whether the transaction was adequately disclosed. +21. The 2015 Form 10-K/A disclosed that QFOR’s transactions with CITS, Surrex, and +a significant vendor were related party transactions. Among other things, the 2015 Form 10-K/A +stated that the vendor was owned by Stonegate, that Thondavadi and Desai had guaranteed certain +obligations of CITS, and that Thondavadi held signatory authority on CITS and Surrex bank +accounts. The 2015 Form 10-K/A also stated that Thondavadi and Desai had provided +management and consulting services to an affiliate of CITS and received compensation for those +services, which was paid to Global Technology and Congruent. Global Technology and +Congruent were described as inactive entities owned by Thondavadi and Desai, respectively. The +related party relationships disclosed in the 2015 Form 10-K/A were all described as being +structured on an arm’s-length basis. +22. SL did not obtain sufficient appropriate audit evidence to support the disclosures +contained in the 2015 Form 10-K/A regarding the relationship between QFOR and Surrex and +CITS. The engagement team did not obtain any documentary evidence regarding Thondavadi’s +signatory authority over Surrex and CITS bank accounts or the nature and terms of the consulting +services Thondavadi and Desai provided to the affiliate of CITS. The engagement team requested +8 +copies of Thondavadi’s and Desai’s consulting agreements and tax records regarding their +compensation for the purported consulting services, but Thondavadi told the engagement team that +QFOR did not have any such records. The engagement team relied solely upon management +representations regarding the nature of the services Thondavadi and Desai performed and the +amounts of the payments they received in lieu of obtaining any documentary evidence. +23. SL also did not evaluate QFOR’s assertions that its relationships with the vendor, +CITS, and Surrex were structured on an arm’s-length basis. SL’s workpapers for the 2015 Form +10-K/A Audit do not contain any documentation regarding the terms of the transactions. Despite +failing to obtain sufficient appropriate audit evidence to substantiate these assertions, SL issued an +unqualified opinion on the 2015 Form 10-K/A. +24. Despite newly learning of previously undisclosed related party transactions, SL did +not evaluate whether QFOR had properly identified and disclosed its related parties and +relationships and transactions with related parties, as required by AS Nos. 18.14-16. In addition to +the transactions that were disclosed in the 2015 Form 10-K/A, the engagement team learned of +other undisclosed related party transactions during the course of the 2015 Form 10-K/A Audit, +including a loan from Global Technology to QFOR that was issued and converted to QFOR +common stock during 2013. SL’s 2015 Form 10-K/A workpapers included a copy of the 2013 +promissory note issued to Global Technology, which included a note added by a member of the +engagement team reading: “Entity owned by Nandu – related party not disclosed prior.” The +engagement team did not perform any procedures to evaluate why this past related party +transaction was not previously disclosed or whether it should be disclosed either in the 2015 Form +10-K/A or through an amendment of prior filings. Additionally, after being notified once more +that Stonegate was a related party of QFOR, the engagement team did not evaluate whether past +transactions with Stonegate should be disclosed as related party transactions. +25. During the 2015 Form 10-K/A Audit, SL also did not undertake any procedures, +beyond inquiry of management or its agents, to identify whether other previously undisclosed +relationships or transactions with related parties existed, as required by AS No. 18.15. SL’s +workpapers for prior periods contained a number of other documents evidencing past related party +transactions between QFOR and Global Technology and Congruent, including documents +regarding the conversion of the 2013 Global Technology debt to equity, a 2015 promissory note +issued to Global Technology, and general ledgers listing transactions with Global Technology and +Congruent in 2014 and 2015. The engagement team did not perform any procedures to determine +whether QFOR had previously entered into transactions with Global Technology or Congruent. +SL Failed to Obtain Sufficient Appropriate Audit Evidence +26. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires the +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion.” AS No. 15.04. To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. See AS No. 15.6. The reliability of evidence depends on its nature and +source, and the circumstances under which it is obtained. Evidence obtained directly by the +auditor and from a knowledgeable independent third party is more reliable than evidence obtained +directly from the company. See AS No. 15.8. +9 +27. PCAOB Standard AU Section 330, The Confirmation Process (“AU § 330”), +provides guidance about the audit confirmation process, including the relationship of confirmation +procedures to the assessment of audit risk and the performance of alternative procedures when +responses to confirmation requests are not received. AU § 330.28 requires an auditor to maintain +control over confirmation requests and responses, which means establishing direct communication +between the intended recipient and the auditor to minimize the possibility that the results will be +biased because of interception and alteration. When an auditor does not receive a response to +certain confirmations, AU § 330.31 provides that the auditor should apply alternative procedures to +obtain the evidence necessary to reduce audit risk to an acceptably low level. +28. Further, PCAOB Standard AU Section 333, Management Representations (“AU § +333”), states that management representations “are not a substitute for the application of those +auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial +statements under audit,” AU § 333.02, and requires conflicts between management +representations and other audit evidence to be investigated, AU § 333.04. +29. PCAOB Standard AU Section 337, Inquiry of a Client’s Lawyer Concerning +Litigation, Claims, and Assessments (“AU § 337”), provides guidance on procedures an auditor +should consider for identifying and evaluating the accounting and reporting for litigation, claims, +and assessments. For all material litigation, claims, and assessments, AU § 337.06 requires an +auditor to “request the client’s management to send a letter of inquiry to those lawyers with +whom management consulted concerning” such matters. +30. In connection with the 2013 and 2014 Audits, SL did not obtain sufficient +appropriate audit evidence to support SL’s unqualified opinion included in the 2014 Form 10-K, +particularly regarding QFOR’s reported liabilities. Much of the deficient testing fell within audit +areas that SL determined were high-risk areas and identified in its planning workpapers as +requiring “extended procedures.” +31. SL did not obtain sufficient appropriate audit evidence regarding a $1.1 million +debt to a hedge fund (“Lender A”) that was purportedly converted to equity in 2013. The +engagement team obtained extensive documentation of the convertible debenture giving rise to the +liability. However, the engagement team’s testing of the purported equity conversion, which +occurred only weeks later and did not satisfy the terms of the convertible debenture, was +inadequate. For example, the engagement team did not obtain any documentation signed by +Lender A consenting to or otherwise substantiating the conversion or confirming the liability had +been extinguished as of year-end 2013. In reality, Lender A had not consented to convert its debt +to equity in 2013, and a liability of least $885,045 was still owed to Lender A as of December 31, +2013. +32. SL also did not obtain sufficient appropriate audit evidence regarding a debt to an +entity (“Lender B”). In documents provided by QFOR management to the engagement team, SL +learned that, during 2013, QFOR had made approximately $700,000 in payments on the debt and +converted $2 million to equity, leaving a liability of approximately $3.1 million as of year-end +2013. In reality, QFOR did not make any payments to Lender B during 2013, and the purported +loan payments were actually misappropriated by Thondavadi and Desai. The engagement team did +not obtain any documentation signed by Lender B authorizing the purported debt conversion or +10 +substantiating the balance due at year-end 2013. The engagement team also did not conduct any +testing of the purported debt payments to Lender B in 2013. For example, had the engagement +team traced these payments to underlying transaction support from QFOR’s bank, it would have +discovered that Lender B was not the true recipient of the funds. +33. SL did not adhere to the procedures set forth in AU § 330 in connection with the +testing of the Lender A and Lender B liabilities, as well as a material liability owed to an +individual. After receiving no response to initial debt confirmations sent to Lender A, Lender B, +and the individual, the engagement team did not either follow up with a second request or apply +alternate procedures to reduce the audit risk to an acceptably low level, as required under AU §§ +330.30-31. +34. The 2014 Form 10-K contained material misrepresentations and omissions +regarding the resolution of a breach of contract suit filed by a New York-based lender (“Plaintiff +A”). The 2014 Form 10-K reported a $692,000 expense for “litigation settlement” in 2013, and the +notes to the financial statements included a disclosure that the lawsuit was settled for 1,870,270 +shares of QFOR stock valued at $692,000. QFOR told SL that, rather than issuing the stock to +Plaintiff A, QFOR had assigned the obligation it owed Plaintiff A to Stonegate in exchange for +1,870,270 shares of QFOR common stock. Though QFOR did issue the stock to Stonegate, +Stonegate never made any payments toward the settlement, and Plaintiff A did not consent to the +assignment of the liability owed to it. Instead, QFOR, Thondavadi, Desai, and a third individual +entered into a settlement agreement with Plaintiff A in December 2013. Between December 2013 +and March 2014, QFOR paid approximately $1.8 million pursuant to the settlement agreement, +largely through a series of wire transfers to Plaintiff A’s lawyers (“Law Firm A”). QFOR falsely +recorded many of these wire transfers as payments related to acquisitions completed earlier in +2013. As of year-end 2013, the outstanding liability on the settlement agreement was $1.25 +million, which was not reported on QFOR’s balance sheet in the 2014 Form 10-K. +35. SL did not obtain sufficient appropriate audit evidence regarding the liability owed +to Plaintiff A. The engagement team did not obtain a copy of the legal judgment, a settlement +agreement or other documentation signed by Plaintiff A, or any other evidence of the size of the +liability owed to Plaintiff A. It also did not obtain any evidence that Plaintiff A consented to the +purported assignment to Stonegate, that Stonegate had performed under the purported assignment, +or that the liability owed to Plaintiff A had been extinguished. The engagement team also did not +identify the law firm that represented QFOR in the Plaintiff A litigation and did not request that +QFOR management send a letter of inquiry to that law firm. +36. SL did not obtain sufficient appropriate audit evidence in other areas. While +performing journal entry testing for the 2014 Audit, the engagement team examined a journal entry +for a $445,000 payment to Law Firm A. It did not obtain any evidence, aside from a representation +by management, regarding the purpose of this transaction. +37. Additionally, while testing earnouts associated with acquisitions that took place in +2013, the engagement team examined various wire transfers that were recorded as earnouts but +actually sent to Law Firm A in payment of the Plaintiff A settlement. Based on the supporting +schedules included in the workpapers: (1) two of the entities that received earnout payments had +not met the revenue targets entitling them to earnout payments; and (2) the earnout payments were +11 +made piecemeal throughout the quarters, rather than in lump sum at the end of each quarter. Both +of these factors should have prompted the engagement team to further scrutinize the relevant +payments, but it did not obtain sufficient appropriate audit evidence to support the recorded +earnout payments. Many of the recorded earnout payments were made by wire transfer, and the +engagement team tested them by tracing them to the bank statements. However, the bank +statements did not provide any information regarding the counterparty to wire transfers. Rather +than obtaining wire details, the engagement team relied solely on bank statement entries reading +“Outgoing Wire Transfer” as evidence that the earnout payments were made. +38. SL did not obtain sufficient appropriate audit evidence regarding payroll tax +liabilities assumed in connection with an acquisition that took place in 2013. The engagement team +did not obtain sufficient evidence to support the original accrual recorded for assumed payroll tax +liabilities, which was not consistent with the amount of assumed liabilities stated in the purported +asset purchase agreement. The engagement team obtained schedules from QFOR listing purported +payments on the tax liabilities, but did not trace them to any transaction support. After noting a +material remaining balance for the accrual as of year-end 2014, the engagement team relied solely +on management’s representation that this balance represented accounts payable incorrectly included +in the tax payable, without performing any procedures to test that assertion. The engagement team +also did not obtain documentation from the taxing authorities confirming that the liabilities had been +extinguished. In reality, as of year-end 2014, more than $500,000 in payroll tax liability remained +outstanding and was not reported as a liability in the 2014 Form 10-K. +39. As discussed in paragraphs 21 to 25, SL did not obtain sufficient appropriate audit +evidence regarding the related party transaction disclosures contained in the 2015 Form 10-K/A. +SL also inappropriately relied upon management’s representations, despite the engagement team’s +awareness that those representations conflicted with prior representations made by management +regarding their receipt of compensation. +SL Failed to Conduct Appropriate Procedures to Obtain Reasonable Assurance that the +Financial Statements were Free of Material Misstatements Caused by Fraud +40. PCAOB Standard AU Section 316, Consideration of Fraud in a Financial +Statement Audit (AU § 316), requires an auditor to perform procedures to address the risk of +fraud in a financial statement audit, including those fraud risks specifically arising from +management override of internal controls. The standard requires an auditor to examine journal +entries “for evidence of possible material misstatement due to fraud.” AU § 316.58. The auditor +should use professional judgment in determining the nature and extent of journal entry testing, +but “the auditor’s procedures should include selecting from the general ledger journal entries to +be tested and examining support for those items.” AU § 316.61. +41. Additionally, AU § 316, as in effect during the 2013 and 2014 Audits, requires an +auditor to evaluate significant transactions that are outside the normal course of business for the +entity, or that otherwise appear to be unusual. The auditor should gain an understanding of the +business purpose of each such transaction and consider whether the rationale for the transaction +suggests that it may have been entered into for fraudulent purposes. AU § 316.66. When +evaluating the business rationale for the transaction, an auditor should consider whether the +12 +transaction involves previously unidentified related parties or parties that do not have the ability to +support the transaction without assistance from the entity under audit. AU § 316.67. +42. During the 2013 and 2014 Audits, SL did not perform appropriate procedures to +obtain reasonable assurance that the financial statements were free of material misstatements +caused by fraud. It did not appropriately perform journal entry testing, and did not evaluate +significant unusual transactions, including a transaction with Stonegate, an undisclosed related +party. +43. Pursuant to PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of +Material Misstatement (“AS No. 12”), the auditor is required to identify the risk of management +override of controls as a fraud risk. AS No. 12.69. The engagement team identified management +override of controls as a significant risk while planning the 2013 and 2014 Audits, yet it did not +properly perform journal entry testing, one of the required procedures to address this risk. As +discussed in paragraph 36, the engagement team examined a journal entry for a $445,000 payment +to Law Firm A while performing journal entry testing for the 2014 Audit. The only procedure the +engagement team performed to test this journal entry was to ask Thondavadi about the purpose of +the payment. Thondavadi told the engagement team that it related to an acquisition that took place +in 2013, and the engagement team relied on this representation without performing any procedures +to verify it. The engagement team did not obtain any additional evidence of the purpose of the +payment, nor did it tie the payment to other workpapers in SL’s possession testing acquisition- +related payments. +44. SL also did not identify the assignment of the Plaintiff A judgment to Stonegate, +an entity the engagement team had identified in planning workpapers as a related party, as a +significant unusual transaction, and evaluate whether it may have been entered into to engage in +fraudulent financial reporting. The transaction was outside the normal course of business for +QFOR, material, and completed near year-end 2013. The engagement team did not obtain an +understanding of the substance of the transaction, particularly whether the purported assignment +effectively satisfied the liability owed to Plaintiff A. The engagement team also did not identify +it as a transaction with a related party. +45. SL also did not identify purported settlements of earnout obligations that took +place in December 2013 as significant unusual transactions and evaluate whether they may have +been entered into to engage in fraudulent financial reporting or conceal misappropriation. The +earnout settlements were outside the normal course of business for QFOR, material, and +completed as of December 31, 2013. They had the effect of materially increasing QFOR’s 2013 +net income while also reducing its liabilities. The engagement team did not obtain a full +understanding of the transactions, including the business rationale for QFOR making substantial +payments to settle contingent obligations to two entities even though the acquired business units +had never met the revenue targets entitling them to earnout payments. +SL Failed to Conduct Appropriate Procedures upon the Subsequent Discovery of Facts +Existing at the Date of a Previous Audit Report +46. PCAOB Standard AU Section 561, Subsequent Discovery of Facts Existing at the +Date of the Auditor’s Report (“AU § 561”), sets forth procedures the auditor should follow when +13 +the auditor becomes aware that facts may have existed at the date of a prior audit report that might +have affected the report if the auditor had been aware of such facts. AU § 561.04 requires that, +when an auditor becomes aware of information that relates to financial statements upon which the +auditor previously issued a report, and which the auditor would have investigated if the auditor had +been aware of it during the audit, the auditor should, “as soon as practicable, undertake to +determine whether the information is reliable and whether the facts existed at the date of his +report.” Upon determining that the information is reliable and existed at the date of the auditor’s +report, the auditor is required to undertake certain procedures, including evaluating whether the +information would have affected the audit report if it had been known but not reflected in the +financial statements, evaluating whether there are persons likely to rely on the financial statements, +and advising the client to make appropriate disclosure of the newly discovered facts and their +impact on the financial statements. AU §§ 561.05-.06. +47. During the 2Q2016 Review, SL did not conduct appropriate procedures after being +provided with additional information relating to the assignment of the Plaintiff A liability that was +previously disclosed in the 2014 Form 10-K. During the planning for the review, QFOR informed +the engagement team that it had cancelled the approximately 1.8 million shares previously issued +to Stonegate because Stonegate had not performed on the assignment. QFOR provided the +engagement team with a memorandum containing extensive new material information that was +inconsistent with the disclosures contained in the 2014 Form 10-K related to the resolution of the +Plaintiff A lawsuit. Among other things, the memorandum stated that Plaintiff A received a +judgment that included reimbursement of legal fees and that QFOR actually ended up paying the +judgment and legal fees rather than satisfying the balances due through the issuance of stock. The +memorandum did not specify the amount of the legal fees or provide any information on when or +how QFOR paid the judgment and legal fees. The engagement team did not perform any +procedures to evaluate the value of the underlying liability to Plaintiff A; to determine whether, +when, or how the liability to Plaintiff A had been extinguished; or to evaluate or assess the impact +of the newly discovered facts on prior period financial statements and disclosures. +48. SL also did not conduct appropriate procedures after learning that a 2013 loan from +Global Technology to QFOR was a related party transaction during the 2015 Form 10-K/A Audit. +Despite noting that the loan was a previously undisclosed related party transaction in a workpaper, +the engagement team did not perform any procedures to consider whether this information would +have affected SL’s report on the 2013 financial statements or whether the information should be +disclosed. +SL Failed to Conduct Appropriate Procedures in Connection with a Review of Interim +Financial Information +49. PCAOB Standard AU Section 722, Interim Financial Information (“AU § 722”), +provides that, if “the accountant becomes aware of information that leads him or her to believe that +the interim financial information may not be in conformity with generally accepted accounting +principles in all material respects, the accountant should make additional inquiries or perform other +procedures that the accountant considers appropriate to provide a basis for communicating whether +he or she is aware of any material modifications that should be made to the interim financial +information.” AU § 722.22. Additionally, “if information comes to the accountant’s attention that +leads him or her to question whether the interim financial information departs from generally +14 +accepted accounting principles with respect to litigation, claims, or assessments,” it may be +appropriate to make an inquiry of the company’s legal counsel. AU § 722.20. +50. SL did not conduct appropriate procedures after being provided with additional +information regarding the assignment of the Plaintiff A liability to Stonegate during the 2Q2016 +Review. After learning that Stonegate had not satisfied the Plaintiff A liability and being informed +that QFOR had paid it at some unspecified time, the engagement team had sufficient information +to question whether the interim financial information was in conformity with generally accepted +accounting principles (“GAAP”) in all material respects. The engagement team did not make +additional inquiries or perform procedures to determine whether, when, and how the liability to +Plaintiff A had been extinguished, and thus did not have a sufficient basis to communicate whether +it was aware of any material modifications that should be made to the interim financial +information. +SL Failed to Properly Plan the Audit and Assess and Respond to Risks of Material +Misstatement +51. PCAOB Auditing Standard No. 9, Audit Planning (“AS No. 9”), requires the +auditor to properly plan the audit. The standard provides that planning is “a continual and iterative +process,” AS No. 9.5, and requires the auditor to modify the audit strategy and plan as necessary if +circumstances change significantly during the course of the audit, including due to the discovery of +a previously unidentified risk of material misstatement, AS No. 9.15. +52. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement (“AS No. 12”), requires the auditor to “perform risk assessment procedures that are +sufficient to provide a reasonable basis for identifying and assessing the risks of material +misstatement, whether due to error or fraud.” AS No. 12.4. The standard provides that risk +assessment should continue throughout the audit, and that the auditor should “revise the risk +assessment and modify planned audit procedures or perform additional procedures in response to +the revised risk assessments” when the auditor obtains evidence “that contradicts the audit +evidence on which the auditor originally based his or her risk assessment.” AS No. 12.74. +53. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement (“AS No. 13”), requires the auditor when responding to the assessed risks +of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and +evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to +obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters. AS No. 13.7. +54. SL did not properly plan the 2015 Form 10-K/A Audit or perform sufficient risk +assessment procedures. The engagement team should have recognized that the newly disclosed +related party transactions constituted a significant change in circumstances from the 2015 Audit +and revealed previously unidentified risks of material misstatement. Additionally, the engagement +team was aware that the three newly disclosed related parties were QFOR’s most significant +vendor and QFOR’s second and third largest customers. The engagement team was also aware +that some of the information provided by management during the 2015 Form 10-K/A Audit, +15 +particularly regarding management’s receipt of compensation for consulting services to an affiliate +of CITS, was inconsistent with prior management representations. Despite the inconsistencies in +management’s representations and the significance of the newly disclosed related parties to +QFOR’s business, the engagement team did not engage in any new risk assessment or planning +activities in connection with the 2015 Form 10-K/A Audit. +SL Failed to Conduct Proper Engagement Quality Reviews +55. PCAOB Audit Standard 7, Engagement Quality Review (“AS No. 7”), requires an +engagement quality reviewer (“EQR”) conducting a review of an engagement to “evaluate the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the engagement report.” AS +No. 7.2. For engagement quality reviews of both audits and reviews of interim financial +information, the EQR should “evaluate” significant judgments as to planning, including +consideration of “risks identified in connection with the firm’s client acceptance and retention +process” and the company’s “recent significant activities.” AS Nos. 7.9-10 (audits), 7.14-15 +(reviews). Additionally, the EQR should “evaluate whether the engagement documentation” +reviewed in connection with required procedures “[s]upports the conclusions reached by the +engagement team with respect to the matters reviewed.” AS Nos. 7.11 (audits), 7.16 (reviews). +56. If the EQR becomes aware of a significant engagement deficiency, including that +the engagement team reached an inappropriate overall conclusion on the subject matter of the +engagement, he or she cannot provide concurring approval of issuance. AS Nos. 7.12 (audits), +7.17 (reviews). For an audit, a significant engagement deficiency includes the failure to obtain +sufficient appropriate evidence in accordance with PCAOB standards. AS No. 7.12. For a review +of interim financial information, a significant engagement deficiency includes a failure to perform +interim review procedures necessary in the circumstances of the engagement. AS No. 7.17. +57. SL did not perform an adequate engagement quality review in connection with the +2Q2016 Review. The cancellation of the shares issued to Stonegate in connection with the +Plaintiff A lawsuit was identified as a recent significant activity, and the EQR reviewed the +workpapers related to that transaction. However, he did not recognize that the workpapers did not +support the conclusions reached by the engagement team regarding that transaction or that the +engagement team had not performed necessary procedures after receiving information that should +have led them to believe that the interim financial information may not have been presented in +conformity with GAAP. +58. SL also did not perform an adequate engagement quality review in connection with +the 2015 Form 10-K/A Audit. First, the engagement team did not perform any planning or risk +assessment specific to the 2015 Form 10-K/A Audit, and the EQR did not review any of the +planning or risk assessment documentation associated with the 2015 Audit. Therefore, the EQR +did not evaluate the significant judgments related to engagement planning or the engagement +team’s assessment of, and audit responses to, significant risks, as required by AS No. 7.10. +59. Additionally, the EQR provided concurring approval of the issuance of the audit +report on the 2015 Form 10-K/A Audit despite the fact that, based on the workpapers he reviewed, +he should have been aware that a significant engagement deficiency existed—namely, the failure +16 +to obtain sufficient appropriate audit evidence supporting the accuracy and completeness of the +company’s disclosures regarding related party transactions. The EQR reviewed nearly all of the +workpapers related to the testing of the new disclosures regarding related party transactions, +including the copy of the 2013 promissory note to Global Technology. However, the EQR did not +recognize that the workpapers did not support the audit team’s conclusions that QFOR’s related +party transactions were adequately tested and disclosed. +SL Failed to Exercise Due Professional Care and Professional Skepticism +60. PCAOB Standard AU Section 230, Due Professional Care in the Performance of +Work (“AU § 230”), requires an auditor to exercise due professional care throughout the audit. +Under this standard, an auditor “should possess ‘the degree of skill commonly possessed’ by other +auditors and should exercise it with ‘reasonable care and diligence.’” AU § 230.05. Due +professional care also requires that the auditor exercise professional skepticism, which is “an +attitude that includes a questioning mind and a critical assessment of audit evidence.” AU +§ 230.07. An auditor is required to “consider the competency and sufficiency of the evidence,” +AU § 230.08, and “should not be satisfied with less than persuasive evidence because of a belief +that management is honest,” AU § 230.09. +61. SL did not exercise due professional care and professional skepticism in connection +with the numerous audit failures described above during the 2013 Audit, 2014 Audit, 2Q2016 +Review, and 2015 Form 10-K/A Audit. +62. SL also did not exercise due professional care while performing the search for +unrecorded liabilities during the 2013 Audit. Nine out of twenty-six payments that fell within the +testing parameters were erroneously excluded from testing. The excluded payments included three +of the Plaintiff A settlement payments (including a $445,000 payment to Law Firm A), as well as a +settlement payment for another undisclosed lawsuit. +SL’s Policies and Procedures were Deficient +63. PCAOB Standard QC Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice (“QC § 20”), requires a CPA firm to have a system of quality +control for its auditing practice. The standard requires the firm to adopt policies and procedures +that provide the firm with reasonable assurance that “the likelihood of association with a client +whose management lacks integrity is minimized,” QC § 20.14; “the firm . . . appropriately +considers the risks associated with providing professional services in the particular circumstances,” +QC § 20.15; and “the work performed by engagement personnel meets applicable professional +standards, regulatory requirements, and the firm’s standards of quality,” QC § 20.17. Firm policies +and procedures should also provide reasonable assurance that the policies and procedures +established for the elements of quality control described in the standard are “suitably designed and +are being effectively applied.” QC § 20.20; see also AU § 161. SL failed to adhere to QC § 20 in +several respects. +64. In 2014, SL hired a new Director of Quality Control in response to a peer review +that found that SL’s system of quality control was not suitably designed or sufficiently complied +with to provide the firm with reasonable assurance of performing and/or reporting in conformity +17 +with applicable professional standards in all material respects. The Director of Quality Control, +along with SL’s Managing Partner, was responsible for administering and monitoring SL’s system +of quality control. However, the Director of Quality Control had limited experience conducting +public company audits, and SL’s Managing Partner had no public company audit experience. SL’s +Director of Quality Control and Managing Partner lacked the experience and expertise necessary to +provide reasonable assurance that SL complied with the requirements of QC § 20. +65. SL’s policies and procedures regarding engagement acceptance and continuance +were deficient because they placed the ultimate authority for decisions on engagement acceptance +and resignation, as well as engagement staffing, with personnel who lacked the experience and +expertise necessary to make those decisions. +66. SL failed to adopt and implement adequate policies and procedures regarding audit +planning and risk assessment. Specifically, SL’s quality control document lacked policies and +procedures addressing the need to engage in planning and risk assessment procedures throughout +the course of an engagement or to modify engagement strategy to respond to changes in risk +assessment and previously unidentified risks of material misstatement. +67. SL failed to adopt and implement adequate policies and procedures governing +supervision, review, and approval. SL’s quality control document did not provide guidance on +supervision and review that addressed engagements staffed by two co-equal principals, as was the +case with most of the QFOR engagements. This contributed to a lack of clear lines of +responsibility for the overall conduct of the engagements and an overly deferential review by the +co-engagement principals of each other’s work. +68. SL also failed to adequately monitor the design and application of its system of +quality control. In the exercise of his monitoring functions, the Director of Quality Control +reviewed the workpaper binder at the conclusion of each attest engagement to provide reasonable +assurance that it included all workpapers required by the firm’s quality control document. He +knew or should have known that the engagement team had not performed the engagement +acceptance and continuance, planning, and risk assessment procedures required by the firm’s +quality control document in connection with the 2015 Form 10-K/A Audit, yet he took no action. +69. Additionally, in the exercise of his monitoring functions, the Director of Quality +Control, for every audit engagement, reviewed and maintained copies of workpapers that, pursuant +to the firm’s quality control document, the engagement partner or engagement principal was +required to sign to document his or her approval of the release of an audit report. These +workpapers were incomplete for each of the QFOR audit engagements. The Director of Quality +Control knew or should have known that the engagement team had not documented the +engagement principal’s approval of the release of the audit report for any of the QFOR audits, as +required by the firm’s quality control document, yet he took no action. +VIOLATIONS +70. Section 10A(a)(2) of the Exchange Act requires each audit to include procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein. No showing of scienter is necessary to establish a violation of +18 +Section 10A of the Exchange Act. As a result of the conduct described above, SL willfully +violated Section 10A(a)(2) of the Exchange Act. +71. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34- +49708 (May 14, 2004). No showing of scienter is necessary to establish a violation of Rule 2- +02(b)(1) of Regulation S-X. As a result of the conduct described above, SL willfully violated +Regulation S-X Rule 2-02(b)(1) when SL issued audit reports stating that it had conducted its +audits in accordance with PCAOB standards when it had not. +72. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission “[t]o have willfully violated, or willfully aided and abetted the violation of, any +provision of the Federal securities laws or the rules and regulations thereunder.” Through the +conduct described above, SL willfully violated the federal securities laws and rules and regulations +thereunder within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. +73. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons licensed +to practice as accountants, “improper professional conduct” includes “intentional or knowing +conduct, including reckless conduct that results in a violation of applicable professional standards.” +Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” includes either of the +following two types of negligent conduct: (1) a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in a violation of applicable professional standards, that +indicate a lack of competence to practice before the Commission. Rule 102(e)(1)(iv)(B). Through +the conduct described above, SL engaged in “improper professional conduct” within the meaning +of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +FINDINGS +74. Based on the foregoing, the Commission finds that SL willfully violated Section +10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X. +75. Based on the foregoing, the Commission finds that SL 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. +19 +UNDERTAKINGS +76. SL has resigned from all audit engagements for issuer clients and has withdrawn +its PCAOB registration. +77. Acceptance of New Clients. +a. SL has undertaken not to accept any audit engagement from any new client who is: +(1) an issuer as that term is defined in Section 2(a)(7) of the Sarbanes-Oxley Act +of 2002; (2) registered with the Commission; or (3) seeking an audit for the +purpose of registering securities with the Commission from the date of entry of +this order. +b. If SL wishes to accept any audit engagement from any new client described in +paragraph 77.a), SL undertakes that, before it accepts such engagements, it will: (1) +certify that it is registered with the PCAOB in accordance with the Sarbanes- +Oxley Act of 2002, and such registration continues to be effective; (2) comply +with the undertakings discussed in paragraphs 78 through 82 below; and (3) provide +the Division of Enforcement with written certification of such compliance by an +independent consultant, as set forth in paragraph 79.e) below. +78. Independent Consultant. If SL wishes to accept any audit engagement from any +new client described in paragraph 77.a): +a. SL shall retain the services of an independent consultant (“Independent +Consultant”) not unacceptable to the Division of Enforcement of the Commission +(“Division of Enforcement”), to review and evaluate SL’s policies and procedures +regarding: (1) client and engagement acceptance and client retention; (2) staffing +and supervision of engagement personnel; (3) audit planning; (4) risk assessment; +(5) the exercise of due professional care and professional skepticism; (6) +obtaining sufficient appropriate audit evidence, including from independent +sources, directly by the auditor; (7) the identification of related parties and related +party transactions and the examination and evaluation of such transctions and the +appropriate disclosures thereof; (8) the evaluation of and reliance upon +management representations; (9) the confirmation process, including obtaining +and evaluating evidence from third parties and determining whether further +testing is required; (10) the consideration of fraud in a financial statement audit, +including review and testing of journal entries; (11) identifying and evaluating the +accounting and reporting for litigation, claims, and assessments; (12) appropriate +procedures upon the subsequent discovery of facts existing at the date of a +previous audit report; (13) performing engagement quality reviews; and (14) +adequate audit documentation, including work paper sign-off. +b. SL 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 SL. +20 +c. SL 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 79 below. +d. To ensure the independence of the Independent Consultant, SL: (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. +e. SL 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 SL, 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 Division of Enforcement’s Chicago office, enter into any +employment, consultant, attorney-client, auditing, or other professional relationship +with SL 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. +f. The reports by the Independent Consultant will likely include confidential +financial, proprietary, competitive business or commercial information. Public +disclosure of the reports could discourage cooperation, impede pending or +potential government investigations or undermine the objectives of the reporting +requirement. For these reasons, among others, the reports and the contents +thereof are intended to remain and shall remain non-public, except (1) pursuant to +court order, (2) as agreed to by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in +furtherance of the Commission’s discharge of its duties and responsibilities, or (4) +is otherwise required by law. +79. Independent Consultant Reports and Certifications. +a. Within five months of the Independent Consultant being retained, SL shall require +the Independent Consultant to issue a detailed written report (“Report”) to SL: +(1) describing the Independent Consultant’s review and evaluation of the areas +identified in paragraph 78.a) above; and (2) making recommendations, where +appropriate, reasonably designed to ensure that audits conducted by SL comply +with Commission regulations and with PCAOB standards and rules. SL shall +21 +require the Independent Consultant to provide a copy of the Report to the +Commission staff when the Report is issued. +b. SL shall adopt, implement, and thereafter maintain all recommendations made by +the Independent Consultant in the Report; provided, however, that within thirty +days of issuance of the Report, SL may advise the Independent Consultant and the +Division of Enforcement in writing of any recommendation that it considers to be +unnecessary, unduly burdensome, or impractical. With respect to any such +recommendation, SL need not adopt that recommendation at that time but shall +propose in writing to the Independent Consultant and the Division of Enforcement +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 SL and the Independent Consultant do not agree, SL shall attempt in good +faith to reach agreement with the Independent Consultant within sixty days of the +date of the Report. In the event that SL and the Independent Consultant are +unable to agree on an alternative proposal, SL shall abide by the determinations of +the Independent Consultant and adopt those recommendations deemed +appropriate by the Independent Consultant. +c. 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, SL shall certify to the +Commission staff in writing that it has adopted and has implemented or will +implement all recommendations of the Independent Consultant (“Interim +Certification of Compliance”). SL shall provide a copy of the Interim +Certification of Compliance to the Commission staff. +d. Within six months of the issuance of the Report, SL shall require the Independent +Consultant to: (1) test whether SL has implemented and enforced its policies and +procedures concerning the areas specified in paragraph 78.a) above; (2) assess the +effectiveness of those policies and procedures; and (3) test whether SL’s staff has +completed the training specified in paragraph 80 below. SL shall require the +Independent Consultant to issue a written final report summarizing the results of +the Independent Consultant’s test and assessment (“Final Report”) and to provide +a copy of the Final Report to the Commission Staff. +e. Upon issuance of the Final Report, if the Independent Consultant determines that +the undertakings discussed herein have been completed to the satisfaction of the +Independent Consultant, SL 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. +SL’s undertaking to not accept any new clients described in paragraph 77 above +shall continue until the Independent Consultant has issued the Independent +Consultant Certification. +80. Training. If SL wishes to accept any audit engagement from any new client +described in paragraph 77.a), SL shall require each audit and attest professional to complete +successfully: (a) a minimum of 24 hours of audit-related training; and (b) a minimum of 8 hours +22 +of fraud-detection training. The audit-related training requirement will cover the topics specified +in paragraph 78.a) above, with no less than four 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. The fraud- +detection training requirement will include training in 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. + +81. Within sixty days from the date of completion of the undertakings, SL shall +certify, in writing, compliance with the undertakings set forth above (“Final Certification of +Compliance”). The Final Certification of Compliance 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. +82. The engagement letter, Report, Interim Certification of Compliance, Final Report, +Independent Consultant Certification, Final Certification of Compliance, and any related +correspondence or other documents shall be submitted to Amy S. Cotter, Division of +Enforcement, Securities and Exchange Commission, 175 W. Jackson Blvd., Ste. 1450, Chicago, +IL 60604, with a copy to the Office of Chief Counsel of the Division of Enforcement. +83. 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. +84. SL agrees that if the Division of Enforcement believes that SL has not satisfied +these undertakings, it may petition the Commission to reopen the matter to determine whether +additional sanctions are appropriate. +85. In determining whether to accept the Offer, the Commission has considered these +undertakings. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent SL shall cease and desist from committing or causing any violations and +any future violations of Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation +S-X. + + B. Respondent SL is censured. + +23 + C. Respondent SL shall comply with the undertakings enumerated in paragraphs 77 to +84 of Section III above. + +D. Respondent SL shall pay disgorgement of $24,500.00, prejudgment interest of +$4,010.29, and a civil money penalty of $70,000.00, to the Securities and Exchange Commission. +The Commission may distribute civil money penalties collected in this proceeding if, in its +discretion, the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, +Section 308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant +to this paragraph in an account at the United States Treasury pending a decision whether the +Commission, in its discretion, will seek to distribute funds or transfer them to the general fund of +the United States Treasury, subject to Section 21F(g)(3). Payment shall be made in the following +installments: $20,000 to be paid within 21 days of the entry of this Order; $20,000 to be paid +within 90 days of the entry of this Order; $20,000 to be paid within 180 days of the entry of this +Order; $20,000 to be paid within 270 days of the entry of this Order; and the remaining balance to +be paid within 364 days of the entry of this Order. Payments shall be applied first to post-order +interest, which accrues pursuant to SEC Rule of Practice 600 as to disgorgement and prejudgment +interest and pursuant to 31 U.S.C. § 3717 as to the civil money penalty. Prior to making the final +payment set forth herein, Respondent shall contact the staff of the Commission for the amount +due. If Respondent fails to make any payment by the date agreed and/or in the amount agreed +according to the schedule set forth above, all outstanding payments under this Order, including +post-order interest, minus any payments made, shall become due and payable immediately at the +discretion of the staff of the Commission without further application to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman Lobel LLP as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Paul A. Montoya, Associate Regional Director, +24 +Division of Enforcement, Securities and Exchange Commission, 175 West Jackson Boulevard, +Suite 1450, Chicago, Illinois 60604. + + E. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4123.txt b/raw/aaer/2020/AAER-4123.txt new file mode 100644 index 0000000000000000000000000000000000000000..4fc167c2377e23051f203dfc60b965161d29bde3 --- /dev/null +++ b/raw/aaer/2020/AAER-4123.txt @@ -0,0 +1,110 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88659 / April 16, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4123 / April 16, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-17112 + +In the Matter of +Miranda Suen, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On June 7, 2016, Miranda Suen, CPA (“Suen”) 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 her pursuant to Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.1 This order is issued in response to Suen’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 Suen served as the engagement manager during Frazer Frost +LLP’s third quarter 2010 review and 2011 year-end audit of China Valves Technology, Inc. +(“CVVT”). In 2010, CVVT misled investors about its acquisition of Watts Valve (Changsha) +Co., Ltd and, in 2011, materially overstated income and understated liabilities incurred by +another subsidiary, Shanghai Pudong Hanwei Valve Co., Ltd., in its financial statements. Suen, +and others, 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 and the firm failed to comply with the documentation requirements of Rule 2-06 of +Regulation S-X. As a result, she engaged in improper professional conduct and was also a cause +of Frazer Frost’s violation of Rule 2-06 of Regulation S-X. + +In her 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, Suen + +1 See Accounting and Auditing Enforcement Release No. 3781 dated June 7, 2016. Suen was permitted, pursuant to +the order, to apply for reinstatement after one year upon making certain showings. + + 2 +attests that she will undertake to have her work reviewed by the independent audit committee of +any company for which she works, or in some other manner acceptable to the Commission, +while practicing before the Commission in this capacity. Suen is not, at this time, seeking to +appear or practice before the Commission as an independent accountant. If she should wish to +resume appearing and practicing before the Commission as an independent accountant, she will +be required to submit an application to the Commission showing that she has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Suen’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. + +Suen is currently subject to probation under the California Board of Accountancy that is +scheduled to end in October 2020. Failure to abide by the terms of her probation could result in +the revocation of Suen’s CPA license pending notice and an opportunity to be heard by the +California Board of Accountancy. Suen has attested that she will notify the Commission if she is +found to have violated the terms of the probation. She also has attested that she understands that +the revocation of her CPA license could result in the revocation of her 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 Suen, it appears that she has complied with the terms of the June 7, 2016 order suspending her +from appearing or practicing before the Commission as an accountant, that no information has +come to the attention of the Commission relating to her character, integrity, professional conduct +or qualifications to practice before the Commission that would be a basis for adverse action +against her pursuant to Rule 102(e) of the Commission's Rules of Practice, and that Suen, by +undertaking to have her work reviewed by the independent audit committee of any company for +which she works, or in some other manner acceptable to the Commission, in her 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 +Miranda Suen, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4124.txt b/raw/aaer/2020/AAER-4124.txt new file mode 100644 index 0000000000000000000000000000000000000000..05ccb66d5938c3502884d312673f0720408ddcd5 --- /dev/null +++ b/raw/aaer/2020/AAER-4124.txt @@ -0,0 +1,346 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88679 / April 17, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4124 / April 17, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19751 + + +In the Matter of + +Eni S.p.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 Eni S.p.A. (“Eni” 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. Between 2007 and 2010, Saipem S.p.A. (“Saipem”), a subsidiary controlled by +Eni S.p.A. (“Eni”), which at the time held a 43% interest in Saipem, entered into four sham +contracts with an intermediary to assist in obtaining contracts awarded by Algeria’s state owned +oil company. Saipem conducted little or no due diligence before entering into the contracts, +received no legitimate services from the intermediary, and falsely characterized its payments to +the intermediary as lawful “brokerage fees” in its books and records, which were consolidated +into Eni’s during the relevant period. As a consequence, Eni, an Italian multinational oil and +gas company whose American Depositary Receipts (“ADRs”) are listed on the New York Stock +Exchange, violated the books and records and internal accounting controls provisions of the +Foreign Corrupt Practices Act (“FCPA”). + +2. Executive A, who served as Saipem’s CFO from 1996 to 2008, participated in +Saipem’s approval of the intermediary contracts, despite being aware of Saipem’s lack of due +diligence, and facilitated the payments to the intermediary, despite being aware of the lack of +services rendered by the intermediary. Executive A was later hired to be the CFO of Eni in +August 2008, and continued to facilitate Saipem’s payments to the intermediary while at Eni. + +3. Saipem paid approximately €198 million to the intermediary and was awarded at +least seven contracts from the Algerian state-owned oil company. The intermediary directed a +portion of the money it received from Saipem to Algerian government officials or their +designees. + +4. As a result of Saipem’s and Executive A’s conduct, Eni’s consolidated financial +statements failed to accurately record the true nature of Saipem’s transactions with the +intermediary in Eni’s books and records. Instead, in violation of the books and records +provisions of Section 13(b)(2)(A) of the Exchange Act, Eni—based on Saipem’s own +characterization of its intermediary payments—indicated in its filings with the Commission +that those payments were lawful “brokerage fees.” + +5. In contravention of Sections 13(b)(2)(B) and 13(b)(6) of the Exchange Act, +because Eni’s CFO was aware of and participated in Saipem’s conduct, Eni failed to proceed +in good faith to use its influence to cause Saipem to devise and maintain a system of internal +accounting controls consistent with Section 13(b)(2)(B) of the Exchange Act. + +6. During the relevant period, Saipem’s practice was to annually distribute to its + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + +shareholders approximately one-third of its profits, so Eni, with its 43% minority-controlling +interest, benefitted from the profits derived from Saipem’s contracts in Algeria. As a 43% +shareholder of Saipem, Eni also benefitted from the fact that Saipem took a tax deduction on +the fees it paid to the intermediary, despite not receiving legitimate services from the +intermediary and thus not incurring a legitimate business expense. + +7. In September 2018, an Italian trial court found Saipem, Executive A, and others +guilty of the Italian crime of international corruption for the payments from Saipem through an +intermediary to Algerian officials. Eni, its former CEO, and a senior Eni executive were +acquitted of the same and related charges by the same court. The court ordered Saipem to +forfeit approximately €198 million, which the court variously described as “the crime’s +profit,” “the amount of the bribe paid by Saipem,” “the quantum paid for the acquisition of the +contracts and, as such, the proceeds of the crime” and “commissions” paid to the intermediary. +The court also ordered Saipem to pay a €400,000 fine. Executive A received a 49-month +prison sentence. On January 15, 2020, the Milan Court of Appeals affirmed the trial court’s +acquittal of Eni and its officers but overruled the trial court and acquitted the remaining +defendants, including Saipem and Executive A, of all charges. This recent ruling may be +further appealed to the Supreme Court of Italy. + +Respondent + +8. Eni S.p.A. (“Eni”) is an Italian company headquartered in Rome, engaged in the +oil and gas, electricity generation, petrochemical, oilfield services and engineering industries. +Eni’s American Depositary Receipts (“ADRs”) are listed on the New York Stock Exchange. +Since 1995, Eni’s ADRs have been registered with the Commission pursuant to Section 12(b) +of the Exchange Act. In July 2010, in settlement of an action brought by the SEC, Eni and its +then- wholly-owned subsidiary, Snamprogetti Netherlands, B.V. (“Snamprogetti”), consented to +a judgment entered by the U.S. District Court for the Southern District of Texas that +permanently enjoined Eni from violating the books and records and internal accounting controls +provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and permanently +enjoined Snamprogetti from violating the anti-bribery, books and records, and internal +accounting control provisions of the FCPA. SEC v. Eni, S.p.A., No. 10-cv-2414 (S.D. Tex. July +20, 2010). That settlement was based on the conduct of certain Snamprogetti employees who +participated in a joint venture known as TSKJ to construct liquefied natural gas facilities in +Bonny Island, Nigeria. No employee of Eni was alleged to have participated in the TSKJ +misconduct. Pursuant to the consent judgment, Eni and Snamprogetti jointly and severally +disgorged $125 million of ill-gotten gains. Snamprogetti was reorganized in 2008 to become a +wholly-owned subsidiary of Saipem and then later was merged into and made a part of Saipem. + +Facts + +Saipem’s Use of the Intermediary + + +9. In early 2006, Saipem’s management came to understand from the Algerian +owner of the intermediary, who was well-connected in Algerian politics, that, in order to + + +obtain business in Algeria, Saipem would need to hire the intermediary. In meetings with +Saipem’s management, the Algerian energy minister at the time referred to the owner of the +intermediary as his personal secretary and someone he considered like a “son.” Following +these conversations, Saipem and certain of its subsidiaries entered into at least four sham +contracts with the intermediary and paid the intermediary pursuant to invoices for services +that were never rendered. + +10. The agreements provided that the intermediary would help Saipem identify and +evaluate business opportunities, assist with bidding processes, develop strategies for procuring +contracts, and provide advice and assistance in connection with the performance of such +contracts. The intermediary never rendered any legitimate services to Saipem. In fact, the +intermediary was wholly unequipped to provide the contemplated consulting services in the +technically complex energy design sector, having no employees or offices in Algeria and only +a “virtual office” in Geneva, Switzerland staffed by one individual. + +11. Saipem paid approximately €198 million to the intermediary. The intermediary +directed at least a portion of that money through offshore shell entities to Algerian officials or +their designees, including the Energy Minister at the time. + +12. Algeria’s state-owned oil company awarded at least seven projects to Saipem +between 2007 and 2009. Saipem deducted the intermediary payments from its taxable +corporate income in Italy. + +13. Executive A, Saipem’s then-CFO, was aware of and participated in Saipem’s +intermediary payments. Executive A supervised the inadequate “due diligence” conducted on +the intermediary, negotiated the intermediary fees, bypassed contracting procedures at Saipem, +and approved certain of the contracts as a Director of certain Saipem subsidiaries. + +Eni Failed to Maintain Accurate Books and Records + +14. During the relevant period of 2007 to 2010, Eni consolidated Saipem’s financial +statements into its own. Thus, Saipem’s transactions were reflected in Eni’s consolidated +financial statements, including the approximately €198 million in payments to the +intermediary that Saipem falsely recorded as legitimate “brokerage fees.” By virtue of its +consolidation of Saipem’s financial statements, Eni included the false line item for “brokerage +fees” in its financial statements that it filed with the Commission in its annual reports on Form +20-F for the years 2007 through 2010. + +15. As Eni’s CFO at the time, Executive A knew that the payments to the +intermediary were mischaracterized as legitimate “brokerage fees” in Eni’s financial +statements, despite no legitimate services being rendered by the intermediary. Saipem claimed +the intermediary payments as a legitimate business expense and obtained an approximately +$57 million tax benefit as a result. That inaccurate expense accounting was also reflected in +Eni’s financial statements by virtue of its consolidation of Saipem’s financial statements. +Moreover, approximately $19,750,000 of the unwarranted tax benefit obtained by Saipem also +flowed to Eni as a result of its 43% interest in Saipem during the time when Executive A was + + +Eni’s CFO. + +Eni Failed to Exercise Good Faith to Use Its Influence to Cause Saipem to Design and +Maintain Sufficient Internal Accounting Controls + +16. Eni, as the controlling minority shareholder, required Saipem to maintain its +own internal controls policies, including adopting Eni’s directives of transparency, +traceability, and anti-bribery compliance. However, because of the conduct of Executive A +and others at Saipem, Saipem’s internal accounting controls were not adequately +implemented and were ineffective. + +17. Eni’s subsidiary Saipem conducted no substantive review of the intermediary +contracts at Saipem. For example, Saipem’s legal department conducted a pre-review of the +sham contracts prior to anyone signing them, but these contracts had no names inserted, not +even the name of the intermediary. Accordingly, Saipem’s legal department did not conduct +any review of the intermediary’s business or reputation. Although Saipem had its own internal +audit department, its audits performed on the intermediary contracts were either inadequate or +perfunctory, such as simply matching invoices to payment amounts. Saipem’s intermediary +contracts were not within the scope of Eni’s internal audit function because Saipem had its own +internal audit department. + +18. Executive A, as Saipem’s CFO at the time, along with other senior officers, +bypassed contracting and procurement controls to enter into contracts with the intermediary, +including falsifying and backdating documents concerning the intermediary contracts in Board +notes and approvals. Saipem also made payments to the intermediary on at least one occasion +without approval from the appropriate senior officer until nearly a year after the payment had +been made. These actions demonstrate that Saipem’s internal accounting controls were +inadequate and insufficient. + +19. In August 2008, Executive A was hired to be the CFO of Eni. At Eni, he +remained involved in Saipem’s intermediary contracts by communicating with the +intermediary and its owner and associates, sending emails concerning the intermediary, and +facilitating Saipem’s ongoing payments to the intermediary. For example, in early 2009, an +associate of the intermediary emailed Executive A, Eni’s CFO at the time, for assistance in +getting an invoice paid by Saipem. In response, in May 2009, Executive A sent an email +from his Eni email account to a Saipem manager requesting that Saipem pay the invoice. + +20. While at Eni, Executive A continued to conceal Saipem’s sham intermediary +contracts from, among others, his colleagues at Eni. For example, in August 2009, he received +an email from a Saipem accounting employee that the semi-annual intermediary fees reported +to Eni for 2009—which Executive A knew to be payments to the intermediary for services that +were not rendered—amounted to €63 million rather than the €22 million that was previously +reported, due to an “incorrect allocation” at Saipem. Eni corrected its interim financial +statements because of this discrepancy, yet Executive A did not disclose the true nature of +those “intermediary fees” to anyone else at Eni. To avoid further scrutiny, he did not request + + +any inquiry or review of that accounting discrepancy. Similarly, he did not request any inquiry +or review as to why Saipem’s “intermediary fees” increased four-fold from 2007 to 2008. + +21. After becoming CFO of Eni, Executive A continued to override and undermine +Saipem’s internal accounting controls by exerting his influence over Saipem and requesting +that it prepay an invoice from the intermediary that was not due yet. Executive A also +circumvented Saipem’s anti-bribery internal controls by emailing the intermediary’s +“strawman” owner and also meeting with the intermediary’s true owner. + +22. In late 2012, Eni became aware that Saipem had entered into four agreements +with the intermediary without conducting adequate due diligence. Eni also learned that +Executive A had continued to involve himself in Saipem’s payments to the intermediary. +Immediately upon discovering those facts, Eni separated Executive A from the company. + +23. Section 13(b)(6) of the Exchange Act provides that when an issuer that holds 50 +per centum or less of the voting power with respect to a domestic or foreign firm, the +provisions of Section 13(b)(2) of the Exchange Act require only that the issuer proceed in good +faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause +such domestic or foreign firm to devise and maintain a system of internal accounting controls +consistent with Section 13(b)(2) of the Exchange Act. Such circumstances include the relative +degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices +governing the business operations of the country in which such firm is located. An issuer +which demonstrates good faith efforts to use such influence shall be conclusively presumed to +have complied with the requirements of Section 13(b)(2) of the Exchange Act. + +24. Here, however, because Saipem’s accounting for intermediary fees was +inaccurate, and because Executive A participated in the approval of and payments to the +intermediary while at Saipem and continued to take certain actions to facilitate payments to the +intermediary while CFO of Eni, Eni failed to proceed in good faith to cause Saipem to devise +and maintain sufficient internal accounting controls. As the principal finance officer of Eni, +Executive A could not have been proceeding in good faith to cause Saipem to devise and +maintain sufficient internal accounting controls while simultaneously being aware of, and +participating in, conduct at Saipem that undermined those controls. Because its CFO was not +acting in good faith, Eni cannot rely on the provisions of Section 13(b)(6) of the Exchange Act. + +Eni’s Remedial Efforts + +25. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Eni and cooperation afforded the Commission staff, including +compiling financial data and analysis relating to the transactions at issue, making substantive +presentations on key topics, and providing translations of key documents and foreign +proceedings. + +Violations + +26. As a result of the conduct described above, Eni violated Section 13(b)(2)(A) of + + +the Exchange Act, which requires reporting companies to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and +dispositions of their assets. + +27. In contravention of Section 13(b)(6) of the Exchange Act, Eni did not proceed in +good faith to use its influence, to the extent reasonable under Eni’s circumstances, to cause +Saipem to devise and maintain a sufficient system of internal accounting controls consistent +with Section 13(b)(2) of the Exchange Act. As a result of the conduct described above, Eni +violated Section 13(b)(2)(B) of the Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Eni’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Eni cease and desist +from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B). + + B. Respondent Eni shall, within 14 days of the entry of this Order, pay disgorgement +of $19,750,000 and prejudgment interest of $4,750,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange +Act Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant +to 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 +Eni as a Respondent in these proceedings, and the file number of these proceedings; a copy of + + +the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5553. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4125.txt b/raw/aaer/2020/AAER-4125.txt new file mode 100644 index 0000000000000000000000000000000000000000..5ce3f4ca619f2d35ff95d6a6d2a35cd18adb2a70 --- /dev/null +++ b/raw/aaer/2020/AAER-4125.txt @@ -0,0 +1,116 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88686 / April 17, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4125 / April 17, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19756 + + + + +In the Matter of + +BRIAN ROBERT SODI, 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 +Brian Robert Sodi, CPA (“Respondent”) pursuant to Rule 102(e)(3) of the Commission’s Rules +of Practice.1 + + + +1 Rule 102(e)(3) provides, in relevant part, that: + +The Commission … may, by order, temporarily suspend from 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 … 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 him and the subject matter of these proceedings, and the findings contained in +paragraphs III. 1, 2 and 4 below, and consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Respondent Sodi, 48 years old and a resident of Boca Raton, Florida, was licensed +as a CPA by the State of Florida in 1995. In or about 1998, Sodi allowed his Florida CPA license +to lapse. Between 1998 and 2017, Sodi was owner and principal of various penny stock +promotion publishing houses, including Capital Financial Media LLC (“CFM”) and List Data +Solutions LLC (“LDS”). + +2. On April 16, 2020, a final judgment was entered by consent against Sodi, +permanently enjoining him from future violations of Sections 5, 17(a) and 17(b) of the Securities +Act of 1933 (“Securities Act”), and Sections 10(b) and 13(d) of the Exchange Act and Rules +10b-5 and 13d-1 thereunder, in the civil action entitled Securities and Exchange Commission v. +Brian Robert Sodi, et al., Civil Action No. 5:18-cv-00313-MHH, in the United States District +Court for the Northern District of Alabama (“SEC v. Sodi”). + +3. The Commission’s complaint (the “SEC Complaint”) in SEC v. Sodi alleged that, +on at least two occasions during 2013, in connection with offerings of two different penny stocks +quoted for trading on U.S. markets, Sodi engaged in “scalping” by secretly acquiring shares +and/or interests in shares of the companies, and then promoting both companies to investors +through his penny stock platform publishing houses, including CFM and LDS, without +disclosing his ownership of/interest in the shares or his plans to sell them/share in profits from +their sale, and then selling/participating in the selling of both companies’ shares, following the +promotions’ dissemination, into the share price and trading volume increases triggered by said +promotions, and ultimately realizing his share of the two stocks’ sales proceeds through circuitous +repatriation. The SEC Complaint also alleged that, as to one of the penny stocks, Sodi sold +unregistered securities, failed to properly disclose the consideration received for the promotions, +and failed to comply with the beneficial ownership reporting requirements. + +4. On May 20, 2019, Sodi pled guilty to securities fraud in violation of Title 15 +United States Code, Section(s) 77q(a), 77x before the United States District Court for the + 3 +Northern District of Alabama, in United States v. Brian R. Sodi, Crim. No. 5:18-cr-56-KOB- +HNJ. + + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondent Sodi’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately that, pursuant to Rule +102(e)(3)(i)(A) of the Commission’s Rules of Practice, Sodi is suspended from appearing or +practicing before the Commission as an accountant. + + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4126.txt b/raw/aaer/2020/AAER-4126.txt new file mode 100644 index 0000000000000000000000000000000000000000..6df0a1773ffc909231c03281ea377cc15b96b7f3 --- /dev/null +++ b/raw/aaer/2020/AAER-4126.txt @@ -0,0 +1,129 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5484 / April 22, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4126 / April 22, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19763 + + + +In the Matter of + +N. SCOTT GILLIS, 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 N. Scott +Gillis (“Gillis” or “Respondent”) pursuant to Section 203(f) of the Investment Advisers Act of +1940 (“Advisers Act”) and Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 + + +1 Rule 102(e)(3)(j) 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 . . . 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.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. Gillis was a certified public accountant licensed to practice in the State of Georgia +until his license lapsed at the end of 2017. Gillis was Chief Financial Officer and Chief Operating +Officer of Aequitas Management, LLC (“Aequitas Management”), an Oregon limited liability +company formed in 2007 with a principal place of business in Lake Oswego, Oregon. Aequitas +Management is the parent company of a number of entities, including Aequitas Investment +Management, LLC (“AIM”), an Oregon limited liability company formed in 2006 with a principal +place of business in Lake Oswego, Oregon. AIM was the investment adviser to a number of +Aequitas funds that raised monies from investors. From 2007 to 2016, AIM was registered as an +investment adviser with the Commission. Gillis, age 66, resides in Lake Oswego, Oregon. + +2. On April 13, 2020, a final judgment was entered by consent against Gillis, +permanently enjoining him from future violations of Sections 17(a) of the Securities Act of 1933 +(“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule +206(4)-8 thereunder, in the civil action entitled Securities and Exchange Commission v. Aequitas +Management LLC, et al., Civil Action Number 3:16-CV-00438-JR, in the United States District +Court for the District of Oregon. + +3. The Commission’s complaint alleged that, in connection with the sale of securities, +Gillis engaged in a scheme to defraud and aided and abetted the making of materially false and +misleading statements to investors regarding the financial condition of the Aequitas companies, the +use of investor funds, and the collateral that backed the securities. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Gillis’ Offer. + + 3 + Accordingly, it is hereby ORDERED pursuant to Section 203(f) of the Advisers Act and +Rule 102(e)(3) of the Commission’s Rules of Practice, effective immediately, that: + + A. Respondent Gillis 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. + + B. 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. + + C. Gillis is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4127.txt b/raw/aaer/2020/AAER-4127.txt new file mode 100644 index 0000000000000000000000000000000000000000..86c6c3e0bbe4fa48498210508f85a9a52f36f3ae --- /dev/null +++ b/raw/aaer/2020/AAER-4127.txt @@ -0,0 +1,427 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10775 / April 22, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88720 / April 22, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4127 / April 22, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19758 + + +In the Matter of + +BRIAN L. FERDINAND, + +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 Brian L. Ferdinand (“Ferdinand” or “Respondent”). + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondent +consents to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section +8A of the Securities Act and 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 involve Liquid Holdings Group, Inc.’s (“Liquid”) disclosures in its +periodic filings and secondary public offering Form S-1 regarding its reliance on loans and +investments from Ferdinand and Liquid’s largest shareholder (“Shareholder A”) to provide a +substantial portion of the money QuantX Management LLP (“QuantX”)—Liquid’s largest +customer and a related party—paid to Liquid in software subscription fees. When QuantX +needed to raise capital in 2013, Ferdinand and Shareholder A provided additional capital to +QuantX to pay its quarterly software subscription fees to Liquid. Ferdinand knew that QuantX +could not have paid the fees it owed to Liquid without this money. Liquid did not disclose these +facts in the Form 10-Q for the third quarter of 2013 or the Form 10-K for 2013. In addition, +Liquid’s Form 10-Q for the third quarter of 2013, the Form 10-K for 2013, and the Form S-1 +filed on April 9, 2014 stated that QuantX represented 69 percent or more of Liquid’s revenue +during the relevant periods but failed to disclose that Liquid was reliant on Ferdinand and +Shareholder A to provide QuantX with additional money to pay its software subscription fees to +Liquid. As a result, Liquid’s disclosures regarding its reliance on QuantX were materially +misleading. During the relevant period, Ferdinand was a member of its Board of Directors and +Liquid’s Head of Corporate Strategy. He was also a co-owner of QuantX, and was +knowledgeable about its financial condition at all times during the relevant period. + +2. During the relevant period, in his role as a board member, Ferdinand reviewed the +Form 10-Q for the third quarter of 2013 and signed the Form 10-K for 2013 and the initial Form S- +1 for Liquid’s secondary public offering. + +3. Ferdinand also failed to timely file new Forms 4 on two occasions in 2014, and to file +amendments to Schedule 13D with the Commission following five material changes to his +ownership of Liquid shares of common stock in 2014 and 2015. + +4. As a result of the conduct described herein, Ferdinand was a cause of Liquid’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +promulgated thereunder and Section 17(a)(2) of the Securities Act; and violated Sections +13(d)(2) and 16(a) of the Exchange Act and Rules 13d-2(a) and 16a-3 promulgated thereunder. + +RESPONDENT + +5. Brian L. Ferdinand, age 42, resides in Syosset, New York. Ferdinand was a founder +of Liquid and was Liquid’s second-largest shareholder until May 2014. From July 2013 through +April 18, 2014, Ferdinand served as a member of Liquid’s Board of Directors and was Head of + + +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 +Corporate Strategy. At all times during the relevant period, Ferdinand, through entities +controlled by him, had a membership interest in QuantX. + +RELATED ENTITIES + +6. Liquid Holdings Group Inc. was a Delaware corporation that was headquartered in +New York City. Liquid’s common shares were registered pursuant to Section 12(b) of the +Exchange Act and were quoted on the NASDAQ until the stock was delisted in September 2015. +Liquid developed and sold software technology to the financial services industry. It filed for +bankruptcy Chapter 11 protection in January 2016. Its bankruptcy was converted to Chapter 7 in +February 2016. Liquid is currently controlled by a court-appointed bankruptcy trustee and is no +longer operating. + +7. QuantX Management LLP was a regulated UK Limited Liability Partnership with +its main offices in London, and offices in New York City. QuantX was a partner-funded trading +firm that allocated capital to traders. In Liquid’s Form S-1 and S-1/A for its initial public +offering, QuantX was disclosed as a related party to Liquid, owned in part by entities controlled +by Ferdinand and Shareholder A. QuantX ceased operations in December 2014. + +FACTS + +8. Liquid developed and sold software technology to the financial services industry. Its +main product (the “Liquid Platform”) was comprised of three pieces of software, each of which +was referred to as a “unit.” Beginning on June 1, 2013, Liquid earned all of its revenue from +licensing fees paid by software subscribers (“customers”) on a monthly or quarterly basis +(“software revenue”). + +9. During the third quarter of 2013 through the second quarter of 2014 (the “relevant +period”), Liquid’s largest customer in terms of revenue and unit subscriptions was QuantX. +QuantX operated as a trading firm that traded for its own account using the Liquid Platform. + +10. In addition to trading in its own accounts, QuantX recruited small hedge funds and +individual traders (“QuantX Traders”). QuantX provided trading capital to the QuantX Traders +(“allocation of trading capital”). QuantX required the QuantX Traders to subscribe to, and pay +Liquid for, at least one unit of the Liquid Platform. QuantX was to receive a share of the +QuantX Traders’ trading profits generated from the capital allocated by QuantX. + +Ferdinand’s and Shareholder A’s Loans and Investments + +11. In early 2013, Ferdinand sought to expand QuantX’s trading operations by recruiting +additional QuantX Traders and allocating greater amounts of capital to them. However, QuantX +lacked sufficient capital to fund the allocations. Ferdinand asked Shareholder A to loan QuantX +approximately $7.5 million in February 2013, which he did. QuantX used some of Shareholder +A’s loan to pay a portion of the software subscription fees that QuantX owed to Liquid during +the first nine months of Liquid’s 2013 fiscal year. + + 4 +12. In the third and fourth quarters of 2013, QuantX’s and the QuantX Traders’ trading +was not generating consistent and sufficient profits to support QuantX’s expansion. +Additionally, QuantX owned hundreds of thousands of Liquid shares that it used as collateral +with its prime broker. The combination of Liquid’s falling share price and trading losses resulted +in margin calls from QuantX’s prime broker in the third and fourth quarters of 2013. These +margin calls increased in size and frequency over these two quarters. QuantX had to reduce its +holdings and the size of its allocations of trading capital to QuantX Traders to meet or partially +meet the calls. During the third and fourth quarters of 2013, QuantX was not generating +sufficient profits to make all of its allocations of trading capital, and also pay, among other +corporate obligations, the software subscription fees it owed Liquid. + +13. In early October, Ferdinand asked Shareholder A to invest an additional $4 million in +QuantX, which he did. On October 11, 2013, $391,147 of this investment was transferred to +Liquid to pay QuantX’s outstanding software subscription fees for the third quarter, which +totaled $556,312. This investment enabled QuantX to pay, among other corporate obligations, +the software subscription fees that it owed to Liquid for this period. + +14. Approximately half of Liquid’s revenue for the first nine months of 2013 originated +from Shareholder A’s 2013 loans to, and investments in, QuantX. + +15. During the fourth quarter of 2013, QuantX continued to receive margin calls, to have +uneven trading profits, and increased capital allocations to the additional traders it brought on. +By November 2013, Ferdinand knew or should have known that QuantX would not be able to +pay its quarterly software subscription fees to Liquid in full. + +16. In November and early December 2013, Ferdinand loaned QuantX approximately $1 +million. On December 30, 2013 approximately $473,500 of the proceeds from this loan were +transferred to Liquid to pay QuantX’s October and November 2013 invoices, which totaled +$751,710. This loan enabled QuantX to pay, among other corporate obligations, the software +subscription fees that it owed to Liquid for this period. + +17. In 2013, Liquid was reliant on loans and investments from Ferdinand and Shareholder +A to QuantX to fund approximately 70 percent of QuantX’s software subscription fees that it +paid to Liquid. + +Liquid’s Disclosures for the Third Quarter of 2013 and Fiscal Year 2013 + +18. In its Form 10-Q for the third quarter of 2013, Liquid reported third quarter software +revenue of $732,388. Liquid also reported $2,016,159 in software revenue for the nine months +ended September 30, 2013 and stated that “QuantX represented . . . 69% of our software +licensing revenues” during the first nine months of 2013. + +19. In its Form 10-K for 2013, Liquid reported that it had total software revenues of +$909,491 in the fourth quarter. It also reported having earned $2,925,650 in software revenue in + + 5 +2013 and that “QuantX represented . . . 72% [$2,119,720] of our software services revenues” that +year. + +20. The representations in paragraphs 18 and 19 were materially misleading. Liquid +failed to disclose in its Form 10-Q for the third quarter of 2013 its reliance on Shareholder A’s +additional loans and investments in 2013 to enable QuantX to pay 55 percent of its software +subscription fees to Liquid for that quarter. Approximately 50 percent of Liquid’s software +revenue for the first nine months of 2013 originated from Shareholder A’s 2013 loans to, and +investments in, QuantX. Liquid failed to disclose in its Form 10-K its reliance on Ferdinand to +loan QuantX the additional money that comprised approximately 63 percent of QuantX’s fourth +quarter fees to Liquid, which also accounted for more than half of Liquid’s software revenue +during the fourth quarter, and its reliance on Ferdinand and Shareholder A to provide QuantX +with the money that comprised approximately 70 percent of Liquid’s software revenue for the +2013 fiscal year. + +21. Ferdinand knew or should have known that Liquid was reliant on Shareholder A and +Ferdinand to invest in, or loan money to, QuantX to enable QuantX to pay a substantial amount +of its fees to Liquid in the first nine months of 2013, including the third quarter of 2013, and for +the fourth quarter of 2013. Ferdinand reviewed the Form 10-Q for the third quarter of 2013 and +signed the Form 10-K in his role as a board member. + +Liquid’s Disclosures in Connection with the May 2014 Public Offering + +22. Liquid held a secondary public offering on May 15, 2014 and raised a net of $40.6 +million. On April 8, 2014, Ferdinand, along with Liquid’s CEO, CFO, and Liquid’s board, +signed the Form S-1 for the offering, which was filed with the Commission on April 9, 2014. +Ferdinand resigned from both his director and officer positions at Liquid on April 18, 2014. +Liquid subsequently filed three Forms S-1/A after Ferdinand’s resignation and the May 15, 2014 +offering. + +23. In its Form S-1 and Forms S-1/A, Liquid stated that for 2013, “a total of $2,119,720 . +. . in software services revenues were recognized by us from QuantX” and that “QuantX +represented . . . 72% of our software services revenues.” Liquid also stated in its Forms S-1 that +it had total software revenues of $909,491 in the fourth quarter of 2013. These representations +were materially misleading because Liquid failed to disclose its reliance on Shareholder A and +Ferdinand to loan to, or invest additional money in, QuantX to enable it to pay a substantial +portion of these software revenues, as described above. + +QuantX Ceases Operations and Liquid Files for Bankruptcy + +24. In December 2014, QuantX ceased operations because of its financial difficulties. On +December 23, 2014, Liquid announced that it had ended its relationship with QuantX. By the +close of trading on December 24, 2014, Liquid’s share price had dropped 46% from the prior +day’s closing price. Liquid filed for Chapter 11 bankruptcy protection in January 2016, which +was converted to Chapter 7 in February 2016. Liquid is currently controlled by a court- +appointed bankruptcy trustee and is no longer operating. + 6 + +Ferdinand’s Personal Security Reporting Violations + +25. Section 13(d) of the Exchange Act requires reporting on a Schedule 13D by any +person who acquires beneficial ownership of more than 5% of any class of securities registered +pursuant to Section 12 of the Exchange Act. Section 13(d)(2) and Rule 13d-2(a) promulgated +thereunder require a filer to promptly amend Schedule 13D when there are material changes or +developments in the information previously reported. A disposition of 1% or more of the +issuer’s securities is per se material under the rule. The failure to timely file a required report, +even if inadvertent, constitutes a violation. Any delay in filing beyond the date the filing +reasonably can be made may not be considered prompt. Strict liability is sufficient to establish a +violation of Section 13(d)(2) and Rule 13d-2(a). + +26. Section 16(a) of the Exchange Act and the rules promulgated thereunder require +officers and directors and beneficial owners (“insiders”) of more than 10% of any class of any +equity security registered pursuant to Section 12 to file Forms 3, 4 and 5. Under Rule 16a-3, to +keep this information current, insiders must file Form 4 reports disclosing transactions resulting +in a change in beneficial ownership within two business days of the execution date. Strict +liability is sufficient to establish a violation of Section 16(a) and Rule 16a-3. + +27. Ferdinand filed his initial Schedule 13D on August 12, 2013 and subsequently filed +four amendments on March 6, 2014, July 15, 2014, December 11, 2014, and July 8, 2015. +Ferdinand filed his initial Form 4 on July 31, 2013, and subsequently made two additional Form +4 filings between on August 1, 2013 and March 4, 2014. + +28. Ferdinand was subject to the reporting requirements of Exchange Section 13(d) +during all relevant periods and was subject to the reporting requirements of Exchange Act +Section 16(a) in March 2014. + +29. On March 3, 2014, Ferdinand sold a put option to Shareholder A for 535,000 with a +$5.50 strike price. This transaction was material because it involved 2.1% of Liquid’s current +outstanding common stock. Ferdinand was required to report this transaction on Form 4 and +under Item 6 in an amended Schedule 13D because it was a material transaction, but never did. + +30. On March 23, 2014, Ferdinand and Shareholder A provided a put option to another +Liquid shareholder (“Shareholder B”). Under this option, Shareholder B could sell up to one +million shares to Ferdinand and Shareholder A if Shareholder B incurred any losses on Liquid +shares that Shareholder B purchased in the public market at a price below $5.51 between March +23 and April 15, 2014. This transaction was material because it involved 4% of Liquid’s current +outstanding common stock. Ferdinand was required to report this transaction on a Form 4, and +under Item 6 in an amended Schedule 13D because it was a material change to prior disclosures, +but never did. + +31. On May 20, 2014, Ferdinand gifted 1.012 million shares of Liquid common stock to a +family trust, which took ownership and control of the shares. This transaction constituted a +material change in beneficial ownership because it involved 1.7% of Liquid’s current + 7 +outstanding common stock. Ferdinand did not report this transaction on an amended Schedule +13D until July 15, 2014, by which time 56 days had passed. + +32. On September 15, 2014, Ferdinand sold a call option for 1.012 million shares of +Liquid common stock to Shareholder B. This transaction was material because it involved 1.7% +of Liquid’s current outstanding common stock. Ferdinand never reported this transaction under +Item 6 on an amended Schedule 13D, as he was required to do. + +33. On March 13, 2015, Ferdinand transferred 2.056 million shares of Liquid common +stock to Shareholder B. This transaction was material because it involved 3% of Liquid’s current +outstanding common stock and therefore materially changed the amount of beneficial ownership +previously reported by Ferdinand. Ferdinand did not report this material change in an amended +Schedule 13D until July 8, 2015, by which time 117 days had passed. + +VIOLATIONS + +34. As a result of the conduct described above, Ferdinand was a cause of Liquid’s +violations of Section 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the +offer or sale of securities, obtaining money or property 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. Negligence is sufficient +to establish liability for causing a primary violation that does not require scienter. In +administrative proceedings, the Commission may impose sanctions upon any person who is, was, +or would be a cause of a violation, due to an act or omission the person knew or should have +known would contribute to such violation. + +35. As a result of the conduct described above, Ferdinand was a cause of Liquid’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +promulgated thereunder, which require every issuer of a security registered pursuant to Section +12 of the Exchange Act to file with the Commission information, documents, and annual and +quarterly reports as the Commission may require, and mandate that periodic reports contain such +further material information as may be necessary to make the required statements not misleading. +These reports must be complete and accurate in all material respects. See SEC v. Savoy +Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). Negligence is sufficient to establish +liability for causing a primary violation that does not require scienter. In administrative +proceedings, the Commission may impose sanctions upon any person who is, was, or would be a +cause of a violation, due to an act or omission the person knew or should have known would +contribute to such violation. + +36. As a result of the conduct described above, Ferdinand violated Section 13(d)(2) of the +Exchange Act and Rule 13d-2(a) promulgated thereunder, which require that a Schedule 13D +must be promptly amended when there are material changes or developments in the information +previously reported. + +37. As a result of the conduct described above, Ferdinand violated Section 16(a) of the +Exchange Act and Rule 16a-3 promulgated thereunder, which require every person who is the + 8 +beneficial owner of more than 10 percent of any class of any equity security registered pursuant +to Section 12 of the Exchange Act, and any officer or director of the issuer of any such security, +to file initial statements of holdings and to keep such information current by reporting +subsequent transactions with the Commission within two business days. + + +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, Respondent cease and desist from +committing or causing any violations and any future violations of Section 17(a)(2) of the +Securities Act. + +B. 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(d)(2), and +16(a) of the Exchange Act and Rules 13a-1, 13a-13, 12b-20, 13d-2, and 16a-3 promulgated +thereunder. + +C. Respondent shall pay a civil money penalty of $115,000 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: $25,000 within 30 days +of the entry of this Order and $90,000 within 120 days of the entry of this Order. Payments shall be +applied first to post order interest, which accrues pursuant to 31 U.S.C. §3717. Prior to making the +final payment set forth herein, Respondent shall contact the staff of the Commission for the amount +due. If Respondent fails to make any payment by the date agreed and/or in the amount agreed +according to the schedule set forth above, all outstanding payments under this Order, including +post-order interest, minus any payments made, shall become due and payable immediately at the +discretion of the staff of the Commission without further application to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + 9 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Brian L. Ferdinand as Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Steven L. +Klawans, Assistant Director, Division of Enforcement, Securities and Exchange Commission, +175 W. Jackson Boulevard, Suite 1450, Chicago, IL 60604. + +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. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4128.txt b/raw/aaer/2020/AAER-4128.txt new file mode 100644 index 0000000000000000000000000000000000000000..4f01b8bcd10d163caf534c7a1fd3ffac0dd1bbff --- /dev/null +++ b/raw/aaer/2020/AAER-4128.txt @@ -0,0 +1,275 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88723 / April 22, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4128 / April 22, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19759 + + +In the Matter of + +KENNETH D. SHIFRIN, +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 Kenneth D. Shifrin (“Shifrin” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these +proceedings, which are admitted, 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. + +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. These proceedings involve Liquid Holdings Group, Inc.’s (“Liquid”) materially +misleading disclosures in its periodic filings regarding the nature and growth of its customer +base. During the third quarter of 2013 through the second quarter of 2014, Liquid represented +that its ability to expand its customer base was an indicator of the growth of its business. Liquid +also stated in its Form 10-K for 2013 and its quarterly filings for the first and second quarters of +2014 that QuantX Management LLP (“QuantX”), its largest customer and a related party, and +Liquid’s affiliated customers, accounted for a small percentage of its customers. During the +relevant period, however, Liquid’s customer base consisted almost entirely of customers that +were referred to Liquid by QuantX and provided with trading capital by QuantX (the “QuantX +Traders”). Liquid did not disclose in its periodic filings that virtually all of its customers were +QuantX Traders. + +2. Shifrin, Liquid’s CFO, reviewed and signed the SEC filings described above. + +3. As a result of the conduct described herein, Shifrin was a cause of Liquid’s +violations of the reporting provisions of Exchange Act Section 13(a) and Rules 13a-1, 13a-13, +and 12b-20 promulgated thereunder. + +RESPONDENT + +4. Kenneth D. Shifrin, age 62, resides in New Jersey. Shifrin served as Liquid’s Chief +Financial Officer from September 2012 through October 2014. As Liquid’s CFO, Shifrin +reviewed the drafts of Liquid’s periodic reports filed with the Commission and then signed the +final versions. Shifrin was licensed as a Certified Public Accountant in New York. That +license lapsed in January 2015. + +RELATED ENTITIES + +5. Liquid Holdings Group Inc. was a Delaware corporation that was headquartered +in New York City. Liquid’s common shares were registered pursuant to Section 12(b) of the +Exchange Act and were quoted on the NASDAQ until the stock was delisted in September +2015. Liquid developed and sold software technology to the financial services industry. It filed +for bankruptcy Chapter 11 protection in January 2016. Its bankruptcy was converted to +Chapter 7 in February 2016. Liquid is currently controlled by a court-appointed bankruptcy +trustee and is no longer operating. + +6. QuantX Management LLP was a regulated UK Limited Liability Partnership with +its main offices in London, and offices in New York City. QuantX was a partner-funded trading +firm that allocated capital to traders. In Liquid’s Form S-1 and S-1/A for its initial public +offering, QuantX was disclosed as a related party to Liquid. QuantX ceased operations in +December 2014. + + +3 +FACTS + +7. Liquid developed and sold software technology to the financial services industry. +Its main product (the “Liquid Platform”) was comprised of three pieces of software, each of +which was referred to as a “unit.” Beginning on June 1, 2013, Liquid earned all of its revenue +from licensing fees paid by software subscribers (“customers”) on a monthly or quarterly +basis (“software revenue”). + +8. During the third quarter of 2013 through the second quarter of 2014 (the +“relevant period”), Liquid’s largest customer in terms of revenue and unit subscriptions +was QuantX. QuantX operated as a trading firm that traded for its own account using the +Liquid Platform. + +9. In addition to trading in its own accounts, QuantX recruited small hedge funds and +individual traders (“QuantX Traders”) to trade using the Liquid Platform. QuantX provided +trading capital to the QuantX Traders (“allocation of trading capital”) and required the QuantX +Traders to subscribe to, and pay Liquid for, at least one unit of the Liquid Platform. QuantX was +to receive a share of the QuantX Traders’ trading profits generated from the capital allocated by +QuantX. + +10. From the third quarter of 2013 through at least the second quarter of 2014, Liquid +did not successfully and independently recruit more than two customers. During the relevant +period, virtually all of Liquid’s new customers were QuantX Traders. + +11. In the third quarter of 2013, 27 out of 27 Liquid customers were QuantX and +QuantX Traders; in the fourth quarter of 2013, 48 out of 48 Liquid customers were QuantX and +QuantX Traders; in the first quarter of 2014, 74 out of 76 Liquid customers were QuantX and +QuantX Traders; and in the second quarter of 2014, 95 out of 97 Liquid customers were QuantX +and QuantX Traders. + +12. Shifrin knew that virtually all of Liquid’s customers aside from QuantX were +QuantX Traders. He regularly received and reviewed spreadsheets prepared by his staff which +contained Liquid’s current customer roster and the units to which each customer subscribed, +and which identified QuantX and QuantX Traders. Shifrin knew that QuantX was allocating +capital to the QuantX Traders and knew that QuantX required the QuantX Traders to subscribe +to the Liquid Platform. + +Liquid Made Misleading Disclosures Regarding the +Nature and Growth of its Customers Base + +13. In its periodic filings from the third quarter of 2013 through the second quarter of +2014, Liquid reported increasing numbers of customers at the end of each quarter, and in these +same filings, with the exception of the Form 10-Q for the third quarter of 2013, Liquid stated, +“[o]ur ability to expand our customer base is an indicator of our market penetration and the +growth of our business.” +4 + +14. In its Form 10-K for the period ended December 31, 2013, Liquid stated that “QuantX +and our affiliated customers accounted for . . . 10% of our customers.” Liquid’s Form 10-Q for +the first quarter of 2014 stated that “QuantX and our affiliated customers accounted for . . . 7% of +our customers.” Its Form 10-Q for the second quarter of 2014 stated that “QuantX and our +affiliated customers accounted for . . . 3% of our customers.” + +15. Liquid publicly disclosed that QuantX “markets [Liquid] to its own members, thereby +providing [Liquid] with a source of customer referrals,” and that most of Liquid’s customers were +“generated as a result of pre-existing relationships of these customers with our founders and +entities related to them,” which included QuantX. + +16. However, Liquid did not disclose in these public filings that virtually all of its +customers were QuantX Traders. Specifically, Liquid did not disclose in these filings that 90% +to 97% of Liquid’s customer base was made up of QuantX Traders or that the QuantX Traders +received allocations of capital from QuantX and subscribed to, and paid Liquid for, the Liquid +Platform. As a result, Liquid’s disclosures were materially misleading. + +17. Shifrin reviewed and signed the SEC filings described above. + +QuantX Ceases Operations and Liquid Files for Bankruptcy + +18. In December 2014, QuantX ceased operations because of its financial difficulties. +On December 23, 2014, Liquid announced that it had ended its relationship with QuantX. By +the close of trading on December 24, 2014, Liquid’s share price had dropped 46% from the prior +day’s closing price. By January 2015, Liquid had lost virtually all of the QuantX Traders as +customers. Liquid filed for Chapter 11 bankruptcy protection in January 2016, which was +converted to Chapter 7 in February 2016. Liquid is currently controlled by a court-appointed +bankruptcy trustee and is no longer operating. + +VIOLATIONS + +19. As a result of the conduct described above, Shifrin was a cause of Liquid’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +promulgated 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. These reports must be complete and accurate +in all material respects. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1165 (D.C. Cir. +1978). No showing of scienter is necessary to establish a violation of Section 13(a) or Rules +13a-1, 13a-13, or 12b-20. See SEC v. Savoy Indus., Inc., 587 F.2d at 1167. In administrative +proceedings, the Commission may impose sanctions upon any person who is, was, or would be +a cause of a violation, due to an act or omission the person knew or should have known would +contribute to such violation. + + +5 +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 Shifrin cease and +desist from committing or causing any violations and any future violations of Section 13(a) of +the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 promulgated thereunder. + +B. Respondent Shifrin shall pay 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: $5,000 within 30 days of the entry of this Order; $10,000 within 180 days of the +entry of this Order; and an additional $10,000 within one year of the entry of this Order. +Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +§3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of +the Commission for the amount due. If Respondent fails to make any payment by the date +agreed and/or in the amount agreed according to the schedule set forth above, all outstanding +payments under this Order, including post-order interest, minus any payments made, shall +become due and payable immediately at the discretion of the staff of the Commission without +further application to the Commission. + +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 + +6 +Payments by check or money order must be accompanied by a cover letter identifying Kenneth L. +Shifrin as Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Steven L. Klawans, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 175 W. Jackson Boulevard, Suite 1450, 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 +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4129.txt b/raw/aaer/2020/AAER-4129.txt new file mode 100644 index 0000000000000000000000000000000000000000..af9240e2ec17f92966a7d7a00bf8f91e97ce7bad --- /dev/null +++ b/raw/aaer/2020/AAER-4129.txt @@ -0,0 +1,324 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88724 / April 22, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4129 / April 22, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19760 + + +In the Matter of + +BRIAN M. STORMS + +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 Brian M. Storms (“Storms” +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 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 involve Liquid Holdings Group, Inc.’s (“Liquid”) materially +misleading disclosures in its periodic filings regarding the nature and growth of its customer +base and its reliance on its largest customer, QuantX Management LLP ("QuantX"). During the +third quarter of 2013 through the second quarter of 2014, Liquid represented that its ability to +expand its customer base was an indicator of the growth of its business. Liquid also stated in +its Form 10-K for 2013 and its quarterly filings for the first and second quarters of 2014 that +QuantX, its largest customer and a related party, and Liquid’s affiliated customers, accounted +for a small percentage of its customers. During the relevant period, however, Liquid’s +customer base consisted almost entirely of customers that were referred to Liquid by QuantX +and provided with trading capital by QuantX (the “QuantX Traders”). Liquid did not disclose +in its periodic filings that virtually all of its customers were QuantX Traders + +2. Liquid’s largest shareholder (“Shareholder A”) loaned millions to QuantX to +enable it to pay its software subscription fees to Liquid for the second quarter of 2014. +Liquid’s Form 10-Q for the second quarter of 2014 stated that QuantX represented 63 percent +of Liquid’s software revenue for that quarter but failed to disclose that Liquid was reliant on +Shareholder A to provide QuantX with the money to pay its software subscription fees to +Liquid that quarter. + +3. Storms, Liquid’s CEO, reviewed the SEC filings described above, and +signed and/or certified them. + +4. As a result of the conduct described herein, Storms was a cause of Liquid’s +violations of the reporting provisions of Exchange Act Section 13(a) and Rules 13a-1, +13a-13, and 12b-20 promulgated thereunder. + +RESPONDENT + +5. Brian M. Storms, age 65, resides in New Jersey. Storms served as Liquid’s +Chief Executive Officer from December 2012 through February 2015, a member of the +Board of Directors from December 2012 through September 2015, and as Chairman of the +Board from July 2013 until December 2013. Storms reviewed Liquid’s periodic reports filed +with the Commission and signed and/or certified them as the principal officer of Liquid. + + +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 +RELATED ENTITIES AND INDIVIDUAL + +6. Liquid Holdings Group Inc. was a Delaware corporation that was +headquartered in New York City. Liquid’s common shares were registered pursuant to +Section 12(b) of the Exchange Act and were quoted on the NASDAQ until the stock was +delisted in September 2015. Liquid developed and sold software technology to the financial +services industry. It filed for bankruptcy Chapter 11 protection in January 2016. Its +bankruptcy was converted to Chapter 7 in February 2016. Liquid is currently controlled by a +court-appointed bankruptcy trustee and is no longer operating. + +7. QuantX Management LLP was a regulated UK Limited Liability Partnership +with its main offices in London, and offices in New York City. QuantX was a partner- +funded trading firm that allocated capital to traders. In Liquid’s Form S-1 and S-1/A for its +initial public offering, QuantX was disclosed as a related party to Liquid, owned in part by +entities controlled by Ferdinand and Shareholder A. QuantX ceased operations in December +2014. + +8. Brian L. Ferdinand (“Ferdinand”), age 42, resides in Syosset, New York. +Ferdinand was a founder of Liquid and was Liquid’s second-largest shareholder until May +2014. From July 2013 through April 18, 2014, Ferdinand served as a member of Liquid’s +Board of Directors and was Head of Corporate Strategy. At all times during the relevant +period, Ferdinand, through entities controlled by him, had a membership interest in QuantX. + +FACTS + +9. Liquid developed and sold software technology to the financial services +industry. Its main product (the “Liquid Platform”) was comprised of three pieces of +software, each of which was referred to as a “unit.” Beginning in June 1, 2013, Liquid +earned all of its revenue from licensing fees paid by software subscribers (“customers”) on +a monthly or quarterly basis (“software revenue”). + +10. During the third quarter of 2013 through the second quarter of 2014 (the +“relevant period”), Liquid’s largest customer in terms of revenue and unit subscriptions +was QuantX. QuantX operated as a trading firm that traded for its own account using +the Liquid Platform. + +11. In addition to trading in its own accounts, QuantX recruited small hedge funds +and individual traders (“QuantX Traders”) to trade using the Liquid Platform. QuantX +provided trading capital to the QuantX Traders (“allocation of trading capital”) and required +the QuantX Traders to subscribe to, and pay Liquid for, at least one unit of the Liquid +Platform. QuantX was to receive a share of the QuantX Traders’ trading profits generated +from the capital allocated by QuantX. + +4 +12. Storms knew the facts described above in paragraphs 9 through 11. Storms +repeatedly expressed concerns to Liquid personnel about Liquid’s continued reliance on +QuantX for customers. He knew that virtually all of Liquid’s customers aside from QuantX +were QuantX Traders. Storms also knew that QuantX was allocating capital to the QuantX +Traders and required the QuantX Traders to subscribe to the Liquid Platform. + +13. From the third quarter of 2013 through at least the second quarter of 2014, +Liquid did not successfully and independently recruit more than two customers. During the +relevant period, virtually all of Liquid’s new customers were QuantX Traders. Specifically, +in the third quarter of 2013, 27 out of 27 Liquid customers were QuantX and QuantX +Traders; in the fourth quarter of 2013, 48 out of 48 Liquid customers were QuantX and +QuantX Traders; in the first quarter of 2014, 74 out of 76 Liquid customers were QuantX +and QuantX Traders; and in the second quarter of 2014, 95 out of 97 Liquid customers +were QuantX and QuantX Traders. + +Liquid Made Misleading Disclosures Regarding +the Nature and Growth of Its Customer Base + +14. In its periodic filings from the third quarter of 2013 through the second +quarter of 2014, Liquid reported increasing numbers of customers at the end of each +quarter, and in these same filings, with the exception of the Form 10-Q for the third quarter +of 2013, Liquid stated, “[o]ur ability to expand our customer base is an indicator of our +market penetration and the growth of our business.” + +15. In its Form 10-K for the period ended December 31, 2013, Liquid stated that +“QuantX and our affiliated customers accounted for . . . 10% of our customers.” Liquid’s +Form 10-Q for the first quarter of 2014 stated that “QuantX and our affiliated customers +accounted for . . . 7% of our customers.” Its Form 10-Q for the second quarter of 2014 +stated that “QuantX and our affiliated customers accounted for . . . 3% of our customers.” + +16. Liquid publicly disclosed that QuantX “markets [Liquid] to its own +members, thereby providing [Liquid] with a source of customer referrals,” and that most of +Liquid’s customers were “generated as a result of pre-existing relationships of these +customers with our founders and entities related to them,” which included QuantX. + +17. However, Liquid did not disclose in these public filings that virtually all of +the customers were QuantX Traders. Specifically, Liquid did not disclose in these filings +that 90% to 97% of Liquid’s customer base was made up of QuantX Traders or that the +QuantX Traders received allocations of capital from QuantX and subscribed to, and paid +Liquid for, the Liquid Platform. As a result, Liquid’s disclosures were materially +misleading. + +18. Storms reviewed the SEC filings described above, and signed and/or +certified them. +5 +Shareholder A’s Loan + +19. During the first half of 2014, QuantX continually experienced financial +problems. QuantX’s and the QuantX Traders’ trading, which were QuantX’s only sources +of revenue, was generally unprofitable. As a result, QuantX received little to no revenue +from its operations. Additionally, the decline in Liquid’s share price during the second +quarter of 2014 impacted the value of the hundreds of thousands of Liquid shares that +QuantX owned and pledged as collateral with its prime broker. The combination of +QuantX’s trading losses and Liquid’s falling share price resulted in daily margin calls from +QuantX’s prime broker during the second quarter. In turn, QuantX reduced its securities +holdings and its allocations to the QuantX Traders, further constraining its ability to +generate trading profits. + +20. Storms learned of QuantX’s financial difficulties on June 16 and 17, 2014 +and learned that Shareholder A was asked to make a $2.2 million loan to QuantX. Once it +received the loan from Shareholder A, QuantX paid approximately $1.4 million to Liquid. +Of that amount, $959,370 was used to pay all of QuantX’s second quarter of 2014 software +bill. The $959,370 payment comprised 62 percent of Liquid’s software revenue for the +quarter. Without Shareholder A’s loan, QuantX would not have been able to pay Liquid +any of the software subscription fees that it owed to Liquid for that quarter. + +21. Storms knew that QuantX used the loan from Shareholder A to pay all of its +software subscription fees to Liquid for that quarter. + +Liquid’s Disclosures for the Second Quarter of 2014 + +22. In its Form 10-Q for the second quarter of 2014, Liquid reported $1,541,537 +in software revenue for the second quarter of 2014, and that “QuantX . . . accounted for +63% of our software services revenue,” but this was materially misleading because Liquid +failed to disclose its reliance on Shareholder A for all of the funds QuantX used to pay its +second quarter of 2014 bill. + +23. Storms reviewed and certified the Form 10-Q for the second quarter of 2014. + +QuantX Ceases Operations and Liquid Files for Bankruptcy + +24. In December 2014, QuantX ceased operations because of its financial +difficulties. On December 23, 2014, Liquid announced that it had ended its relationship +with QuantX. By the close of trading on December 24, 2014, Liquid’s share price had +dropped 46% from the prior day’s closing price. By January 2015, Liquid had lost virtually +all of the QuantX Traders as customers. Liquid filed for Chapter 11 bankruptcy protection +in January 2016, which was converted to Chapter 7 in February 2016. Liquid is currently +controlled by a court-appointed bankruptcy trustee and is no longer operating. + +6 +VIOLATIONS + +25. As a result of the conduct described above, Storms was a cause of Liquid’s +violations of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +promulgated thereunder, which require every issuer of a security registered pursuant to +Section 12 of the Exchange Act to file with the Commission information, documents, and +annual and quarterly reports as the Commission may require. These reports must be +complete and accurate in all material respects. See SEC v. Savoy Industries, Inc., 587 F.2d +1149, 1165 (D.C. Cir. 1978). No showing of scienter is necessary to establish a violation of +Section 13(a) or Rules 13a-1, 13a-13, or 12b-20. See SEC v. Savoy Indus., Inc., 587 F.2d at +1167. In administrative proceedings, the Commission may impose sanctions upon any +person who is, was, or would be a cause of a violation, due to an act or omission the person +knew or should have known would contribute to such violation. + + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist +from committing or causing any violations and any future violations of Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-13, and 12b-20 promulgated thereunder. + +B. Respondent Storms 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 + +7 +(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 Brian M. Storms as Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to +Steven L. Klawans, Assistant Director, Division of Enforcement, Securities and Exchange +Commission, 175 W. Jackson Boulevard, Suite 1450, 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 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. + + +8 +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is +a debt for the violation by Respondent of the federal securities laws or any regulation or +order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 +U.S.C. §523(a)(19). + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4130.txt b/raw/aaer/2020/AAER-4130.txt new file mode 100644 index 0000000000000000000000000000000000000000..b0b5fd4a3fccabe3017894f256469cf83eb639f5 --- /dev/null +++ b/raw/aaer/2020/AAER-4130.txt @@ -0,0 +1,110 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88731 / April 22, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4130 / April 22, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-16212; 3-17180 + +In the Matter of +Elliot R. Berman, 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 October 24, 2014, the Commission issued an order denying Elliot R. Berman, CPA +(“Berman”) the privilege of appearing or practicing before the Commission as an accountant as a +result of settled administrative proceedings instituted by the Commission against him pursuant to +Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.1 On January 3, +2017, the Commission issued a second order denying Berman the privilege of appearing or +practicing before the Commission as an accountant as a result of separate settled administrative +proceedings instituted by the Commission against him pursuant to Rules 102(e)(1)(ii) and (iii) of +the Commission’s Rules of Practice.2 This order is issued in response to Berman’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. +With respect to the 2014 order, the Commission found that Berman willfully violated +Section 10A(j) of the Securities Exchange Act of 1934, willfully aided and abetted and caused +violations of Rule 2-02 of Regulation S-X, caused violations of Section 13(a) of the Exchange +Act and Rule 13a-1 thereunder, and engaged in improper professional conduct. The +Commission’s findings related to Berman’s putative appointment of an unqualified person as +lead partner of an audit engagement while Berman continued to provide the services of a lead +partner for the same engagement for more than five consecutive years. + +1 See Accounting and Auditing Enforcement Release No. 3592 dated October 24, 2014. Berman was permitted, +pursuant to the order, to apply for reinstatement after one year upon making certain showings. + +2 See Exchange Act Release No.79723 January 3, 2017. Berman was permitted, pursuant to that order, to apply for +reinstatement after two years upon making certain showings. + + 2 +With respect to the 2017 order, the Commission found that Berman willfully aided and +abetted and caused violations of Rule 2-02(b)(1) of Regulation S-X, Section 13(a) of the +Exchange Act, and Rule 13a-1 thereunder and engaged in improper professional conduct. The +Commission’s findings related to Berman’s failures to adhere to Public Company Accounting +Oversight Board audit standards with respect to the 2010 and 2011 audits of MusclePharm +Corporation by Berman & Company, P.A., while also causing Berman & Company, P.A. to lack +independence from MusclePharm Corporation during the same period. +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, Berman +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. Berman 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 orders in this regard. Therefore, Berman’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 orders. + +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.”3 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Berman, it appears that he has complied with the terms of the October 24, 2014 and January +3, 2017 orders 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 Berman, 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, + + + +3 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 +Elliot R. Berman, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4131.txt b/raw/aaer/2020/AAER-4131.txt new file mode 100644 index 0000000000000000000000000000000000000000..d3f6d715f85b874d6fca22e202e99fc54b2b7ba3 --- /dev/null +++ b/raw/aaer/2020/AAER-4131.txt @@ -0,0 +1,898 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88739 / April 24, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4131 / April 24, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19767 + + + + +In the Matter of + +PLS, CPA, A +PROFESSIONAL +CORPORATION, +a/k/a PLS CPAs, +CHANG G. PARK, +CPA, a/k/a +CHANGGEUN +PARK, JOSEPH +YONGYUN LEE, +CPA, a/k/a YONG +YUN LEE, and +JUCHI LEE, CPA, +a/k/a JUCHI LEE +FERNANDEZ, JU- +CHI LEE, JU CHI +LEE, SUE LEE + +Respondents. + + + + +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 AND NOTICE OF HEARING + + + +2 +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and +102(e)(1)(iii)2 of the Commission’s Rules of Practice against PLS, CPA, a Professional +Corporation, a/k/a PLS CPAs; Chang G. Park, CPA, a/k/a Changgeun Park; Joseph Yongyun Lee, +CPA, a/k/a Yong Yun Lee; and Juchi Lee, CPA, a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi +Lee, Sue Lee (collectively, “Respondents”). + +II. + + After an investigation, the Division of Enforcement alleges that: + +A. RESPONDENTS + +1. PLS, CPA, A Professional Corporation (a/k/a “PLS CPAs”) (“PLS”), a California +corporation, is a PCAOB-registered public accounting firm based in San Diego, California. PLS +was incorporated in November 2009, and is co-owned by Park, Joseph Lee, and a third individual. +Park, Joseph Lee, and Juchi Lee are PLS’s only individuals who perform audit services +(collectively, the “individual auditors”). + +2. Chang G. Park (a/k/a Changgeun Park) (“Park”), age 60, resides in San Diego, +California. Park is a certified public accountant licensed in California. Park is the founder of + +1 Section 4C provides, in relevant part, that: + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 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 +Chang G. Park, C.P.A., A Professional Corporation, which later reincorporated as PLS. Since +November 2009, Park has been the managing partner and 55% co-owner of PLS, and one of the +firm’s three auditors. + +3. Joseph Yongyun Lee (a/k/a Yong Yun Lee) (“Joseph Lee”), age 57, resides in San +Diego, California. Joseph Lee is a certified public accountant licensed in California. Joseph Lee +joined Chang G. Park, C.P.A. as an accountant in December 2003. Since November 2009, +Joseph Lee has been a partner, 25% co-owner, and the CFO of PLS, where he is one of the firm’s +three auditors. + +4. Juchi Lee (a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee) +(“Juchi Lee”), age 47, resides in San Diego, California. Juchi Lee is a certified public accountant +licensed in California. Juchi Lee joined Chang G. Park, C.P.A. as a senior auditor in October +2007. Since November 2009, Juchi Lee has been one of the three auditors at PLS. + +B. OTHER RELEVANT ENTITIES + +5. Interactive Multi-Media Auction Corporation (n/k/a Stop Sleep Go Inc.) +(“IMMA”), CIK# 0001565430, is a British Virgin Islands corporation with its principal place of +business in the United Kingdom, and has common stock registered pursuant to Section 12(g) of the +Exchange Act. IMMA was formerly headquartered in Hong Kong, and its stock was quoted on +OTC Link under the ticker symbol “IMMA.” In December 2016, IMMA entered into a business +combination with another company and changed its name to “Stop Sleep Go Inc.” Its stock +currently is quoted on the OTC Link under the ticker symbol “SSGOF.” + +6. IMMA has not filed any annual or quarterly periodic reports with the Commission +since 2016. The Commission filed an injunctive action against IMMA, SEC v. McDiarmid et al., +Case 2:17-cv-07201 (C.D. Cal.), and, on November 19, 2018, obtained a default judgment +enjoining IMMA from violations of the antifraud provisions of the Securities Act and the +Exchange Act. SEC v. McDiarmid et al., 2018 WL 6062313 (C.D. Cal. Nov. 19, 2018). PLS +issued audit reports for IMMA’s Forms 10-K for the fiscal years ended October 31, 2014 and +October 31, 2015, and resigned as IMMA’s auditor on October 13, 2016. + +7. IMK Group, Inc. (“IMKG”), CIK# 0001321710, is a Delaware corporation with its +principal place of business in Seoul, South Korea. IMKG had common stock registered pursuant +to Section 12(g) of the Exchange Act, which was quoted on OTC Link under the ticker symbol +“IMKG.” + +8. IMKG has not filed any periodic reports with the Commission since 2016. The +Commission suspended trading in IMKG from September 25, 2017 through October 6, 2017 (In +the Matter of IMK Group, Inc., et al., Exchange Act Release No. 81691 (September 22, 2017)), +then revoked the registration of each class of registered securities of IMKG, effective April 16, +2019, for failure to file timely periodic reports with the Commission. In the Matter of IMK Group, +Inc., et al., Exchange Act Release No. 85648 (April 15, 2019). PLS issued an audit report for +IMKG’s Form 10-K for the fiscal year ended February 28, 2015. +4 + +9. RadTek, Inc. (“RDTK”), CIK# 0001487252, is a Nevada corporation with its +principal place of business in Louisville, Kentucky, and has common stock registered pursuant to +Section 12(g) of the Exchange Act which trades on the OTC Grey Market under the ticker symbol +“RDTK.” + +10. RadTek has not filed any periodic reports with the Commission since 2016. The +Commission suspended trading in RDTK from August 28, 2019 through September 11, 2019 for +failure to file timely periodic reports with the Commission and failure to maintain a valid address +on file with the Commission. In the Matter of LD Holdings, Inc., et al., Exchange Act Release No. +86780 (August 27, 2019). PLS issued audit reports for RDTK’s Forms 10-K for the fiscal years +ended December 31, 2013, December 31, 2014, and December 31, 2015. + +11. Therapeutic Solutions International, Inc. (“TSOI”), CIK# 0001419051, is a Nevada +corporation with its principal place of business in Oceanside, California, and has common stock +registered pursuant to Section 12(g) of the Exchange Act which is quoted on OTC Link under the +ticker symbol “TSOI.” PLS issued audit reports for TSOI’s Forms 10-K for the fiscal years ended +December 31, 2013, December 31, 2014, and December 31, 2015, and resigned as TSOI’s auditor +on or around October 31, 2016. + +12. Each of the Respondents signed a tolling agreement with the Commission that +tolled and suspended the running of any applicable statute of limitations for the period beginning +on January 13, 2020 through July 13, 2020. + +C. RESPONDENTS’ IMPROPER PROFESSIONAL CONDUCT + +1. Respondents’ Audit Practice + +13. In or around 2001, Park founded an audit firm, initially named Chang G. Park, +C.P.A. In November 2009, the firm was re-incorporated as PLS. + +14. PLS currently provides audit and review services to microcap issuers, development +stage companies, and shell companies. Park, Joseph Lee, and Juchi Lee are the three individual +auditors who conduct PLS’s audits and reviews of public company financial statements. + +15. PLS has never used any proprietary auditing software. The individual auditors use +downloads of commercially available electronic audit templates to document audits. The +individual auditors complete these templates electronically and/or print out hard copies to fill out +manually. + +16. The individual auditors either save their electronic work papers on PLS’s +networked storage drive, or they save them in electronic client folders on their PLS computers +which are copied to PLS’s networked storage drive. Hard copies are printed out and assembled in +audit binders for the auditors’ review and signature; the resulting audit binders are then stored in +the individual auditors’ offices. +5 + +17. Joseph Lee and Juchi Lee are generally responsible for preparing PLS’s audit +documentation and assembling and storing the audit binders. Park generally reviews the audit +binders assembled by Joseph Lee or Juchi Lee. + +18. As managing partner of the firm, Park manages the relationship of the firm with its +clients, while Joseph Lee and Juchi Lee perform most of the audit and review work. When matters +arise during a client’s audit, all three individual auditors typically meet to discuss the audit. + +19. As of early 2016, PLS was providing audit and review services to approximately +thirty clients, including IMMA, IMKG, RDTK, and TSOI. + +2. The July 2016 Commission Subpoena and the November 2016 PCAOB +Inspection + +20. On July 5, 2016, the Commission issued an administrative subpoena for documents +to PLS (the “July 2016 Commission Subpoena”). The subpoena included requests for IMMA audit +work papers created during, or concerning, the time period from September 30, 2014, to July 5, +2016. + +21. PLS produced IMMA audit work papers in response to the July 2016 Commission +Subpoena. Juchi Lee was responsible for gathering and producing PLS’s documents in response to +the subpoena. + +22. On April 1, 2016, the PCAOB informed PLS that it would conduct an inspection +of PLS during the week of November 7, 2016 (the “November 2016 PCAOB inspection”). + +23. On April 12, 2016, a representative of the PCAOB emailed Park, cc’ing Joseph +Lee and Juchi Lee, requesting that PLS complete and return, prior to the inspection, an attached +“issuer information form.” The issuer information form required PLS to specify, among other +information, the engagement partner (“EP”) and engagement quality reviewer (“EQR”) assigned +to its client issuers. + +24. Park asked Joseph Lee and Juchi Lee to fill out the issuer information form, for +Park’s review. + +25. PLS sent the completed issuer information form back to the PCAOB on October +12, 2016. PLS subsequently amended the issuer information form to reflect the termination of its +auditor relationship with TSOI, sending a final version to the PCAOB on October 31, 2016. The +final version of the issuer information form PLS provided to the PCAOB included information +for twenty-nine issuers. + +6 +26. The final version of the issuer information form PLS provided to the PCAOB +identified the individual auditors’ roles on audits for issuers IMMA, IMKG, RDTK and TSOI as +follows: + +Issuer EP EQR +IMMA Juchi Lee Park +IMKG Park Juchi Lee +RDTK Park Juchi Lee +TSOI Joseph Lee Juchi Lee + +27. Park instructed Joseph Lee and Juchi Lee to review PLS’s clients’ audit binders in +preparation for the inspection. + +28. Before the November 2016 PCAOB inspection was scheduled to begin, the +PCAOB informed PLS that it would review the audit work papers for IMKG, RDTK and TSOI +during the inspection. + +29. After learning which issuers were selected for the inspection, Park instructed +Joseph Lee and Juchi Lee to review the audit binders for those issuers again. + +30. The PCAOB conducted its inspection of PLS from November 7, 2016 to +November 11, 2016. + +3. Respondents Failed to Prepare and Retain Required Audit Documentation, +and Inappropriately Modified Audit Documentation, in Violation of PCAOB +Auditing Standard No. 33 + +31. Respondents violated PCAOB Auditing Standard No. 3, Audit Documentation +(“AS 3”), in that they: failed to timely prepare required audit documentation; failed to document +the addition of documents to the work papers after the documentation completion date; and drafted +back-dated, fraudulent work papers to create the appearance of having proper contemporaneous +work papers. + +32. AS 3 establishes general requirements for documentation the auditor should prepare +and retain in connection with engagements conducted pursuant to the standards of the PCAOB. +AS 3.1, AS 3.4. Audit documentation is the written record of the basis for the auditor’s +conclusions that provides the support for the auditor’s representations, whether those +representations are contained in the auditor’s report or otherwise. AS 3.2. Audit documentation +also facilitates the planning, performance, and supervision of the engagement, and is the basis for +the review of the quality of the work because it provides the reviewer with written documentation +of the evidence supporting the auditor’s significant conclusions. Id. + +3 PCAOB Auditing Standard No. 3 was renumbered from AS 3 to AS 1215, effective December +31, 2016; references herein are to the numbering in effect at the time of the alleged conduct. + +7 + +33. Among other things, audit documentation includes records of the planning and +performance of the work, the procedures performed, evidence obtained, and conclusions reached +by the auditor. AS 3.2. The auditor also must identify all significant findings or issues in an +engagement completion document. AS 3.13. + +34. The report release date is the date the auditor grants permission to use the auditor’s +report in connection with the issuance of the company’s financial statements. AS 3.14. Prior to +the report release date, the auditor must have completed all necessary auditing procedures and +obtained sufficient evidence to support the representations in the auditor’s report. AS 3.15. A +complete and final set of audit documentation should be assembled for retention as of a date not +more than 45 days after the report release date (the “documentation completion date”). Id. + +35. Circumstances may require additions to audit documentation after the report release +date. AS 3.16. Audit documentation must not be deleted or discarded after the documentation +completion date, however, information may be added. Id. Any documentation added must +indicate the date the information was added, the name of the person who prepared the additional +documentation, and the reason for adding it. Id. + +36. Because PLS did not use automated auditing software, it was up to the individual +auditors themselves to keep track of what audit work had been performed, and when, and to ensure +that the audit documentation for each audit was completed by the 45-day documentation +completion date, as required by AS 3.15. + +37. The individual auditors were aware that PLS commonly lacked a complete audit +binder for its clients’ audits. + +a. Park noticed missing work papers when reviewing audits; reprimanded Joseph Lee +for missing documentation; and told Juchi Lee that Joseph Lee’s work papers were +incomplete. + +b. Juchi Lee acknowledged that prior to the November 2016 PCAOB inspection, the +individual auditors were less “serious” about complying with the audit +documentation completion period, which she understood to be “45 days or 60 +days.” + +c. Joseph Lee admitted that he was unaware of the 45 day audit documentation +completion period before the November 2016 PCAOB inspection. + +38. PLS and the individual auditors inappropriately added documents to audit work +papers after the audit report had been released and the applicable documentation completion date +had passed, without disclosing the date that these documents were added, or other information +required under AS 3.16. In certain instances, the individual auditors identified documents that +were missing from the audit work papers, then intentionally prepared and backdated those +documents in order to make it appear as though those documents had been prepared and included +8 +in the audit work papers on or before the date of the corresponding PLS audit report. +PLS subsequently produced backdated documents in response to the July 2016 Commission +Subpoena and/or the November 2016 PCAOB inspection. + +39. PLS and the individual auditors knew or were reckless in not knowing that they +inappropriately added documents to audit work papers and backdated audit work papers. + +a. IMMA Audits – Fiscal Years Ended October 31, 2014 and 2015 + +40. PLS performed the audit for IMMA’s fiscal year ended October 31, 2014 (the +“IMMA 2014 audit”). IMMA filed the PLS audit report, dated February 12, 2014,4 with its Form +10-K on February 12, 2015. The audit report stated that PLS had conducted the audit in +accordance with PCAOB standards. The applicable documentation completion date was March +29, 2015. + +41. PLS also performed the audit for IMMA’s fiscal year ended October 31, 2015 (the +“IMMA 2015 audit”). IMMA filed the PLS audit report, dated February 10, 2016, with its Form +10-K on February 10, 2016. The audit report stated that PLS had conducted the audit in +accordance with PCAOB standards. The applicable documentation completion date was +March 26, 2016. + +42. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection described Juchi Lee as the EP for IMMA, and Park as the +EQR. + +43. Juchi Lee was the lead auditor for the IMMA 2014 audit and the IMMA 2015 audit. +Park reviewed the audit binders for these audits. Each of them knew or were reckless in not +knowing that the IMMA 2014 audit and the IMMA 2015 audit had not actually been conducted in +accordance with PCAOB standards. + +44. The July 2016 Commission Subpoena required PLS to produce IMMA audit work +papers for the time period from September 30, 2014, to July 5, 2016, which included both the +IMMA 2014 audit and the IMMA 2015 audit. After PLS received the July 2016 Commission +Subpoena on or around July 5, 2016, Juchi Lee prepared and backdated documents for both the +IMMA 2014 audit and the IMMA 2015 audit. + +45. Specifically, after PLS received the July 2016 Commission Subpoena on or around +July 5, 2016, Juchi Lee prepared an audit form entitled “Inquiries of Management/Directors about +the Risks of Fraud” for the IMMA 2014 audit. Juchi Lee admitted that she had searched the +IMMA 2015 audit work papers for that audit’s version of the same form; hand copied the + +4 The February 12, 2014 date on the PLS audit report appears to have been a typo, as the report +was for the fiscal year ended October 31, 2014, and was filed with IMMA’s Form 10-K on +February 12, 2015. + +9 +responses from that version onto a blank form, which she then signed and backdated to make it +look like it had been prepared in 2015; and produced the backdated form to the Commission along +with the IMMA 2014 audit work papers. + +46. Or around July 21, 2016, Juchi Lee also prepared an “Engagement Acceptance and +Continuance” form for the IMMA 2014 audit and backdated this document to December 1, 2014, +approximately two months before the date of the corresponding PLS audit report, which was +February 12, 2015. This document, which was filled out electronically prior to printing, included +the names of both Juchi Lee (as “Lead Partner”) and Park (as “Concurring Partner”) next to the +date December 1, 2014. Juchi Lee admitted that she had created this document after reviewing the +audit work papers in July 2016. + +47. On or around July 27, 2016, Juchi Lee prepared a form entitled “Engagement +Completion Document” for the IMMA 2015 audit and backdated this document to February 10, +2016, the date of the corresponding PLS audit report. The hard copy version of this form included +handwritten signatures from both Juchi Lee and Park, which also were backdated to February 10, +2016. Park admitted that his signature on this document was backdated. + +b. IMKG Audit – Fiscal Year Ended February 28, 2015 + +48. PLS performed the audit for IMKG’s fiscal year ended February 28, 2015 (the +“IMKG 2015 audit”). IMKG filed the PLS audit report, dated July 29, 2015, with its Form 10-K +on July 29, 2015. The audit report stated that PLS had conducted the audit in accordance with +PCAOB standards. The applicable documentation completion date was September 12, 2015. + +49. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection listed Park as the engagement partner for IMKG, and +Juchi Lee as the EQR. + +50. However, Park and Joseph Lee each admitted that they went together to Korea to +conduct field work for the audit. Joseph Lee prepared most of the audit work papers for IMKG, +which Park reviewed. Each of them knew or were reckless in not knowing that the IMKG 2015 +audit had not actually been conducted in accordance with PCAOB standards. + +51. The PCAOB reviewed audit work papers for the IMKG 2015 audit in connection +with the November 2016 PCAOB inspection. + +52. Both Park and Joseph Lee admitted that in October 2016, in the course of +preparing for the November 2016 PCAOB inspection, they had become aware that Joseph Lee +had failed to obtain all of the documents necessary for the IMKG 2015 audit. + +53. With Park’s knowledge, Joseph Lee emailed IMKG’s former owner and outside +consultants to request board minutes, bank reconciliations, and other documents, in an attempt to +complete the audit binder before the PCAOB inspection. + +10 +54. Joseph Lee also prepared and backdated documents for the IMKG 2015 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the IMKG 2015 audit to the PCAOB in connection with the November 2016 PCAOB inspection. + +55. On or around October 12, 2016, Joseph Lee prepared a document entitled “Audit +Program for General Planning Procedures” for the IMKG 2015 audit. Joseph Lee admitted that +he had created this document after the audit report date, in preparation for the November 2016 +PCAOB inspection. + +56. On or around October 12 or 13, 2016, Joseph Lee also prepared a form entitled +“Engagement Completion Document” for the IMKG 2015 audit, and backdated it to July 29, +2015, the date of the corresponding PLS audit report. This document, which was filled out +electronically prior to printing, included the names of Joseph Lee (as “Engagement Manager”), +Park (as “Engagement Partner”), and Juchi Lee (as “Concurring Partner/Engagement Quality +Reviewer”) next to the date July 29, 2015. Joseph Lee admitted that this document had not been +prepared before the audit report was issued, and that he had backdated this document to the audit +report date. + +57. On or around October 14, 2016, Joseph Lee prepared a “Risk Assessment +Summary Form” for the IMKG 2015 audit, and backdated it to July 9, 2015, a few weeks prior to +the date of the corresponding PLS audit report. Joseph Lee admitted that he had created this +document after the audit report date, in preparation for the November 2016 PCAOB inspection. + +c. RDTK Audit – Fiscal Year Ended December 31, 2015 + +58. PLS performed the audit for RDTK’s fiscal year ended December 31, 2015 (the +“RDTK 2015 audit”). RDTK filed the PLS audit report, dated April 27, 2016, with its Form 10- +K on April 27, 2016. The audit report stated that PLS had conducted the audit in accordance +with PCAOB standards. The applicable documentation completion date was June 11, 2016. + +59. RDTK filed an amended Form 10-K for its fiscal year 2015 on August 24, 2016. +The Amended RDTK Form 10-K included a PLS audit report that was amended as to one note +only; that report was dual dated related to the one note for August 22, 2016. The audit report +stated that PLS had conducted the audit in accordance with PCAOB standards. + The applicable +documentation completion date was October 6, 2016. + +60. The issuer information form that PLS provided to the PCAOB in advance of the +November 2016 PCAOB inspection listed Park as the engagement partner for RDTK, and +Juchi Lee as EQR. + +61. However, Park and Joseph Lee conducted the fieldwork for RDTK. Joseph Lee +prepared most of the audit work papers for RDTK, which Park reviewed. Each of them knew or +were reckless in not knowing that the RDTK 2015 audit had not actually been conducted in +accordance with PCAOB standards. + +11 +62. The PCAOB reviewed audit work papers for the RDTK 2015 audit in connection +with the November 2016 PCAOB inspection. + +63. Joseph Lee admitted that he had contacted RDTK after the audit report was +released to request supporting documentation that was missing from the audit binders. + +64. Joseph Lee also prepared and backdated documents for the RDTK 2015 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the RDTK 2015 audit to the PCAOB in connection with the November 2016 PCAOB inspection. + +65. On or around October 18, 2016, Joseph Lee prepared a document entitled “Audit +Program for General Planning Procedures” for the RDTK 2015 audit. Joseph Lee admitted that +he had noticed this document was missing from the audit work papers and that he had created +this document in preparation for the November 2016 PCAOB inspection. + +66. On or around October 19, 2016, Joseph Lee also prepared a “Supervision, Review +and Approval Form” for the RDTK 2015 audit and backdated it to April 27, 2016, the date of the +original PLS audit report. This document, which was filled out electronically prior to printing, +included the typed “signatures” of Joseph Lee (under the “Detailed Review” section supposed to +be “performed by the staff in charge of the field work”), Park (as “Engagement Partner”), and +Juchi Lee (as “Engagement Quality Reviewer”) next to the date April 27, 2016. Joseph Lee +admitted that he had created this document in preparation for the November 2016 PCAOB +inspection. Park also admitted that this document was created in October 2016 to supplement the +audit work papers, and backdated. + +67. In addition, on or around October 19, 2016, Joseph Lee prepared an “Engagement +Completion Document” for the RDTK 2015 audit, and backdated it to April 27, 2016, the +original report release date. This document, which was filled out electronically prior to printing, +included the names of Joseph Lee (as “Engagement Manager”), Park (as “Engagement Partner”), +and Juchi Lee (as “Concurring Partner/Engagement Quality Reviewer”) next to the date April 27, +2016. Joseph Lee admitted that he had created this document in October 2016 in preparation for +the November 2016 PCAOB inspection. Park also admitted that this document was created in +October 2016 to supplement the audit work papers, and backdated. + +d. TSOI Audit – Fiscal Year Ended December 31, 2014 + +68. PLS performed the audit for TSOI’s fiscal year ended December 31, 2014 (the +“TSOI 2014 audit”). TSOI filed the PLS audit report, dated June 15, 2016, with its Form 10-K +on June 16, 2016. The audit report stated that PLS had conducted the audit in accordance with +PCAOB standards. The applicable documentation completion date was July 30, 2016. + +69. The issuer information form that PLS provided to the PCAOB in connection with +the November 2016 PCAOB inspection listed Joseph Lee as the engagement partner for TSOI, +and Juchi Lee as the EQR. + +12 +70. However, Joseph Lee performed the substantive audit work for TSOI, including +preparation of the audit binder, and Park served as the reviewer. Each of them knew or were +reckless in not knowing that the TSOI 2014 audit had not actually been conducted in accordance +with PCAOB standards. + +71. Juchi Lee did not perform an engagement quality review for TSOI. In fact, Juchi +Lee admitted that she had not performed engagement quality reviews for IMKG, RDTK, or +TSOI, even though the issuer information form that PLS provided to the PCAOB in advance of +the November 2016 PCAOB inspection listed her as the EQR for each of these issuers. + +72. The PCAOB reviewed audit work papers for the TSOI 2014 audit in connection +with the November 2016 PCAOB inspection. + +73. Joseph Lee admitted that he did not fill out audit documentation forms for the +TSOI 2014 audit until the fall of 2016, when he was reviewing audit binders in preparation for +the November 2016 PCAOB inspection. + +74. Joseph Lee prepared and backdated documents for the TSOI 2014 audit in +preparation for the November 2016 PCAOB inspection. PLS produced backdated documents for +the TSOI 2014 audit to the PCAOB in connection with the November 2016 PCAOB inspection. + +75. Sometime between October 24 and November 1, 2016, Joseph Lee prepared a +document entitled “Audit Program for General Planning Procedures” for the TSOI 2014 audit. +Joseph Lee admitted that he had created this document several months after the TSOI 2014 Form +10-K had been filed, in preparation for the November 2016 PCAOB inspection. + +76. Sometime between October 24 and November 1, 2016, Joseph Lee also prepared +a document entitled “Risk Assessment Summary Form” for the TSOI 2014 audit. This +document, which was filled out electronically prior to printing, included the names of Joseph Lee +and Juchi Lee next to the date January 7, 2016, which was several months prior to the date of the +corresponding PLS audit report. + +77. In addition, on or around October 31 or November 1, 2016, Joseph Lee prepared a +“Supervision, Review and Approval Form” for the TSOI 2014 audit. This document, which was +filled out electronically prior to printing, included the names of Joseph Lee (as “Engagement +Partner”) and Juchi Lee (as “Engagement Quality Reviewer”) next to the date June 15, 2016, the +date of the corresponding PLS audit report. + + +13 +4. Respondents Failed to Obtain or Perform Engagement Quality Reviews in +Violation of PCAOB Auditing Standard No. 75 + +78. Respondents violated PCAOB Auditing Standard No. 7, Engagement Quality +Review (“AS 7”), by failing to obtain or perform adequate engagement quality reviews in +connection with PLS’s clients’ audits. + +79. AS 7 requires an engagement quality review and concurring approval of issuance +for each audit engagement conducted pursuant to the standards of the PCAOB. AS 7.1. The +objective of the EQR 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, if a report is to be issued, in order to +determine whether to provide concurring approval of issuance. AS 7.2. To evaluate such +judgments and conclusions, the EQR to the extent necessary should hold discussions with the +engagement partner and other members of the engagement team, and review documentation. +AS 7.9. + +80. The EQR must be an associated person of a registered public accounting firm. +AS 7.3. An EQR from the firm that issues the engagement report must be a partner or another +individual in an equivalent position. Id. The EQR may also be an individual from outside the +firm. Id. To maintain objectivity, the EQR and others who assist the EQR should not make +decisions on behalf of the engagement team or assume any of the responsibilities of the +engagement team. AS 7.7. + +81. In an audit, the EQR should evaluate, among other things, the significant +judgments that relate to engagement planning, including consideration of the firm’s recent +engagement experience with the company and risks identified in connection with the firm’s +client acceptance and retention process. AS 7.10. The EQR also should evaluate the +engagement team’s assessment of, and audit responses to, significant risks identified by the +engagement team, including fraud risks, and other significant risks identified by the EQR. Id. +The EQR’s review of documentation should specifically include the engagement completion +document. Id. + +82. Additionally, in an audit, the EQR should evaluate whether the engagement +documentation that he or she reviewed indicates that the engagement team responded +appropriately to significant risks, and supports the conclusions reached by the engagement team +with respect to the matters reviewed. AS 7.11. The EQR 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, such as a failure by the engagement +team to obtain sufficient appropriate evidence in accordance with the standards of the PCAOB. + +5 PCAOB Auditing Standard No. 7 was renumbered from AS 7 to AS 1220, effective December +31, 2016; references herein are to the numbering in effect at the time of the alleged conduct. + +14 +AS 7.12. The audit firm may grant permission to the client to use the engagement report only +after the EQR provides concurring approval of issuance. AS 7.13. + +83. The issuer information form that PLS provided to the PCAOB in advance of the +November 2016 PCAOB inspection represented that Park was the EQR for IMMA, and Juchi +Lee was the EQR for IMKG, RDTK, and TSOI. PLS, however, was not actually staffing its +audits in this manner. + +84. PLS and the individual auditors violated AS 7 by failing to obtain or perform +adequate engagement quality reviews, in accordance with the requirements of AS 7, for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +85. Juchi Lee, the purported EQR for the IMKG 2015 audit, the RDTK 2015 audit, +and the TSOI 2014 audit, admitted that she had not performed engagement quality reviews for +IMKG, RDTK, or TSOI. She also admitted that she had not even known that she was supposed +to be EQR for these issuers until October 2016, when Park tasked her and Joseph Lee with the +job of completing the issuer information form for the PCAOB in connection with the +November 2016 PCAOB inspection. + +86. Moreover, given the audit documentation deficiencies described above, PLS and +the individual auditors could not have obtained or performed engagement quality reviews, in +accordance with the requirements of AS 7, for the IMMA 2014 audit, the IMMA 2015 audit, +the IMKG 2015 audit, the RDTK 2015 audit, or the TSOI 2014 audit. The documents that were +inappropriately added to audit work papers, after the audit report had been released and the +applicable documentation completion date had passed, included engagement acceptance, audit +planning, risk assessment, engagement completion, and other documents that an EQR +performing an engagement quality review pursuant to the standards of AS 7 should have +reviewed before providing approval for the audit report to be released. + +87. Respondents knew or were reckless in not knowing that they had failed to obtain +or perform engagement quality reviews, in accordance with the requirements of AS 7, for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +5. Respondents Failed to Exercise Due Professional Care in Violation of +PCAOB Interim Auditing Standard No. 2306 + +88. Respondents violated PCAOB Interim Auditing Standard No. 230, +Due Professional Care in the Performance of Work (“AU 230”), by failing to exercise due + +6 PCAOB Interim Auditing Standard No. 230 was renumbered from AU 230 to AS 1015, +effective December 31, 2016; references herein are to the numbering in effect at the time of the +alleged conduct. + +15 +professional care in connection with the IMMA 2014 audit; the IMMA 2015 audit; the IMKG +2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. Namely, Respondents failed to +prepare and retain required audit documentation and produced backdated documents to the +PCAOB and the Commission, and they failed to obtain and perform engagement quality +reviews. + +89. AU 230 requires an auditor to exercise due professional care in the planning and +performance of the audit and the preparation of the report. AU 230.01 - 230.02. 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. + +90. The matter of due professional care concerns what the independent auditor does +and how well he or she does it. AU 230.04. An auditor should possess “the degree of skill +commonly possessed” by other auditors and should exercise it with “reasonable care and +diligence” (that is, with due professional care). AU 230.05. The engagement partner should +know, at a minimum, the relevant professional accounting and auditing standards and should be +knowledgeable about the client. AU 230.06. + +91. Due professional care requires the auditor to exercise professional skepticism. +AU 230.07. Professional skepticism is an attitude that includes a questioning mind and a +critical assessment of audit evidence. Id. 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. Id. Gathering and objectively +evaluating audit evidence requires the auditor to consider the competency and sufficiency of the +evidence. AU 230.08. Since evidence is gathered and evaluated throughout the audit, +professional skepticism should be exercised throughout the audit process. Id. + +92. PLS and the individual auditors failed to exercise due professional care in +connection with the audit documentation for the IMMA 2014 audit; the IMMA 2015 audit; the +IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. + +93. As described above, PLS and the auditors failed to prepare and retain required +audit documentation for these audits, as required by AS 3. Although all three of the individual +auditors were aware that PLS had a problem with missing work papers, they did not take any +action to remedy this problem until the July 2016 Commission Subpoena and the announcement +of the November 2016 PCAOB inspection threatened to expose their audit deficiencies. + +94. Even then, Respondents did not follow the requirements for adding audit +documentation set forth in AS 3.16, but intentionally attempted to conceal their actions from the +Commission and the PCAOB by retroactively completing and backdating documents, which +PLS then produced to the Commission or the PCAOB. + +95. PLS and the individual auditors also failed to exercise due professional care in +connection with engagement quality reviews for the IMMA 2014 audit; the IMMA 2015 audit; +the IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. PLS and the individual +16 +auditors issued audit reports and provided information to the PCAOB, representing that +engagement quality reviews had been obtained or performed for each of these audits, when in +fact they had failed to obtain or perform engagement quality review, in accordance with the +requirements of AS 7, for each of these audits. + +96. Respondents knew or were reckless in not knowing that they failed to exercise +due professional care in connection with the IMMA 2014 audit; the IMMA 2015 audit; the +IMKG 2015 audit; the RDTK 2015 audit; and the TSOI 2014 audit. + +6. Respondents Willfully Violated PCAOB Rules 3500T and 4006 + +97. PCAOB Rule 3500T, Interim Ethics and Independence Standards (“Rule +3500T”), requires a registered public accounting firm and its associated persons to comply with +AICPA’s Code of Professional Conduct Rule 102 in connection with the preparation or issuance +of any audit report. Rule 3500T(a). +7 + +98. AICPA’s Code of Professional Conduct Rule 102, Integrity and Objectivity +(“AICPA Rule 102”) mandates that “in the performance of any professional service, a member +shall maintain objectivity and integrity.” AICPA Rule 102.01. The AICPA Code of +Professional Conduct defines “professional services” as including “all services requiring +accountancy or related skills performed by a member for a client, an employer, or on a volunteer +basis. These services include, but are not limited to accounting, audit and other attest services, +tax, bookkeeping, management consulting, financial management, corporate governance, +personal financial planning, business valuation, litigation support, educational, and those services +for which standards are promulgated by bodies designated by [the AICPA Council].” AICPA +Code of Professional Conduct § 0.400.40. + +99. PLS and the individual auditors willfully violated Rule 3500T because they failed +to act with integrity in connection with the preparation and issuance of the audit reports for the +IMMA 2014 audit; the IMMA 2015 audit; the IMKG 2015 audit; the RDTK 2015 audit; and the +TSOI 2014 audit. + +100. PLS and the individual auditors further demonstrated a lack of integrity by taking +affirmative steps to conceal their auditing deficiencies from us and the PCAOB, including the +preparation and backdating of additional audit documentation which was subsequently produced +to us and/or the PCAOB. + +101. PCAOB Rule 4006, Duty to Cooperate with Inspectors (“Rule 4006”), requires a +public accounting firm and its associated persons to cooperate with the Board in the performance + +7 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule +102, and interpretations and rulings thereunder, as in existence on April 16, 2003. Although +PCAOB Rule 3500T references the AICPA Code as in existence on April 16, 2003, the +definition of integrity remains identical to the current definitions in the Code of Professional +Conduct promulgated by the AICPA and applicable to current members of the AICPA. +17 +of any Board inspection. Cooperation includes, but it is not limited to, cooperating and complying +with any request made by the PCAOB to “provide access to, and the ability to copy, any record in +the possession, custody, or control of such firm or person.” See Rule 4006(a). “Implicit in this +cooperation requirement is that auditors provide accurate and truthful information.” In the Matter +of the Application of Kabani & Company, Inc., et al., Exchange Act Release No. 80201, at 13-14 +(March 10, 2017) (Commission Opinion). + +102. PLS and the individual auditors willfully violated Rule 4006 in connection with the +November 2016 PCAOB inspection by providing to the PCAOB documents that had been added to +audit work papers for the IMKG 2015 audit, the RDTK 2015 audit, and the TSOI 2014 audit, after +the audit report for each of these audits had been released and the applicable documentation +completion date had passed, without disclosing of the date that these documents were added to the +work papers, the persons who did so, or the reasons for doing so, as required under AS 3. + +103. Moreover, PLS and the individual auditors attempted to deceive the PCAOB by +backdating documents so that it would appear as though these documents had been prepared and +included in the audit work papers before the audit report had been released. + +D. VIOLATIONS + +104. As a result of the conduct described above, PLS 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 by engaging in repeated instances of unreasonable conduct and/or +engaging in intentional or knowing conduct, including reckless conduct, and willfully violated the +federal securities laws under Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, by willfully violating Rule 2-02(b)(1) of Regulation S-X, and +willfully violating PCAOB Rule 3500T and PCAOB Rule 4006. + +105. As a result of the conduct described above, Park 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 by engaging in repeated instances of unreasonable conduct and/or +engaging in intentional or knowing conduct, including reckless conduct, and willfully violated or +willfully aided and abetted violation of the federal securities laws under Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, by willfully aiding +and abetting and causing PLS’s violations of Rule 2-02(b)(1) of Regulation S-X, and by willfully +violating PCAOB Rule 3500T and PCAOB Rule 4006. + +106. As a result of the conduct described above, Joseph Lee 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless conduct, and willfully +violated or willfully aided and abetted violation of the federal securities laws under Section +4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, by +willfully aiding and abetting and causing PLS’s violations of Rule 2-02(b)(1) of Regulation S-X, +and by willfully violating PCAOB Rule 3500T and PCAOB Rule 4006. +18 + +107. As a result of the conduct described above, Juchi Lee 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 by engaging in repeated instances of unreasonable conduct +and/or engaging in intentional or knowing conduct, including reckless conduct, and willfully +violated or willfully aided and abetted violation of the federal securities laws under Section +4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, by +willfully aiding and abetting and causing PLS’s violations of Rule 2-02(b)(1) of Regulation S-X, +and by willfully violating PCAOB Rule 3500T and PCAOB Rule 4006. + +III. + + In view of the allegations made by the Division of Enforcement, the Commission deems it +necessary and appropriate in the public interest that public administrative and cease-and-desist +proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate in the public interest against +Respondents pursuant to Section 4C of the Exchange Act and Rule 102(e) of the Commission’s +Rules of Practice; + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondents should be +ordered to cease and desist from committing or causing violation of and any future violations of +Rule 2-02(b)(1) of Regulation S-X, PCAOB Rule 3500T, and PCAOB Rule 4006; whether PLS +should be ordered to pay disgorgement of audit fees for each of the audits at issue pursuant to +Sections 21B(e) and 21C(e) of the Exchange Act; and whether Respondents should be ordered to +pay civil penalties pursuant to Section 21B(a) of the Exchange Act. + + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purposes of taking +evidence on the questions set forth in Section III hereof shall be convened not earlier than 30 days +and not later than 60 days from service of this Order at a time and place to be fixed by further order +of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, 17 C.F.R. § +201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220(b) of the Commission's Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents shall +conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, +19 +17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The parties may meet in +person or participate by telephone or other remote means; following the conference, they shall file +a statement with the Office of the Secretary advising the Commission of any agreements reached at +said conference. If a prehearing conference was not held, a statement shall be filed with the Office +of the Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing 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 Respondents by any means permitted by the +Commission’s Rules of Practice. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all +papers (including those listed in the following paragraph) shall be filed with the Office of the +Secretary and all motions, objections, or applications will be decided by the Commission. The +Commission requests that an electronic courtesy copy of each filing should be emailed to +APFilings@sec.gov + in PDF text-searchable format. Any exhibits should be sent as separate +attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, +232, 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, +231, 232, 233, and 250, shall be directed to and, as appropriate, decided by the Commission. This +proceeding shall be deemed to be one under the 120-day timeframe specified in Rule of Practice +360(a)(2)(i), 17 C.F.R. § 201.360(a)(2)(i), for the purposes of applying Rules of Practice 233 and +250, 17 C.F.R. §§ 201.233 and 250. + +The Commission finds that it would serve the interests of justice and not result in prejudice +to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.100(c), that the Commission shall issue a decision on the basis of the record in this +proceeding, which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.350(a), and any other document or item filed with the Office of the +Secretary and accepted into the record by the Commission. The provisions of Rule 351 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.351, relating to preparation and certification of a +record index by the Office of the Secretary or the hearing officer are not applicable to this +proceeding. + + +20 +The Commission will issue a final order resolving the proceeding after one of the following: +(A) The completion of post-hearing briefing in a proceeding where the public hearing has been +completed; (B) The completion of briefing on a motion for a ruling on the pleadings or a motion for +summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250, where the Commission has determined that no public hearing is necessary; or (C) The +determination that a party is deemed to be in default under Rule 155 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as +witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed +subject to the provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4132.txt b/raw/aaer/2020/AAER-4132.txt new file mode 100644 index 0000000000000000000000000000000000000000..74ed41a734899d819971a0f163ffc3b6389a1c19 --- /dev/null +++ b/raw/aaer/2020/AAER-4132.txt @@ -0,0 +1,117 @@ + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88763 / April 28, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4132 / April 28, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19774 + + +In the Matter of + + +WILLIAM M. +AISENBERG, CPA, + +Respondent. +CORRECTED 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 William +M. Aisenberg (“Respondent” or “Aisenberg”) 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 Paragraph III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Aisenberg, age 58, is and has been a certified public accountant licensed to +practice in the State of New York. He served as Chief Financial Officer of Ironclad Performance +Wear Corp. (“Ironclad”) from April 2014 until his resignation in July 2017. + +2. Ironclad, a leading developer and manufacturer of high-performance, task- +specific gloves, was a Nevada corporation headquartered in Farmers Branch, Texas. Ironclad’s +common stock was registered pursuant to Section 12(g) of the Securities Exchange Act of 1934 +(the “Exchange Act”), and was quoted on the OTC Markets under the symbol “ICPW.” Ironclad +owned all of the shares of Ironclad Performance Wear Corp. California (“ICPW California”), +through which all operations were conducted. On September 8, 2017, Ironclad and ICPW +California filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. Ironclad +and ICPW California completed a sale of substantially all of their assets on November 14, 2017 +and filed a plan of liquidation. The plan was approved by the bankruptcy court and became +effective on February 28, 2018. + +3. On April 6, 2020, the Commission filed a complaint against Aisenberg in +SEC v. Cordes et al. (Civil Action No. 3:20-cv-00822-G). On April 9, 2020, the court entered an +order permanently enjoining Aisenberg, by consent, from (i) violating Section 17(a) of the +Securities Act of 1933 (the “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, (ii) aiding or abetting any violation 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, and (iii) 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. Aisenberg was also ordered to pay a $173,437 civil +money penalty. + +4. The Commission’s complaint alleged, among other things, that Aisenberg, along +with Ironclad’s CEO and Senior Vice President, engaged in a fraudulent scheme which resulted +in Ironclad filing materially false and misleading financial statements in the company’s annual +3 +report on Form 10-K for the fiscal years ending on December 31, 2015 and 2016, and in the +company’s quarterly report on Form 10-Q for the first quarter of 2017. The Complaint alleged +that Aisenberg engaged in a number of improper accounting practices that materially increased +Ironclad’s annual and quarterly revenue and net income in a departure from generally accepted +accounting principles (“GAAP”). These practices included, among other things, recognizing +revenue for: out-of-period shipment; orders that were never shipped to or paid for by customers; +exchanges booked as new sales; cancelled orders; and products never ordered by a customer. In +addition, the complaint alleged that Aisenberg took affirmative steps to hide information about +Ironclad’s fraudulent revenue recognition practices from its 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 Aisenberg’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that Respondent Aisenberg is +suspended from appearing or practicing before the Commission as an accountant. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4133.txt b/raw/aaer/2020/AAER-4133.txt new file mode 100644 index 0000000000000000000000000000000000000000..be63394c3666fb5bbada08c8a8c2d1b0783da767 --- /dev/null +++ b/raw/aaer/2020/AAER-4133.txt @@ -0,0 +1,1399 @@ + + + + + + + + + + + + + + + + SEC.gov | Penn West Petroleum Ltd., d/b/a Obsidian Energy Ltd., Todd H. Takeyasu, Jeffery A. 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Takeyasu, Jeffery A. Curran, and Waldemar Grab + + + + + + + + + + + + Penn West Petroleum Ltd., d/b/a Obsidian Energy Ltd., Todd H. Takeyasu, Jeffery A. Curran, and Waldemar Grab + + + + + + + + + + + + + + + + + + + + + --> + + SEC Settles with Former Top Finance Executives of Oil and Gas Company + + Litigation Release No. 24809 / April 28, 2020 + + Accounting and Auditing Release No. 4133 / April 28, 2020 + + Securities and Exchange Commission v. Penn West Petroleum Ltd., d/b/a Obsidian Energy Ltd., Todd H. Takeyasu, Jeffery A. Curran, and Waldemar Grab , No. 17-CV-4866 (S.D.N.Y. filed June 28, 2017) + + + + + + + + + The Securities and Exchange Commission today announced that Todd H. Takeyasu and Jeffery A. Curran, respectively the former CFO and former vice president of accounting and reporting of a Canadian public oil and gas company, agreed to settle charges arising from an accounting fraud at the company. + + The SEC's complaint alleges that from 2012 through 2014, Penn West Petroleum, Ltd., now doing business as Obsidian Energy Ltd., improperly classified certain operating expenses as capital expenses in order to lower a key publicly reported metric concerning the cost of oil extraction and processing. As alleged, this fraudulent practice was not disclosed to the company 's external auditor and caused the company's financial statements to be materially inaccurate. In September 2014, the company publicly reported that it would restate its financial statements from 2012 to the first quarter of 2014 and that its historical financial statements and related audit reports could no longer be relied upon. The company and Waldemar Grab , a former operations controller at Penn West, previously settled the Commission's fraud claims. + + Without admitting or denying the allegations, Curran and Takeyasu agreed to be permanently enjoined from violating the record-keeping and internal controls provisions of Section 13(b)(5) of the Securities Exchange Act of 1934 and Rule 13b2-1 thereunder. Takeyasu has also agreed to be permanently enjoined from violating Exchange Act Rule 13b2-2, to pay a monetary penalty of $100,000, and to reimburse Penn West C$54,755 pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002. Curran has agreed to be permanently enjoined from violating the antifraud provisions of Section 17(a)(3) of the Securities Act of 1933, and to pay a monetary penalty of $55,000. + + The SEC's investigation was conducted by Matthew T. Spitzer and Colin J. Rand, and the case was supervised by Anita B. Bandy. The litigation was led by Melissa J. Armstrong, Derek S. Bentsen, David B. Misler, Sarah H. Concannon, and Matthew Spitzer, with supervision by Stephan J. Schlegelmilch. + + + + + + + + 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/2020/AAER-4134.txt b/raw/aaer/2020/AAER-4134.txt new file mode 100644 index 0000000000000000000000000000000000000000..ea8193d24b087dff0ba59d7aba570f7bf4d772de --- /dev/null +++ b/raw/aaer/2020/AAER-4134.txt @@ -0,0 +1,153 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88791 / May 1, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4134 / May 1, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19781 + + : + : + : +In the Matter of : ORDER INSTITUTING PUBLIC + : ADMINISTRATIVE PROCEEDINGS + : PURSUANT TO RULE 102(e) OF THE +TODD H. TAKEYASU, CA : COMMISSION’S RULES OF PRACTICE, + : MAKING FINDINGS, AND IMPOSING + Respondent. : REMEDIAL SANCTIONS + : + : +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Todd H. +Takeyasu (“Respondent” or “Takeyasu”) 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.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. Respondent, age 59, resides in Calgary, Alberta, Canada. Respondent is a chartered +accountant licensed to practice in Alberta, Canada. Respondent has been a chartered accountant +since 1987. + + 2. On April 29, 2020, a final judgment was entered against Respondent, permanently +enjoining him from future violations of Section 13(b)(5) of the Exchange Act of 1934 and Rules +13b2-1 and 13b2-2 thereunder, in the civil action entitled Securities and Exchange Commission v. +Penn West Petroleum Ltd., et al., Civil Action Number 17-4866-GHW in the United States District +Court for the Southern District of New York. Respondent also was also ordered to reimburse Penn +West Petroleum, Ltd. in the amount of C$54,755 and to pay a $100,000 civil money penalty. + + 3. The Commission’s complaint alleged, among other things, that while Respondent +was the Chief Financial Officer of Penn West Petroleum, Ltd. (“Penn West”), Penn West engaged +in accounting practices that resulted in false and misleading journal entries that had no adequate +documentary support or basis in reality. The complaint further alleged that the journal entries rolled +up into Penn West’s annual and quarterly reports, which were signed by Respondent and filed with +the Commission. The complaint further alleged that Respondent did not disclose these accounting +practices to Penn West’s independent auditor. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Takeyasu’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + + A. Todd H. Takeyasu is suspended from appearing or practicing before the +Commission as an accountant. + + 3 + 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 (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; + + (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 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 she +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his province chartered +accountant license is current and he has resolved all other disciplinary issues with the +applicable provincial boards of accountancy. However, if provincial licensure is dependent + 4 +on reinstatement by the Commission, the Commission will consider an application on its +other merits. The Commission’s review may include consideration of, in addition to the +matters referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission as an +accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + + Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4136.txt b/raw/aaer/2020/AAER-4136.txt new file mode 100644 index 0000000000000000000000000000000000000000..ae8ff6d756399adad5981d5550ca0c729c59f17c --- /dev/null +++ b/raw/aaer/2020/AAER-4136.txt @@ -0,0 +1,57 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88796 / May 1, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4136 / May 1, 2020 + +Admin. Proc. File No. 3-19767 + + +In the Matter of + +PLS, CPA, A PROFESSIONAL +CORPORATION, A/K/A PLS CPAs; +CHANG G. PARK, CPA, A/K/A CHANGGEUN PARK; +JOSEPH YONGYUN LEE, CPA, A/K/A YONG +YUN LEE; AND JUCHI LEE, CPA, A/K/A JUCHI LEE +FERNANDEZ, JUCHI LEE, JU CHI LEE, SUE LEE + + + +ORDER REGARDING SERVICE + +On April 24, 2020, the Securities and Exchange Commission issued an order instituting +an administrative proceeding (“OIP”) against PLS, CPA, a Professional Corporation, a/k/a PLS +CPAs; Chang G. Park, CPA, a/k/a Changgeun Park; Joseph Yongyun Lee, CPA, a/k/a Yong Yun +Lee; and Juchi Lee, CPA, a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee +(collectively, “Respondents”), pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.1 It appears that +there have been no other filings in this proceeding since issuance of the OIP, including as to +whether the OIP was served upon Respondents. Accordingly, IT IS ORDERED that the +Division of Enforcement file a status report concerning service of the OIP by May 8, 2020, and +every 28 days thereafter until service is accomplished. + + + + +1 PLS, CPA, a Professional Corporation, a/k/a PLS CPAs, Exchange Act Release No. +88739, 2020 WL 2039958 (Apr. 24, 2020). +2 + +The parties are reminded that to the extent possible all filings should be emailed to +APFilings@sec.gov in accordance with the Commission’s March 18, 2020 order.2 +For the Commission, by the Office of General Counsel, pursuant to delegated authority. + + +Vanessa A. Countryman +Secretary + +2 See In re Pending Administrative Proceedings, Securities Act Release No. 10767, 2020 +WL 1322001 (Mar. 18, 2020), https://www.sec.gov/litigation/opinions/2020/33-10767.pdf +(encouraging parties in pending proceedings to confer and notify the Commission as to whether +they agree to waive paper service of all opinions and orders and accept service by email). \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4138.txt b/raw/aaer/2020/AAER-4138.txt new file mode 100644 index 0000000000000000000000000000000000000000..d846961cfd5b46ac98cc03bbf0400201ac352eac --- /dev/null +++ b/raw/aaer/2020/AAER-4138.txt @@ -0,0 +1,159 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88808 / May 5, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4138 / May 5, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19783 + + : + : + : +In the Matter of : ORDER INSTITUTING PUBLIC + : ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + : 102(e) OF THE COMMISSION’S RULES OF + JEFFERY A. CURRAN, CA : 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 Jeffery +A. Curran (“Respondent” or “Curran”) 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.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. Respondent, age 51, resides in Calgary, Alberta, Canada. Respondent is a chartered +accountant licensed to practice in Alberta, Canada. Respondent has been a chartered accountant +since 1996. + + 2. On April 29, 2020, a final judgment was entered against Respondent, permanently +enjoining him from future violations of 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 Exchange +Act Rule 13b2-1, in the civil action entitled Securities and Exchange Commission v. Penn West +Petroleum Ltd., et al., Civil Action Number 17-4866-GHW in the United States District Court for +the Southern District of New York. Respondent also was also ordered to pay a $55,000 civil +money penalty. + + 3. The Commission’s complaint alleged, among other things, that while Respondent +was the Vice President of Accounting and Reporting of Penn West Petroleum, Ltd. (“Penn West”), +Penn West booked materially false accounting journal entries and improperly understated its +operating expenses in order to meet financial targets. The complaint further alleged that +Respondent did not take adequate steps to ensure that Penn West’s journal entries were materially +accurate and properly supported. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Curran’s Offer. + + Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice, effective immediately, that: + + + 3 + A. Jeffery A. Curran is suspended from appearing or practicing before the Commission +as an accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (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; + + (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 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 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 Respondent to resume +appearing or practicing before the Commission provided that his province chartered +accountant license is current and he has resolved all other disciplinary issues with the +applicable provincial boards of accountancy. However, if provincial licensure is dependent +on reinstatement by the Commission, the Commission will consider an application on its +other merits. The Commission’s review may include consideration of, in addition to the +matters referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission as an +accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4139.txt b/raw/aaer/2020/AAER-4139.txt new file mode 100644 index 0000000000000000000000000000000000000000..dff818be3bf95c469ae248ea64e677b3b4c9ac18 --- /dev/null +++ b/raw/aaer/2020/AAER-4139.txt @@ -0,0 +1,46 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88851 / May 11, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4139 / May 11, 2020 +Admin. Proc. File No. 3-19767 +In the Matter of +PLS, CPA, A PROFESSIONAL +CORPORATION, A/K/A PLS CPAs; +CHANG G. PARK, CPA, A/K/A CHANGGEUN PARK; +JOSEPH YONGYUN LEE, CPA, A/K/A YONG +YUN LEE; AND JUCHI LEE, CPA, A/K/A JUCHI LEE +FERNANDEZ, JUCHI LEE, JU CHI LEE, SUE LEE +ORDER +On April 24, 2020, the Securities and Exchange Commission issued an order instituting +an administrative proceeding (“OIP”) against PLS, CPA, a Professional Corporation, a/k/a PLS +CPAs; Chang G. Park, CPA, a/k/a Changgeun Park; Joseph Yongyun Lee, CPA, a/k/a Yong Yun +Lee; and Juchi Lee, CPA, a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee +(collectively, “Respondents”), pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.1 In compliance +with the statutory provision governing cease-and-desist proceedings, the OIP specified that a +“public hearing before the Commission for the purpose of taking evidence . . . shall be convened +not earlier than 30 days and not later than 60 days” from service of the OIP.2 The statute also +provides that “an earlier or later date” for the hearing may be “set by the Commission with the +consent of any respondent so served.”3 +1 PLS, CPA, a Professional Corporation, a/k/a PLS CPAs, Exchange Act Release No. +88739, 2020 WL 2039958 (Apr. 24, 2020). +2 Id. at *15. +3 15 U.S.C. § 78u-3(b). +2 + +Respondents were served with the OIP by April 28, 2020. As a consequence, in the +absence of consent by Respondents regarding a later hearing date, a public hearing will be set for +a date on or before June 26, 2020. To facilitate the orderly and expeditious resolution of this +matter, it is ORDERED that the parties shall file a statement advising the Commission of any +agreement to a later hearing date (or a statement that no agreement could be reached) by May 18, +2020. In the event the parties do not reach an agreement by that date, this order does not +preclude the parties from reaching such an agreement subsequently. The Commission will +specify further proceedings by subsequent order. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4140.txt b/raw/aaer/2020/AAER-4140.txt new file mode 100644 index 0000000000000000000000000000000000000000..47ab59730d72092431375ce31649580e103f4ee5 --- /dev/null +++ b/raw/aaer/2020/AAER-4140.txt @@ -0,0 +1,1384 @@ + + + + + + + + + + + + + + + + SEC.gov | TCA Fund Management Group Corp. and TCA Global Credit Fund GP, Ltd. + + + + + + + + !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\/524571","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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TCA Fund Management Group Corp. and TCA Global Credit Fund GP, Ltd. , No. 1:20-cv-21964 (S.D. Fla. filed May 11, 2020) + + + + + + + + + The Securities and Exchange Commission today filed fraud charges against Florida-based investment adviser TCA Fund Management Group Corp. (TCA) and its affiliate, TCA Global Credit Fund GP, Ltd. (TCA-GP), for an alleged fraudulent scheme conducted by TCA to inflate asset values and performance returns of funds it managed. + + The SEC's complaint, filed in the U.S. District Court for the Southern District of Florida, charges TCA and TCA-GP with violating the anti-fraud provisions of Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint separately charges TCA with violating the anti-fraud provisions of Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8 thereunder. The SEC seeks permanent injunctions, disgorgement of allegedly ill-gotten gains and prejudgment interest, financial penalties, and the appointment of a receiver over TCA, TCA-GP, and the funds TCA managed. + + The SEC's investigation, which is ongoing, is being conducted by Shan Chang, Raynette R. Nicoleau, and Allen J. Genaldi, under the supervision of Chedly C. Dumornay and Glenn S. Gordon, and with the assistance of Jose Molina, Victor Mendoza, William Tudor, Roda Johnson, Jeannie M. Cabot, and John C. Mattimore, of the SEC's Miami Regional Office. The litigation will be handled by Andrew O. Schiff and Stephanie N. 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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/2020/AAER-4141.txt b/raw/aaer/2020/AAER-4141.txt new file mode 100644 index 0000000000000000000000000000000000000000..909aa3b3b27223708a625fb2eb2f788654603ab9 --- /dev/null +++ b/raw/aaer/2020/AAER-4141.txt @@ -0,0 +1,325 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88895 / May 18, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4141 / May 18, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19803 + + + +In the Matter of + +TIMOTHY DALY, CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- + AND- DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Timothy +Daly, CPA ( “Respondent” or “Daly”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) +not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and +regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found to be lacking in character or integrity or to have engaged in +unethical or improper professional conduct. +2 +II. + +In anticipation of the institution of these proceedings, 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 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 misconduct by a now-former KPMG audit partner in +connection with an examination on an internally-administered training course. The purpose of the +examination was to test whether KPMG audit professionals understood certain accounting and +auditing principles. In 2018, former lead audit engagement partner Timothy Daly solicited and +received questions and answers to the examination from a colleague who was a second audit +partner on one of Daly’s engagement teams. + +2. After learning of KPMG’s internal investigation of its audit professionals’ cheating +on internal training exams, Daly deleted text messages with his colleague in which the colleague +had relayed the questions and answers to the exam, after receiving a notice from the firm requiring +Daly to preserve them. Daly also made a misrepresentation to KPMG’s investigators, which he +subsequently self-corrected. + +3. Daly is required, both by the rules of the Public Company Accounting Oversight +Board (“PCAOB”) and by the Code of Professional Conduct of the American Institute of Certified +Public Accountants (“AICPA”), to act with integrity in connection with performing professional + + + 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 +services.4 Certified public accountants are required to “be, among other things, honest and candid +within the constraints of client confidentiality.”5 Additionally, Daly is prohibited from committing +acts “discreditable to the profession.”6 By the misconduct described herein, Daly failed to meet +these standards. + +RESPONDENT + +4. Timothy Daly, 53, of Weston, Connecticut was a partner in KPMG’s audit practice +until March 2019. Daly is licensed as a CPA in the state of New York and was previously licensed +in Connecticut. + +OTHER RELEVANT PERSON AND ENTITY + +5. Michael Bellach, 45, of New York, New York was a partner in KPMG’s audit +practice until March 2019. Bellach is licensed as a CPA in Connecticut and New York. The +Commission has charged Bellach for his role in the misconduct described in this Order. + +6. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. + +FACTS + +A. Professional Education Requirements for KPMG Auditor Personnel + +7. As an accountant licensed in New York, Daly was required to complete a minimum +number of continuing professional education (“CPE”) courses. KPMG requires its audit +professionals, including Daly, to complete additional training in excess of state requirements and to +take examinations generally not mandated by state accountancy boards. These training +requirements vary by position, role, and industry, and are designed by the firm to be relevant to the +audit work its professionals are performing. + +8. To help its audit professionals satisfy these requirements, KPMG administers its +own set of online training programs that also qualify for CPE credit. KPMG requires its auditors to +pass an examination at the conclusion of each online training program. Audit professionals are +given three opportunities to pass each examination. If one of KPMG’s audit professionals is + +4 PCAOB Rule 3500T requires Daly to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. As an AICPA member, Daly is required to comply +with the AICPA’s Code of Professional Conduct, which requires him to maintain integrity in connection with all +professional services. + +5 See “Principles of Professional Conduct,” ET Section 54 (available at +https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessiona +lConduct.pdf). Codified as AICPA Code 0.300.040. + +6 AICPA Code of Professional Conduct 1.400.001 (“Acts Discreditable Rule”). +4 +unable to pass after two attempts, their Performance Management Leader is notified. If they are +unable to pass after three attempts, the consequences are more significant: they are required to re- +take the training; they are prohibited from conducting audit work until they pass the exam; and +others at the firm may be notified. Audit professionals also understood that failing to pass an exam +could lead to their compensation being reduced. + +B. Daly Solicits Test Answers from Bellach + +9. In the fall of 2018, KPMG required its audit staff to complete trainings and exams +related to a new lease accounting standard. In late September, Daly asked Michael Bellach, the +second partner on a significant KPMG engagement for which Daly was lead engagement partner, +about his progress on the KPMG lease testing. Bellach told Daly he had completed the last lease +exam, and it was difficult. Bellach also told Daly he had pictures of the questions and his +responses that he had taken after he failed his first attempt for his own use in preparing to retake +the exam. In early October, Daly sent Bellach a text message asking for the photographs of the +failed lease exam, and Bellach texted the images back to Daly. + +C. Daly and Bellach Delete the Text Containing the Test Photos + +10. After learning of potential cheating on internal training exams, KPMG leadership +began an internal investigation. The firm’s Board of Directors then formed a Special Committee +led by an independent board member to oversee an investigation of this conduct. + +11. As part of its investigation, KPMG’s Office of General Counsel emailed an “Urgent +Request” to all KPMG personnel to preserve all documents related to KPMG’s training +requirements or training sessions. The November 1, 2018 email emphasized the importance of +“strict compliance” with the document preservation order, cautioning that failure to comply could +expose individuals and the firm to serious consequences. After receiving the November 1 +document preservation notice, Daly deleted the text message and photos of the failed lease exam +Bellach had sent him and encouraged Bellach to do the same. + +12. In December 2018, the firm required certain audit professionals to complete a +questionnaire that probed whether individuals had shared exam materials. Daly falsely answered +“no” to the question of whether he had received any answers to KPMG training exams. Early the +following week, Daly self-corrected by informing KPMG senior management that he had, contrary +to his response to the questionnaire, received a colleague’s answers to a training exam. + + + + + + + + + +5 +VIOLATIONS + +13. As a result of the conduct described above, Daly willfully7 violated PCAOB Rule +3500T, which requires Daly to comply with ethics standards, including to maintain integrity, as +described in the AICPA’s Code of Professional Conduct when performing any professional service +in connection with the preparation or issuance of any audit report,8 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. + +14. The AICPA Code of Professional Conduct requires that a member not commit any +act discreditable to the profession. AICPA Code of Professional Conduct 1.400.001. As a result +of the conduct described above, Daly failed to comply with AICPA Code of Professional Conduct +1.400.001 within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. + +FINDINGS + +15. Based on the foregoing, the Commission finds that Daly willfully violated PCAOB +Rule 3500T within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. + +16. Based on the foregoing, the Commission finds a basis to impose remedies against +Daly pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice, because Daly engaged in conduct within their purview. Those provisions allow +the Commission to impose remedies when a person has been found to have engaged in conduct +“lacking in character or integrity or [has] engaged in unethical or improper professional conduct.” + + + + + + + + + + +7 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C(a) (3) and Rule 102(e)(1)(iii) +“means no more than that the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement +that the actor “also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. +1965). + +8 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and +interpretations and rulings thereunder, as in existence on April 16, 2003. Although PCAOB Rule 3500T references +the AICPA Code as in existence on April 16, 2003, the definition of integrity remains identical to the current +definitions in the Code of Professional Conduct promulgated by the AICPA and applicable to current members of +the AICPA. + +6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Daly’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Daly shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T. + + B. Daly is denied the privilege of appearing or practicing before the Commission as an +accountant. + + C. After three years from the date of this order, Daly 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 Daly’s work in his practice +before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which he works or +in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Daly, 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; + +7 + (b) Daly, 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 Daly will not receive appropriate supervision; + (c) Daly 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) Daly 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 Daly 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 Daly’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4142.txt b/raw/aaer/2020/AAER-4142.txt new file mode 100644 index 0000000000000000000000000000000000000000..e57adee25a3361f551728d7dd2b379ad060fc102 --- /dev/null +++ b/raw/aaer/2020/AAER-4142.txt @@ -0,0 +1,324 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88896 / May 18, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4142 / May 18, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19804 + + + +In the Matter of + +MICHAEL BELLACH, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- + AND- DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Michael +Bellach, CPA (“Respondent” or “Bellach”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if t hat person is found . . . (1) +not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and +regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found to be lacking in character or integrity or 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”) 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 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 misconduct by a now-former KPMG audit partner in +connection with an examination on an internally-administered training course. The purpose of the +examination was to test whether KPMG audit professionals understood certain accounting and +auditing principles. In late 2018, the former audit partner, Michael Bellach, sent pictures of +questions and answers to the examination that he had failed to a colleague, a now-former lead audit +engagement partner on one of Bellach’s engagements, at the lead partner’s request. + +2. After learning of KPMG’s internal investigation of its audit professionals’ cheating +on internal training exams, the lead partner encouraged Bellach to delete his text messages with the +lead partner in which Bellach had relayed the questions and answers to the exam. Bellach did so +after receiving a notice from the firm requiring him to preserve them. + +3. Bellach is required, both by the rules of the Public Company Accounting Oversight +Board (“PCAOB”) and by the Code of Professional Conduct of the American Institute of Certified +Public Accountants (“AICPA”), to act with integrity in connection with performing professional + + + 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 +services.4 Certified public accountants are required to “be, among other things, honest and candid +within the constraints of client confidentiality.”5 Additionally, Bellach is prohibited from +committing acts “discreditable to the profession.”6 By the misconduct described herein, Bellach +failed to meet these standards. + +RESPONDENT + +4. Michael Bellach, 45, of New York, New York was a partner in KPMG’s audit +practice until March 2019. Bellach is licensed as a CPA in Connecticut and New York. +OTHER RELEVANT PERSON AND ENTITY + +5. Timothy Daly, 53, of Weston, Connecticut was a partner in KPMG’s audit practice +until March 2019. Daly is licensed as a CPA in New York and was previously licensed in +Connecticut. The Commission has charged Daly for his role in the misconduct described in this +Order. + +6. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. + +FACTS + +A. Professional Education Requirements for KPMG Auditor Personnel + +7. As an accountant licensed in Connecticut and New York, Bellach was required to +complete a minimum number of continuing professional education (“CPE”) courses. KPMG +requires its audit professionals, including Bellach, to complete additional training in excess of state +requirements and to take examinations generally not mandated by state accountancy boards. These +training requirements vary by position, role, and industry, and are designed by the firm to be +relevant to the audit work its professionals are performing. + +8. To help its audit professionals satisfy these requirements, KPMG administers its +own set of online training programs that also qualify for CPE credit. KPMG requires its auditors to +pass an examination at the conclusion of each online training program. Audit professionals are +given three opportunities to pass each examination. If one of KPMG’s audit professionals is + +4 PCAOB Rule 3500T requires Bellach to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. As an AICPA member, Bellach is required to +comply with the AICPA’s Code of Professional Conduct, which requires him to maintain integrity in connection +with all professional services. + +5 See “Principles of Professional Conduct,” ET Section 54 (available at +https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessiona +lConduct.pdf). Codified as AICPA Code 0.300.040. + +6 AICPA Code of Professional Conduct 1.400.001 (“Acts Discreditable Rule”). +4 +unable to pass after two attempts, their Performance Management Leader is notified. If they are +unable to pass after three attempts, the consequences are more significant: they are required to re- +take the training; they are prohibited from conducting audit work until they pass the exam; and +others at the firm may be notified. Audit professionals also understood that failing to pass an exam +could lead to their compensation being reduced. + +B. Daly Solicits Test Answers from Bellach + +9. In 2017 Daly, as lead partner on a significant KPMG engagement, added Bellach as +the second partner on the audit. By late summer 2018, Bellach understood that Daly intended to +recommend Bellach become lead audit engagement partner when Daly rotated off the engagement. + +10. In the fall of 2018, KPMG required its audit staff to complete trainings and exams +related to a new lease accounting standard. In late September, in response to Daly asking about his +progress on the KPMG lease testing, Bellach told Daly he had completed the last lease exam, and it +was difficult. Bellach also told Daly he had pictures of the questions and his responses that he had +taken after he failed his first attempt for his own use in preparing to retake the exam. In early +October, Daly sent Bellach a text message asking for the photographs of the failed lease exam, and +Bellach texted the images back to Daly. + +C. Daly Encourages Bellach to Delete the Text Containing the Test Photos + +11. After learning of potential cheating on internal training exams, KPMG leadership +began an internal investigation. The firm’s Board of Directors then formed a Special Committee +led by an independent board member to oversee an investigation of this conduct. + +12. As part of its investigation, KPMG’s Office of General Counsel emailed an “Urgent +Request” to all KPMG personnel to preserve all documents related to KPMG’s training +requirements or training sessions. The November 1, 2018 email emphasized the importance of +“strict compliance” with the document preservation order, cautioning that failure to comply could +expose individuals and the firm to serious consequences. + +13. After receiving the November 1 document preservation notice, Daly deleted the text +message and photos of the failed lease exam Bellach had sent him and encouraged Bellach to do +the same. After repeated inquiries from Daly, Bellach also deleted the texts with Daly, but not the +pictures of the exam. Bellach later told counsel representing the Special Committee overseeing +KPMG’s internal investigation about his deletion of the text. + + + + + + + + +5 +VIOLATIONS + +14. As a result of the conduct described above, Bellach willfully7 violated PCAOB +Rule 3500T, which requires Bellach to comply with ethics standards, including to maintain +integrity, as described in the AICPA’s Code of Professional Conduct when performing any +professional service in connection with the preparation or issuance of any audit report,8 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. + +15. The AICPA Code of Professional Conduct requires that a member not commit any +act discreditable to the profession. AICPA Code of Professional Conduct 1.400.001. As a result +of the conduct described above, Bellach failed to comply with AICPA Code of Professional +Conduct 1.400.001 within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +FINDINGS + +16. Based on the foregoing, the Commission finds that Bellach willfully violated +PCAOB Rule 3500T within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +17. Based on the foregoing, the Commission finds a basis to impose remedies against +Bellach pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, because Bellach engaged in conduct within their purview. Those +provisions allow the Commission to impose remedies when a person has been found to have +engaged in conduct “lacking in character or integrity or [has] engaged in unethical or improper +professional conduct.” + + + + + + + + +7 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) +“means no more than that the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement +that the actor “also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. +1965). + +8 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and +interpretations and rulings thereunder, as in existence on April 16, 2003. Although PCAOB Rule 3500T references +the AICPA Code as in existence on April 16, 2003, the definition of integrity remains identical to the curre nt +definitions in the Code of Professional Conduct promulgated by the AICPA and applicable to current members of +the AICPA. + +6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bellach’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Bellach shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T. + + B. Bellach is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After two years from the date of this order, Bellach 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 Bellach’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Bellach, 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; + +7 + (b) Bellach, 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 Bellach will not receive appropriate supervision; + (c) Bellach 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) Bellach 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 Bellach 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 Bellach’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4143.txt b/raw/aaer/2020/AAER-4143.txt new file mode 100644 index 0000000000000000000000000000000000000000..697c16abf75ea692f17a92b701f61b78697ac3ad --- /dev/null +++ b/raw/aaer/2020/AAER-4143.txt @@ -0,0 +1,271 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88897 / May 18, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4143 / May 18, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19805 + + + +In the Matter of + +JOHN DONOVAN, CPA, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- + AND- DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against John +Donovan, CPA (“Respondent” or “Donovan”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) +not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and +regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found to be lacking in character or integrity or to have engaged in +unethical or improper professional conduct. +2 + +II. + +In anticipation of the institution of these proceedings, 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 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 misconduct by a now-former KPMG audit partner in +connection with examinations on internally-administered training courses. The purpose of the +examinations was to test whether KPMG audit professionals understood certain accounting and +auditing principles. In 2018, former lead audit engagement partner John Donovan shared answers +to three and received answers to seven KPMG training examinations with junior members of his +engagement team. During KPMG’s internal investigation of its audit professionals’ exam-related +cheating, Donovan made misrepresentations to KPMG’s investigators. +2. Donovan is required, both by the rules of the Public Company Accounting +Oversight Board (“PCAOB”) and by the Code of Professional Conduct of the American Institute +of Certified Public Accountants (“AICPA”), to act with integrity in connection with performing +professional services.4 Certified public accountants are required to “be, among other things, honest + + + 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. + +4 PCAOB Rule 3500T requires Donovan to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. As an AICPA member, Donovan is required to +comply with the AICPA’s Code of Professional Conduct, which requires him to maintain integrity in connection +with all professional services. + +3 +and candid within the constraints of client confidentiality.”5 Additionally, Donovan is prohibited +from committing acts “discreditable to the profession.”6 By the misconduct described herein, +Donovan failed to meet these standards. +RESPONDENT + +3. John Donovan, 57, of Westlake Village, California was a partner in KPMG’s audit +practice until March 2019. Donovan is licensed as a CPA in California and Texas. +OTHER RELEVANT ENTITY + +4. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. +FACTS + +A. Professional Education Requirements for KPMG Auditor Personnel + +5. As an accountant licensed in California and Texas, Donovan was required to +complete a minimum number of continuing professional education (“CPE”) courses. KPMG +requires its audit professionals, including Donovan, to complete additional training in excess of +state requirements and to take examinations generally not mandated by state accountancy boards. +These training requirements vary by position, role, and industry, and are designed by the firm to be +relevant to the audit work its professionals are performing. +6. To help its audit professionals satisfy these requirements, KPMG administers its +own set of online training programs that also qualify for CPE credit. KPMG requires its auditors to +pass an examination at the conclusion of each online training program. Audit professionals are +given three opportunities to pass each examination. If one of KPMG’s audit professionals is +unable to pass after two attempts, their Performance Management Leader is notified. If they are +unable to pass after three attempts, the consequences are more significant: they are required to re- +take the training; they are prohibited from conducting audit work until they pass the exam; and +others at the firm may be notified. Audit professionals also understood that failing to pass an exam +could lead to their compensation being reduced. +B. Donovan Shares Exam Materials and Misrepresents Conduct +7. As a partner of the firm, Donovan was charged by KPMG’s Code of Conduct with +helping to ensure that KPMG professionals he supervised understood the importance of ethics and + +5 See “Principles of Professional Conduct,” ET Section 54 (available at +https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessiona +lConduct.pdf). Codified as AICPA Code 0.300.040. + +6 AICPA Code of Professional Conduct 1.400.001 (“Acts Discreditable Rule”). + +4 +integrity. Despite his responsibilities, Donovan supported examination sharing within his team. +Between April and September 2018, Donovan received answers to training exams from +subordinates on his engagement team on seven occasions and shared answers with his team three +times. +8. In December 2018, the firm required certain audit professionals to complete a +questionnaire that probed whether individuals had shared exam materials. Donovan falsely +responded on the questionnaire that he had not sent, received, or shared answers. +VIOLATIONS + +9. As a result of the conduct described above, Donovan willfully7 violated PCAOB +Rule 3500T, which requires Donovan to comply with ethics standards, including to maintain +integrity, as described in the AICPA’s Code of Professional Conduct when performing any +professional service in connection with the preparation or issuance of any audit report,8 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. +10. The AICPA Code of Professional Conduct requires that a member not commit any +act discreditable to the profession. AICPA Code of Professional Conduct 1.400.001. As a result +of the conduct described above, Donovan failed to comply with AICPA Code of Professional +Conduct 1.400.001 within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. +FINDINGS + +11. Based on the foregoing, the Commission finds that Donovan willfully violated +PCAOB Rule 3500T within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +12. Based on the foregoing, the Commission finds a basis to impose remedies against +Donovan pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, because Donovan engaged in conduct within their purview. +Those provisions allow the Commission to impose remedies when a person has been found to have + +7 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) +“means no more than that the person charged with the duty knows what he is doing.” Wonsover v. SEC, 205 F.3d +408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement +that the actor “also be aware that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. +1965). + +8 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and +interpretations and rulings thereunder, as in existence on April 16, 2003. Although PCAOB Rule 3500T references +the AICPA Code as in existence on April 16, 2003, the definition of integrity remains identical to the curre nt +definitions in the Code of Professional Conduct promulgated by the AICPA and applicable to current members of +the AICPA. + +5 +engaged in conduct “lacking in character or integrity or [has] engaged in unethical or improper +professional conduct.” +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Donovan’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Donovan shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T. + + B. Donovan is denied the privilege of appearing or practicing before the Commission +as an accountant. + + C. After one year from the date of this order, Donovan 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 Donovan’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Donovan, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +6 +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Donovan, 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 Donovan will not receive appropriate supervision; + (c) Donovan 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) Donovan 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 Donovan 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 Donovan’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4144.txt b/raw/aaer/2020/AAER-4144.txt new file mode 100644 index 0000000000000000000000000000000000000000..e00cc83a673ff760f0fd6358456758dd1dd39fff --- /dev/null +++ b/raw/aaer/2020/AAER-4144.txt @@ -0,0 +1,222 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5508 / May 22, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4144 / May 22, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19807 + + +In the Matter of + +TSP CAPITAL MANAGEMENT +GROUP, LLC, + +Respondent. +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 203(e) AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF 1940, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) against TSP Capital Management Group, LLC (“TSP Capital” or the +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, the Respondent has submitted an +Offer of Settlement (“Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, the Respondent consents to the entry of this Order Instituting +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the +Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + +2 +III. + + On the basis of this Order and the Respondent’s Offer, the Commission finds that: + +Summary + +1. TSP Capital, a registered investment adviser, failed to timely distribute annual +audited financial statements prepared in accordance with Generally Accepted Accounting +Principles (“GAAP”) to the investors in the largest private fund that it advised in each fiscal year +from 2014 through 2018, or even to retain an auditor for the years after 2015, resulting in +violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, commonly +referred to as the “custody rule.” + + 2. TSP Capital also failed to adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder, a violation +of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. + +Respondent + +3. TSP Capital is a Delaware limited liability company with its principal office and +place of business in Summit, New Jersey. TSP Capital has been registered with the Commission +as an investment adviser since September 2004. During the relevant period, TSP Capital was the +managing member of and served as investment adviser to two private funds. +Facts + +4. TSP Capital’s largest private fund is Cameroon Enterprises, LLC Fund (the +“Cameroon Fund”), which accounted for approximately $31.5 million of the approximately $296 +million in regulatory assets under management that TSP Capital reported in its Form ADV filed on +March 27, 2019. The Cameroon Fund’s stated investment strategy focuses on private agricultural +investments in Cameroon. +5. The custody rule is designed to protect investment advisory clients from the misuse +or misappropriation of their funds and securities. It requires that registered advisers who have +custody of client funds or securities implement an enumerated set of requirements to prevent loss, +misuse, or misappropriation of those assets. + + 6. An investment adviser has custody of client assets if it holds, directly or indirectly, +client funds or securities, or if it has the ability to obtain possession of those assets. See Rule +206(4)-2(d)(2). + + 7. TSP Capital had custody of the Cameroon Fund’s assets as defined in Rule +206(4)-2. An investment adviser who has custody of client assets must, among other things: (i) +ensure that a qualified custodian maintains the client assets; (ii) notify the client in writing of +accounts opened by the adviser at a qualified custodian on the client’s behalf; (iii) have a + +3 +reasonable basis for believing that the qualified custodian sends account statements at least +quarterly to clients, except if the client is a limited partnership for which the adviser or a related +person is a general partner, the account statements must be sent to each limited partner; and (iv) +ensure that client funds and securities are verified by actual examination each year by an +independent public accountant at a time chosen by the accountant without prior notice or +announcement to the adviser. See Rule 206(4)-2(a)(1) - (5). + + 8. The custody rule provides an alternative to complying with the requirements of +Rule 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships or other types of +pooled investment vehicles, such as the Cameroon Fund. The custody rule provides that an +investment adviser “shall be deemed to have complied with” the independent verification +requirement and is not required to satisfy the notification and accounts statements delivery +requirements with respect to a fund if the fund is subject to audit at least annually and “distributes +[the fund’s] audited financial statements prepared in accordance with generally accepted +accounting principles to all limited partners . . . within 120 days of the end of [the fund’s] fiscal +year” (“Audited Financials Alternative”). See Rule 206(4)-2(b)(4). The accountant performing the +audit must be an independent public accountant that is registered with, and subject to regular +inspection by, the Public Company Accounting Oversight Board (“PCAOB”). See Rule 206(4)- +2(b)(4)(ii). An investment adviser to a limited partnership that fails to meet the requirements of the +Audited Financials Alternative to timely distribute audited financial statements prepared in +accordance with GAAP would need to satisfy all of the requirements of Rule 206(4)-2(a)(2-4) in +order to avoid violating the custody rule. + +9. With respect to the Cameroon Fund, TSP Capital relied on the Audited Financials +Alternative to attempt to comply with the custody rule for the years 2014 through 2018 but did +not do so. Although TSP Capital engaged a PCAOB-registered firm to conduct an annual audit +of the Cameroon Fund’s financial statements for fiscal years 2014 and 2015, the audit firm was +not engaged, and did not issue an audit report, until well after 120 days following the end of both +of those fiscal years. For 2014, the audit report was mailed to investors 686 days late; for 2015, +the audit report was mailed to investors 927 days late. For the following years, TSP Capital did +not succeed in engaging an audit firm to audit the Cameroon Fund’s annual financial statements +and therefore failed to distribute the requisite audited financial statements to investors within 120 +days of the fiscal year’s end or at any time thereafter. Accordingly, TSP Capital did not satisfy +the requirements of the Audited Financials Alternative in Rule 206(4)-2(b)(4) for the Cameroon +Fund for fiscal years 2014 through 2018 and was therefore obligated to comply with Rule +206(4)-2(a)(2), (3) and (4), which it also failed to do. + + 10. TSP Capital also failed to comply with the requirement that every investment +adviser registered with the Commission adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder. See Rule +206(4)-7(a). While TSP Capital’s written policies and procedures referenced the custody rule, they +were not reasonably designed and implemented to prevent violations of the rule. + + +4 +Violations + + 11. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging +in acts, practices or courses of business that are fraudulent, deceptive, or manipulative, as defined +by the Commission in rules and regulations promulgated under the statute. Proof of scienter is not +required to establish a violation of Section 206(4) of the Advisers Act and the rules thereunder. +See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). Among other things, Rule 206(4)-2 +requires registered investment advisers with custody of client assets to have independent public +accountants conduct surprise examinations of those client funds or securities, or to have private fund +clients timely distribute to their investors annual audited financial statements prepared in accordance +with GAAP. Rule 206(4)-7 requires, among other things, that an investment adviser registered +with the Commission adopt and implement written policies and procedures reasonably designed to +prevent violation of the Advisers Act and rules thereunder. + + 12. As a result of the conduct described above, TSP Capital willfully violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, pursuant Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +B. TSP Capital is censured. + +C. Within 21 days of the entry of this Order, TSP Capital shall pay a civil monetary +penalty in the amount of $60,000 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 + + +5 +(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 TSP +Capital Management Group, LLC, as Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to Sanjay +Wadhwa, Senior Associate Director, Securities and Exchange Commission, New York Regional +Office, 200 Vesey Street, Suite 400, New York, NY 10281. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, Respondent shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4145.txt b/raw/aaer/2020/AAER-4145.txt new file mode 100644 index 0000000000000000000000000000000000000000..79ea5947a72272d4ec3fe6fc35def599a9c508f9 --- /dev/null +++ b/raw/aaer/2020/AAER-4145.txt @@ -0,0 +1,102 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 88998 / June 3, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4145 / June 3, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19821 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE +Christopher D. Larson (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 +Christopher D. Larson (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by +order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has been by name . +. . permanently enjoined by any court of compe tent 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 (“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 48, is a certified public accountant in the State of Minnesota +on inactive status. From no later than December 2011 through at least December 2012, he acted as +the undisclosed Chief Financial Officer (CFO) of Crown Dynamics Corporation (“Crown”), a +company whose common stock traded on the Over-the-Counter Bulletin Board (OTCBB), and also +served as the CFO of Mix1Life Inc., a company whose common stock also traded on the OTCBB. +Respondent is currently an employee of Ammo, Inc. + + 2. On April 25, 2016, the Commission filed a complaint against Larson in the +Southern District of California styled as SEC v. Zouvas et al., (Civil Action No. 16CV0998), which +subsequently was transferred to the District of Arizona as Civil Action No. CV-17-00427-PHX-SPL. +On June 1, 2020, the court entered an order permanently enjoining Larson, by consent, from future +violations of Section 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the +Securities Exchange Act of 1934. + + 3. The Commission’s complaint alleged, among other things, that from no later +than December 2011 through at least December 2012, Larson engaged in a scheme to manipulate +the market for Crown stock. As part of the scheme, Larson obtained control of Crown, transferred +shares to nominees, paid $400,000 for a “call center” to promote Crown, placed manipulative trades +in his own account to create the appearance of market interest, and acted as the undisclosed CFO of +the company. As Crown’s stock price became inflated as a result of these efforts, Larson’s nominees +sold Crown shares and wired the sale proceeds — at least $865,000 — to him. + +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. + + + + + 3 + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4146.txt b/raw/aaer/2020/AAER-4146.txt new file mode 100644 index 0000000000000000000000000000000000000000..ccf6b5ce201bc5ecdedb1c6b9f1d1c4f48758686 --- /dev/null +++ b/raw/aaer/2020/AAER-4146.txt @@ -0,0 +1,249 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89009 / June 4, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4146 / June 4, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19822 + +In the Matter of + +ARGO GROUP +INTERNATIONAL +HOLDINGS, LTD., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Argo Group International Holdings, Ltd. +(“Argo” 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 arises from Argo Group International Holding, Ltd.’s failure to disclose +in its definitive proxy statements that, from 2014 through 2018, it paid over $5.3 million to its then +Chief Executive Officer, President and member of its Board of Directors, Mark E. Watson III, in +the form of a wide range of perquisites and personal benefits. In connection with this conduct, +Argo violated Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules +12b-20, 13a-1, 14a-3, and 14a-9 thereunder. In late 2019, Watson resigned and agreed to +reimburse Argo for certain perquisites and/or personal expenses. +Respondent and Relevant Individual + 2. Respondent Argo Group International Holdings, Ltd. is organized under the laws +of, and headquartered in, Bermuda. Argo is an international underwriter of specialty insurance and +reinsurance products in the property and casualty market, with significant operations in the United +States. The company’s common stock is registered under Section 12(b) of the Exchange Act and +trades on the New York Stock Exchange under the ticker symbol “ARGO.” + 3. Mark E. Watson III was the Chief Executive Officer, President and a director of +Argo from 2000 until late 2019. His resignation as Argo’s Chief Executive Officer and President +became effective on November 5, 2019, and his resignation as a member of Argo’s Board of +Directors became effective on December 30, 2019. +Facts + 4. In definitive proxy statements disclosing executive compensation paid for 2014 +through 2018, which were filed in 2015 through 2019, Argo disclosed a total of approximately +$1.22 million worth of perquisites and personal benefits provided to Watson, with an annual +average of approximately $244,000. The disclosed perquisites and personal benefits consisted +predominately of 401(k) and retirement contributions, the imputed value of insurance coverage, +supplemental executive retirement plan benefits, housing and home leave allowances, medical +premiums and financial planning services. +5. However, these same definitive proxy statements failed to disclose over $5.3 +million worth of additional perquisites and personal benefits provided to Watson, thereby +understating the perquisites and personal benefits portion of Watson’s compensation by an annual +average of over $1 million, or 400%. Items that Argo paid for on Watson’s behalf, but did not +disclose, include, but are not limited to, expenses associated with personal use of corporate aircraft, + +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 +rent and other housing costs, personal use of corporate automobiles, helicopter trips, other personal +travel costs, use of a car service by family members, club and concierge service memberships, +tickets and transportation to sporting, fashion or other entertainment events, personal services +provided by Argo employees, and watercraft-related costs. + 6. In February 2019, an Argo shareholder issued a press release in which it alleged, +among other things, the misuse of Argo assets by Watson, including undisclosed personal usage of +corporate aircraft. On April 12, 2019, during a proxy contest with this shareholder in connection +with Argo’s May 2019 annual shareholders meeting, Argo filed a definitive proxy statement that +failed to disclose over $1 million worth of perquisites, including over $230,000 related to Watson’s +use of corporate aircraft. + 7. From 2015 through 2019, Argo incorporated its definitive proxy statements into its +annual reports by reference. + 8. From 2014 through 2018, Argo incorrectly recorded payments for the benefit of, +and reimbursements to, Watson 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. + 9. In addition, Argo failed to devise and maintain internal accounting controls relating +to payments for the benefit of, and reimbursements to, Watson that were sufficient to provide +reasonable assurances that transactions were recorded as necessary to maintain the accountability +of assets. These failures included, for instance, a practice of providing expense reimbursements to +Watson without requiring an adequate explanation of a business purpose for the expense, allowing +Watson to approve his own expense reimbursements, and a lack of a mechanism to ensure Watson +paid for personal usage of corporate aircraft. + 10. Argo conducted an internal investigation, which was launched in June 2019 after +receipt of a subpoena from the Commission staff. Thereafter, Watson resigned and agreed to +reimburse Argo for certain perquisites and/or personal expenses, subject to an arbitration process +as to any items Watson disputes. +Violations + 11. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers (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 + 4 +prohibits the use of proxy statements containing materially false or misleading statements or +materially misleading omissions. No showing of scienter is required to establish a violation of +Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder. See, e.g., Gerstle v. +Gamble-Skogmo, Inc., 478 F.2d 1281, 1299-1300 (2d Cir. 1973). As a result of the conduct +described above, Argo violated Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 +thereunder. + 12. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. The Commission need not +prove scienter to establish a violation of Section 13(a) of the Exchange Act (or Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, or Exchange Act Rules 12b-20 and 13a-1). See, +e.g., SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998). As a result of its incorporation of +deficient proxy statements by reference in its annual reports, Argo violated Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder. + 13. As a result of the conduct described above, Argo 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. + 14. As a result of the conduct described above, Argo 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. + 15. As a result of the conduct described above, Argo 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. +Undertakings +16. 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; + 5 +c. To use its best efforts to cause Respondent’s current and former employees, +officers and directors to appear and testify truthfully and completely without service of a notice or +subpoena in such investigations, depositions, hearings or trials as may be reasonably requested by +the Commission’s staff; and +d. In connection with any interviews of Respondent’s current and former +employees, officers and directors to be conducted pursuant to this undertaking, requests for such +interviews may be provided by the Commission’s staff by regular or electronic mail to Barry +Rashkover of Sidley Austin LLP, or such other counsel that may be substituted by Respondent. +17. In determining whether to accept the Offer, the Commission has considered these +undertakings. +Argo’s Remedial Efforts and Cooperation +18. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. Specifically, Argo +undertook remedial efforts including (i) engagement of outside counsel and an independent +forensic accounting firm to conduct an investigation; (ii) engagement of a third-party consultant +to assist in reviewing and revising its executive compensation process, policies and controls; (iii) +replacing its Chief Executive Officer; (iv) entering into an agreement to obtain repayments from +the former Chief Executive Officer; (v) implementing new internal controls and compliance +policies and procedures concerning perquisites, airplane usage, expense reimbursement, travel, +and charitable contributions; and (vi) changing the composition of its Board of Directors. In +addition, Argo shared the results of its internal investigation with the Commission staff. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Argo’s Offer. + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 21C of the Exchange Act, Respondent Argo 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 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 14a-3 and 14a-9 thereunder. + B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $900,000 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; + + 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/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 Argo +Group International Holding, Ltd. as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to 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. + 7 + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $900,000 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 penalty. +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, +any statute of limitations defense. + By the Commission. +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4147.txt b/raw/aaer/2020/AAER-4147.txt new file mode 100644 index 0000000000000000000000000000000000000000..a02ca1511708ba17867600ce6c88d9c76d456968 --- /dev/null +++ b/raw/aaer/2020/AAER-4147.txt @@ -0,0 +1,317 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89023 / June 5, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4147 / June 5, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19824 + + + + +In the Matter of + +JANA FAITH +KIENA, 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 Jana Faith +Kiena, CPA (“Respondent” or “Kiena”) 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 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: + +A. SUMMARY + + These proceedings involve insider trading by Jana Faith Kiena, a certified public accountant +(“CPA”), who is licensed in California, and worked as an accountant in the revenue recognition +department at Illumina, Inc. (“Illumina” or “ILMN”). In late June 2019, during a meeting at +Illumina, an accounting manager told Kiena and others that Illumina would have disappointing +revenues for its second quarter of 2019. While possessing, and on the basis of, this material +nonpublic information, Kiena bought a total of 50 short term out of the money ILMN put option +contracts on two days, July 2 and 8, 2019. On July 11, 2019, after the market closed, Illumina +disclosed that its second quarter revenues would be lower than expected and updated its full year +revenue guidance. ILMN’s stock price dropped from $363.66 to $305.05 per share, or +approximately 16%, following the issuance of the announcement. On July 12, 2019, Kiena sold the +50 option contracts and netted $249,227.92 in profits. + + In August 2019, Kiena self-reported her trading to the Commission staff. + + +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 + + Jana Faith Kiena, 59, resides in San Diego, California. Kiena worked at Illumina as a +contract employee from May to October 2019 in its revenue recognition department. She is +currently the chief financial officer of a biotechnology company. Since November 15, 1996, Kiena +has been a CPA licensed in California; her CPA license, however, is currently inactive. + +C. RELATED ENTITY + +Illumina, Inc., is a Delaware corporation headquartered in San Diego, California. +Illumina manufactures DNA sequencing machines, and its services are used by genetic testing +companies. Illumina is an SEC-reporting company with a class of shares registered under +Section 12(b) of the Exchange Act. Its common stock is quoted on the NASDAQ Global Select +Market under the ticker symbol “ILMN,” and its options are quoted on the CBOE. Illumina’s +second quarter ended on June 30, 2019. + +D. FACTS + + 1. In May 2019, Kiena began as a contract employee at Illumina in its revenue +recognition department. Upon starting at Illumina, she was informed that she could not buy or sell +ILMN securities while in possession of material, nonpublic information. + +2. While in Illumina’s revenue recognition department, Kiena processed revenue +related to monthly service contracts. She also participated in periodic status updates about revenue +by phone or in-person. The in-person updates were called “group huddles.” At one group huddle, +in late June 2019, an accounting manager told the group of approximately seven employees, +including Kiena, that revenue for the second quarter would be disappointing. + +3. Kiena knew or was reckless in not knowing that information about Illumina’s +revenue was material and nonpublic. Kiena also knew or was reckless in not knowing that she +owed a duty of trust and confidence to Illumina to refrain from trading in Illumina securities +while in possession of the confidential information about revenues that she learned in the course +of her employment. + +4. Shortly after the aforementioned group huddle, on July 2, 2019, Kiena took a cash +advance on her credit card and bought $13,638.33 worth of July 12, 2019 out of the money ILMN +put option contracts with a strike price of $365 per share. Six days later, on July 8, 2019, she took +money out of her savings account and bought an additional $3,096.33 worth of the same short-term +out of the money ILMN put option contracts. Kiena bought these 50 put option contracts while +possessing, and on the basis of, material nonpublic information about Illumina’s disappointing +revenues. + +5. On July 11, 2019, Illumina announced that the company’s preliminary revenue for +the second quarter would be lower than expected and updated its full year revenue guidance. +Illumina’s stock price dropped from $363.66 to $305.05 per share or approximately a 16% +4 +decrease following the issuance of the announcement. The next day, on July 12, 2019, Kiena sold +her 50 put option contracts, realizing a gain of $249,227.92. + +6. Within a month after her insider trading, Kiena self-reported her Illumina trading to +the Commission staff. + +E. VIOLATIONS + + 7. As a result of the conduct described above, Kiena 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. + +F. RESPONDENT’S COOPERATION + + 8. In determining to accept this Offer, the Commission considered Respondent’s +cooperation afforded the Commission’s staff. + +G. FINDINGS + + 9. Based on the foregoing, the Commission finds that Kiena willfully violated Section +10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Kiena’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Kiena 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 promulgated thereunder. + + B. Kiena is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After two years from the date of this order, Kiena may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Kiena’s work in her practice +before the Commission as an accountant will be reviewed either by the +5 +independent audit committee of the public company for which she works or +in some other acceptable manner, as long as she practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Kiena, 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) Kiena, 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 Kiena will not receive appropriate supervision; + (c) Kiena 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) Kiena 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. + +D. The Commission will consider an application by Kiena 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 Kiena’s character, +integrity professional conduct, or qualifications to appear or practice before the Commission as +6 +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + E. Respondent shall, within 14 days, pay disgorgement of $249,227.92 and a civil +penalty of $124,613.96 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, interest shall accrue pursuant to SEC Rule of Practice 600, and if timely +payment of the civil money penalty is not made, 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 Jana +Faith Kiena as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Alka Patel, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 444 S. Flower St, Suite 900, Los +Angeles, CA 90071. + + 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, 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 +7 +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. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $124,613.96, based on her cooperation in a Commission investigation. If at any time +following the entry of the Order, the Division of Enforcement (“Division”) obtains information +indicating that Respondent knowingly provided materially false or misleading information or +materials to the Commission, or in a related proceeding, the Division may, at its sole discretion and +with prior notice to the Respondent, petition the Commission to reopen this matter and seek an +order directing that the Respondent pay an additional civil penalty. Respondent may contest by +way of defense in any resulting administrative proceeding whether she knowingly provided +materially false or misleading information, but may not: (1) contest the findings in the Order; or (2) +assert any defense to liability or remedy, including, but not limited to, any statute of limitations +defense. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4148.txt b/raw/aaer/2020/AAER-4148.txt new file mode 100644 index 0000000000000000000000000000000000000000..f5d4635a0150bce2b28728a0ccd16c0a541830d4 --- /dev/null +++ b/raw/aaer/2020/AAER-4148.txt @@ -0,0 +1,114 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89099 / June 18, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4148 / June 18, 2020 + +Admin. Proc. File No. 3-19767 + + +In the Matter of + +PLS, CPA, A PROFESSIONAL +CORPORATION, A/K/A PLS CPAs; +CHANG G. PARK, CPA, A/K/A CHANGGEUN PARK; +JOSEPH YONGYUN LEE, CPA, A/K/A YONG +YUN LEE; AND JUCHI LEE, CPA, A/K/A JUCHI LEE +FERNANDEZ, JUCHI LEE, JU CHI LEE, SUE LEE + + + + + +ORDER + +On April 24, 2020, the Securities and Exchange Commission issued an order instituting +an administrative proceeding (“OIP”) against PLS, CPA, a Professional Corporation, a/k/a PLS +CPAs; Chang G. Park, CPA, a/k/a Changgeun Park; Joseph Yongyun Lee, CPA, a/k/a Yong Yun +Lee; and Juchi Lee, CPA, a/k/a Juchi Lee Fernandez, Ju-chi Lee, Ju Chi Lee, Sue Lee +(collectively, “Respondents”), pursuant to Sections 4C and 21C of the Securities Exchange Act +of 1934 and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice.1 In compliance +with the statutory provision governing cease-and-desist proceedings, the OIP specified that a +“public hearing before the Commission for the purpose of taking evidence . . . shall be convened +not earlier than 30 days and not later than 60 days” from service of the OIP.2 The statute also +provides that “an earlier or later date” for the hearing may be “set by the Commission with the +consent of any respondent so served.”3 + +1 PLS, CPA, a Professional Corporation, a/k/a PLS CPAs, Exchange Act Release No. +88739, 2020 WL 2039958 (Apr. 24, 2020). +2 Id. at *15. +3 15 U.S.C. § 78u-3(b). +2 + +Respondents were served with the OIP by April 28, 2020. As a consequence, in the +absence of consent by Respondents regarding a later hearing date, a public hearing was to be +held on or before June 26, 2020. On May 11, 2020, the parties were directed to file a statement +advising the Commission of any agreement to a later hearing date (or a statement that no +agreement could be reached) by May 18, 2020.4 +On May 15, 2020, the parties filed a joint statement in which Respondents consented to a +hearing more than 60 days from service of the OIP. Also on May 15, 2020, Respondents each +filed answers to the OIP. The parties filed another joint statement on May 28, 2020. They stated +that, after a prehearing conference, they had reached agreement on a proposed schedule with a +hearing to commence on or about June 1, 2021, in San Diego, California. The Division of +Enforcement also sought leave to file a motion for summary disposition. +Accordingly, it is ORDERED, based on the parties’ representations, that the parties +adhere to the following procedural schedule: +June 23, 2020 Parties exchange initial witness lists. + +October 20, 2020 Close of fact discovery. + +November 10, 2020 Last date to serve expert reports. + +December 1, 2020 Last date to serve rebuttal expert reports. + +December 18, 2020 Close of expert discovery. + +January 26, 2021 Last date to file motions for summary disposition, with leave. + +February 16, 2021 Last date to file oppositions to summary disposition. + +February 23, 2021 Last date to file replies to summary disposition. + +March 23, 2021 Parties exchange witness and exhibit lists. + +March 30, 2021 Parties exchange pre-marked exhibits. + +April 13, 2021 Parties exchange supplemental pre-marked exhibits. + +April 27, 2021 Parties to file prehearing briefs and any motions in limine. + +May 4, 2021 Parties file opposition to motions in limine. + + +4 Exchange Act Release No. 88851, 2020 WL 2394950 (May 11, 2020). +3 + +May 18, 2021 Final prehearing conference and hearing on motions in limine. + +June 1, 2021 Hearing commences. + +It is further ORDERED that the Division of Enforcement is granted leave to file a motion +for summary disposition pursuant to Rule of Practice 250(c) and that briefs shall be filed +consistent with the procedural schedule set forth above.5 + +We note that the Division represents that it has made documents available for inspection +or copying in accordance with Rule of Practice 230.6 Respondents have indicated they will make +arrangements to inspect or copy the documents. The parties may engage in discovery consistent +with the Rules of Practice. We note that the parties reserve their rights to take no more than five +depositions per side unless granted leave to notice additional depositions in accordance with +Rule of Practice 233.7 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + Vanessa A. Countryman + Secretary + +5 17 C.F.R. § 201.250(c). +6 17 C.F.R. § 201.230. +7 17 C.F.R. § 201.233. \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4149.txt b/raw/aaer/2020/AAER-4149.txt new file mode 100644 index 0000000000000000000000000000000000000000..d37c800574ea7e513e0eeabbf9a4c864d03c22ea --- /dev/null +++ b/raw/aaer/2020/AAER-4149.txt @@ -0,0 +1,450 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10793 / June 23, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89133 / June 23, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4149 / June 23, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19831 + + +In the Matter of + + +VEREIT, INC., + + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE +SECURITIES ACT OF 1933 AND +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate +and in the public interest that cease-and-desist proceedings be, and hereby are, instituted +pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Section 21C of +the Securities Exchange Act of 1934 (“Exchange Act”) against VEREIT, Inc., formerly +known as American Realty Capital Properties, Inc. (“ARCP” 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 proceeding arises from ARCP’s violations of the antifraud and books +and records provisions of the federal securities laws. ARCP, now known as VEREIT, Inc. +(hereinafter, “ARCP” or the “Company”), is a real estate investment trust (“REIT”) +primarily engaged in the business of acquiring, owning, and managing single-tenant +commercial real estate properties that by February 2014 had grown to be the nation’s +largest publicly-traded net lease REIT. ARCP, acting through its then Chief Financial +Officer, Brian S. Block (the “CFO”), and its then Chief Accounting Officer, Lisa +McAlister (the “CAO”), falsely reported and manipulated the Company’s “Adjusted +Funds from Operations” or “AFFO,” a key non-GAAP performance metric relied on by +ARCP management, investors, and analysts to assess ARCP’s financial performance +from at least May 2014 until the Company’s initial disclosure on October 29, 2014 of +their misconduct (the “Relevant Period”). +2. On October 29, 2014, ARCP announced that its Audit Committee had +concluded that the previously issued financial reports for its full fiscal year 2013, first +quarter 2014 (“1Q14”), and second quarter 2014 (“2Q14”) should no longer be relied +upon. The Audit Committee’s conclusion was based on the preliminary findings of an +internal investigation that ARCP had overstated AFFO in its 1Q14 financial reports and +that this error was identified but intentionally not corrected, and other AFFO and +financial statement errors were intentionally made resulting in an overstatement of AFFO +in its 2Q14 financial reports. The Company also announced that the CFO and CAO had +resigned at the request of the Audit Committee, and that the investigation was ongoing +and had been expanded to encompass fiscal year 2013 in light of the fact that the CFO +and CAO had key roles in the preparation of such filings. The closing price of ARCP’s +stock on the day of this announcement, declined by approximately 19 percent from the +prior day’s close. +Respondent +3. ARCP is a Maryland corporation that during the Relevant Period was +headquartered in New York, New York. ARCP’s common stock has been registered with +the Commission under Exchange Act Section 12(b) since conducting its initial public +offering and becoming a publicly-traded REIT in 2011. ARCP 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. ARCP’s stock was traded on NASDAQ’s +Global Select Market (ticker: ARCP) until July 2015 at which time it changed its name to + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and +are not binding on any other person or entity in this or any other proceeding. + +3 + +VEREIT, Inc. and moved its listing to the New York Stock Exchange (ticker: VER). As +of June 30, 2014, ARCP reported total assets of approximately $21 billion. +Facts +A. AFFO and AFFO Per Share +4. For financial reporting purposes, publicly traded issuers in the United +States must follow accounting standards that are commonly known as generally accepted +accounting principles, or GAAP. Additionally, many REITs, including ARCP, report +supplemental non-GAAP financial measures utilized by Company management, +investors, and analysts in understanding and assessing operating results. One such key +measure typically reported by REITs, AFFO, is an “adjusted” version of a standardized +metric of REIT operating performance, Funds From Operations (“FFO”), as defined by +the National Association of Real Estate Investment Trusts (“Nariet”). Nariet defines FFO +as: GAAP net income or loss “excluding gains or losses from sales of property, and +adding back real estate depreciation.” +5. ARCP, like many REITs, defined AFFO as Nariet FFO with further +adjustments to exclude certain non-cash income and expense items (e.g., unrealized gains +and losses) and certain “special” or “non-routine” expenses (such as merger and +acquisition-related expenses) that are expensed-as-incurred under GAAP. ARCP reported +AFFO in its quarterly and annual reports filed with the Commission on Forms 10-Q and +10-K and explained that “AFFO is a recognized measure of sustainable operating +performance by the REIT industry” and that the ARCP adjustments to calculate its AFFO +“provides information consistent with management’s analysis of the operating +performance of the properties.” REIT investors and analysts typically consider AFFO a +measure of “normalized” residual cash flow after eliminating non-cash and non-recurring +expenses, and an indicator of a REIT’s ability to pay dividends. +6. Because FFO and AFFO are non-GAAP measures, ARCP was required by +Commission regulations to provide a reconciliation of those metrics to the “most directly +comparable GAAP financial measure.” See 17 C.F.R. §§ 228, 229, 244 and 249. The +most directly comparable GAAP measure to FFO and AFFO is net income. And FFO per +share or AFFO per share is most directly comparable to GAAP’s earnings per share +(“EPS”) metric. +7. Both prior to and during the Relevant Period, ARCP’s senior management +considered AFFO per share as an important performance metric. ARCP prominently +featured its AFFO per share in its earnings releases, financial supplements, and +presentations furnished with Forms 8-K that ARCP filed contemporaneously with each +quarterly and annual report. ARCP also provided public earnings guidance in the form of +projected full-year AFFO per share. Internally, ARCP personnel regularly prepared +models for forecasting performance and evaluating potential transactions in terms of +impact to AFFO per share. Externally, analysts also watched ARCP’s reported AFFO per +share closely, and many included in their reports their predictions of ARCP’s quarterly +and annual AFFO per share. + +4 + +8. ARCP provided public projections of its full-year 2014 AFFO per share +beginning in early 2013, in connection with announcements about quarterly earnings and +announced transactions. On October 23, 2013, ARCP updated its 2014 AFFO per share +projection to a range of $1.13 to $1.19. That projection remained unchanged until an +update in connection with a transaction announced on October 1, 2014, and the $1.13 to +$1.19 AFFO per share earnings guidance was reaffirmed on numerous occasions during +that period, including in ARCP’s earnings releases for both 1Q14 and 2Q14. Throughout +the reporting periods for 1Q14 and 2Q14, ARCP’s senior management tracked analysts’ +estimates of ARCP’s quarterly AFFO per share and sought to meet or exceed those +estimates, as well as to maintain reported AFFO within the previously announced 2014 +guidance range of $1.13 to $1.19 per share. +B. The Operating Partnership and Non-Controlling Interests +9. ARCP, like many REITs, conducts substantially all of its business +activities through an operating partnership (the “OP”). From 2013 through 2014, ARCP +was the sole general partner of the OP and owned in excess of 95% of its equity interests +(the “OP units”). The remainder OP units (i.e., those not owned by ARCP) were held by +certain affiliated and unaffiliated investors and could be redeemed for a corresponding +number of ARCP shares (or cash, at ARCP’s election) after a one-year holding period. +10. Under GAAP, these remainder OP units are deemed non-controlling +interests (“NCI”). GAAP requires the consolidated income statement of ARCP to present +net income or loss on a consolidated basis, as well as to identify separately the net +income or loss attributable to ARCP stockholders and to the NCI. As such, ARCP +reported both forms of its net loss: one that included the total operations of ARCP and the +OP, without eliminating the portion of the consolidated net loss that was attributable to +the NCI interests (identified simply as “net loss”), and one that eliminated from the net +loss the portion of the consolidated net loss that was attributable to the NCI interests +(identified as “net loss attributable to common stockholders”). +11. Similarly, because FFO and AFFO represent net income or loss with +adjustments, they may be presented on either (i) a “gross” consolidated basis +(stockholders plus NCI) or (ii) a “net” basis (stockholders only). The “gross” basis +calculation begins with consolidated net income or loss and excludes the gross amount of +the adjustment items. To properly calculate FFO and AFFO per share on a “gross” basis, +the share count divisor would include the shares into which the NCI holders’ OP units +can be converted (“the NCI shares”). This “gross method” essentially includes both 100% +of the consolidated results and 100% of the shares of the OP. The “net” basis calculation +begins with net income or loss attributable to the stockholders and excludes only the +Company’s portion of the adjustment items. To properly calculate FFO and AFFO per +share on a “net” basis, the share count divisor would exclude the NCI shares. The “net +method” essentially includes only the results and shares of the stockholders. Both +methods are internally consistent and should produce virtually the same FFO or AFFO +per share. + + +5 + +C. ARCP’s 1Q14 AFFO Presentation +12. On April 10, 2014, ARCP announced plans to issue its 1Q14 financial +results before market open on May 8, 2014. At the announced time, ARCP reported its +financial results for 1Q14 in a Form 10-Q filed with the Commission, along with an +earnings release, earnings supplement, and investor presentation furnished as exhibits to a +Form 8-K. ARCP reported for 1Q14 consolidated net loss of approximately $321 million, +net loss attributable to the Company of approximately $309 million, total FFO of +negative $184 million, total AFFO of approximately $147 million (positive), and AFFO +per share of $0.26. In its earnings release, ARCP highlighted that “[w]e had a record +quarter with earnings coming exactly in line with our expectations of $0.26 AFFO per +share, consistent with our previously stated guidance for the year” and reaffirmed its +2014 AFFO guidance of $1.13 to $1.19 per share. +13. In these 1Q14 reports and its quarterly reports in 2013, ARCP’s +presentations of its FFO and AFFO indicated that it was on a “net” basis. Specifically, +ARCP’s Form 10-Q for 1Q14 presented a reconciliation of FFO and AFFO to “net loss +attributable to stockholders” and stated that the “[a]mounts are presented net of any non- +controlling interest effect where applicable.” However, ARCP’s presentation of FFO and +AFFO was not in fact “net” of NCI effects and instead used an improper hybrid method +that overstated its results. +14. Specifically, while ARCP began the calculation with the net loss +attributable to the stockholders, (in this case, a loss that was smaller than the consolidated +net loss), ARCP’s adjustment items to calculate FFO and AFFO (most of which were +positive) used for the most part the gross amounts of the applicable items (i.e., both the +stockholders’ portion and the NCI holders’ portion of these items, rather than only the +stockholders’ portion, resulting in an increase in the total dollar amount of those +adjustments and, in turn, an increase in positive AFFO), and divided by a share count that +excluded the NCI shares (i.e., a lower share count, resulting in greater AFFO per share). +This improper hybrid method misleadingly inflated ARCP’s reported AFFO and AFFO +per share. +15. ARCP’s AFFO calculated on an actual “net” basis would have been +approximately $129.8 million in total and $0.23 per share for 1Q14. ARCP’s reported +1Q14 AFFO was thus overstated by approximately $17 million in total and $0.03 per +share. +16. Shortly before the 1Q14 financial results were scheduled to be announced, +ARCP personnel, including a senior member of the accounting staff responsible for +financial reporting (the “Accountant”), raised concerns about ARCP’s method of +calculating AFFO and AFFO per share—specifically that those metrics may be +overstated because it was calculated using an improper hybrid method. These concerns +were raised to ARCP’s CFO, CAO, and others. Despite those concerns, and without +having a substantive explanation or completing an analysis, the CFO instructed that they +file the 1Q14 Form 10-Q and related releases as-is by the previously announced date of +May 8, 2014. + +6 + +D. ARCP Personnel Quantified the 1Q14 AFFO Misstatement +17. Following the 1Q14 filings, the Accountant continued to analyze ARCP’s +1Q14 AFFO presentation. The Accountant repeatedly advised the CFO, CAO and others +that the Accountant believed ARCP had made a mistake in its 1Q14 AFFO calculation, +and thus, had reported incorrect results by a significant amount. +18. For example, by no later than May 23, 2014, the Accountant had informed +the CAO that a correct calculation under either the “net method” or the “gross method” +yielded 1Q14 AFFO results of only $0.23 per share, rather than the $0.26 per share +ARCP reported. +19. Notwithstanding the understanding of the significance of this error, ARCP +conducted an offering of common stock on May 23, 2014, pursuant to a Prospectus +Supplement filed with the Commission pursuant to Rule 424(b)(5) on the same date. The +Prospectus Supplement incorporated by reference ARCP’s 1Q14 Form 10-Q that +included the false and misleading AFFO results. The offering raised $1.66 billion, of +which the net proceeds to ARCP after underwriting discounts, commissions, and +offering-related expenses were $1.59 billion. +E. ARCP’s CFO and CAO Take Additional Manipulative Steps to Conceal +the Inflated 1Q14 AFFO Results and to Further Inflate 2Q14 AFFO +20. ARCP was scheduled to file its 2Q14 Form 10-Q and publish its related +earnings releases, before market-open on the morning of July 29, 2014. +21. Based on the Accountant’s analysis of the AFFO issue, the Accountant +determined to prepare the 3-month 2Q14 AFFO results using the correct “net method” +and provided numerous AFFO schedules reflecting that calculation throughout July to the +CAO and CFO. However, the 2Q14 financial reports would need to report not only the 3- +month 2Q14 results, but also the results for the first half of the year (“FH14”). The FH14 +AFFO result adds the first and second quarter amounts for each line in the calculation. +Therefore, adding the original, as-reported 1Q14 AFFO would overstate the FH14 results +even if the correct method was used to calculate the 3-month 2Q14 AFFO result. +22. Instead of correcting the reported 1Q14 AFFO amount, the CFO and CAO +ultimately chose to conceal the misstated 1Q14 AFFO amount and make further +intentional errors in the 2Q14 AFFO result in order to meet analysts’ consensus +expectations for ARCP’s AFFO results. +23. Specifically, late in the evening of July 28, 2014, the night before the +2Q14 filings would be made, the CFO, the CAO, and the Accountant met in the CFO’s +office about ARCP’s AFFO calculations. The CFO began preparing a spreadsheet in +which he recalculated AFFO and AFFO per share for 1Q14, 2Q14 and FH14 using the +“gross method.” Using this method properly, however, would have revealed the 1Q14 +AFFO per share overstatement of $0.03 per share. Moreover, the correct “gross method” +calculation for 2Q14 AFFO would have shown that ARCP only achieved $0.23 per share + +7 + +(versus analysts’ consensus expectations of $0.24) and $0.46 per share for FH14 (out of +the Company’s annual guidance projections for AFFO of $1.13 to $1.19 per share). +24. The CFO then manipulated several line items of the AFFO calculation to +inflate the figures in order to conceal the 1Q14 overstatement, meet the analysts’ +consensus expectations for the 3-month 2Q14 period, and report FH14 results that would +not require ARCP to lower its annual guidance projection for AFFO of $1.13 to $1.19 per +share. First, the CFO added a total of approximately $13.1 million in unsupported +plugged amounts to a certain line item in both the 1Q14 and 2Q14 AFFO calculations, +which served to mask the overstatement of ARCP’s reported 1Q14 AFFO as well as to +meet analysts’ consensus estimates for 2Q14 AFFO per share of $0.24. Second, the CFO +also improperly deducted millions of shares from the weighted shares outstanding for +FH14 for the AFFO calculation, thereby improperly inflating the FH14 AFFO per share +in his spreadsheet from $0.46 to $0.49. +25. Despite the Accountant’s objections, the CFO instructed the Accountant to +use the numbers and calculations in the spreadsheet the CFO had just prepared in +ARCP’s 2Q14 Form 10-Q and related earnings releases and emailed to the Accountant +and CAO. The CAO informed the Accountant that she would handle communicating with +the auditors. The Accountant followed the CFO’s and CAO’s instruction and prepared +the filings accordingly. Prior to market open on July 29, 2014, the CFO and CAO +authorized the filing of the Form 10-Q and related earnings releases. +26. ARCP’s 2Q14 Form 10-Q falsely reported total AFFO on a purportedly +“gross method” basis for 2Q14 of $205.3 million and FH14 of $353 million. ARCP also +filed a related Form 8-K furnishing a press release and supplemental financial +presentation that falsely reported AFFO of $0.24 per share for 2Q14 and $0.49 per share +for FH14. ARCP’s press release further highlighted these falsely inflated AFFO and +AFFO per share figures and affirmed the prior 2014 annual guidance range of AFFO per +share of $1.13 to $1.19. +27. On September 7, 2014, the Audit Committee of ARCP’s Board of +Directors was informed by ARCP’s independent auditor of concerns raised by an +employee regarding accounting practices and other matters, including ARCP’s 2Q14 +reporting of AFFO. On October 29, 2014, prior to market open, ARCP announced that, +based on the preliminary results of an internal investigation, the Audit Committee of the +Board of Directors believed that 1Q14, 2Q14, and FH14 AFFO and AFFO per share had +been overstated, with the 2Q14 report “intentionally not correct[ing]” the 1Q14 error and +making “other AFFO and financial statement errors … intentionally.” The announcement +also stated that at the request of the Audit Committee, the CFO and CAO had resigned. +Following this disclosure, ARCP’s stock price dropped by approximately 19% (from a +closing price of $12.38 on October 28 to $10.00 on October 29), resulting in a market- +capitalization loss of over $2 billion. When ARCP ultimately filed restatements on March +2, 2015, its stock price closed at $9.90. +28. ARCP filed restatements of its Form 10-K for fiscal year 2013, 1Q14 +Form 10-Q, and 2Q14 Form 10-Q on March 2, 2015. Among other things, the + +8 + +restatements disclosed the Company’s conclusion that AFFO had been overstated for +fiscal years 2011-2013 and for the first two quarters of 2014. The restatements also +reported that the investigation found that senior management considered AFFO to be an +important metric used by analysts and investors in evaluating the Company’s +performance and, for the first two quarters of 2014, sought to maintain reported AFFO +within the 2014 guidance range of $1.13 to $1.19 per share announced at the end of 2013. +It further reported that some members of senior management were aware of AFFO errors +prior to the 1Q14 Form 10-Q filing but allowed the report to be filed without completing +an analysis of the errors and in the 2Q14 Form 10-Q report, as previously reported, errors +were intentionally not corrected and other AFFO and financial statement errors were +intentionally made. The restatements also identified other corrections and issues relating +to multiple matters, including related party payments to affiliates of the former external +manager and issues relating to equity awards made to its former CEO and CFO. +29. ARCP’s control environment during the Relevant Period significantly +contributed to the fraudulent misrepresentations of AFFO described above. As +acknowledged in ARCP’s restatements, including for 1Q14 and 2Q14, the Company had +numerous material weaknesses in the design and implementation of controls to, among +other things, ensure that AFFO was correctly calculated, ensure that the information +contained in ARCP’s periodic reports and other SEC filings correctly reflected the +information contained in the Company’s accounting records and other supporting +information, prevent changes to the financial statements and supporting financial +information by senior management without proper review, and ensure that accounting +employees would not be subject to pressure to make inappropriate decisions affecting the +financial statement components of the calculation of AFFO. +Violations +30. As a result of the conduct described above, ARCP violated Section 17(a) +of the Securities Act, which prohibits fraudulent conduct in connection with the offer or +sale of securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, +which prohibit fraudulent conduct in connection with the purchase or sale of securities. +31. Also, as a result of the conduct described above, ARCP violated Section +13(a) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13, which require every +issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the +Commission information, documents, and 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. +32. In addition, as a result of the conduct described above, ARCP violated +Section 13(b)(2)(A) of the Exchange Act, which requires all 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. + +9 + +ARCP’s Self-Reporting, Remediation, and Cooperation +33. In determining to accept ARCP’s Offer, the Commission considered +ARCP’s self-reporting, public disclosures, cooperation, and remediation, as described +below. +34. ARCP promptly self-reported to the Commission, and in its Form 8-K +filed on October 29, 2014 disclosed to investors the preliminary results of the Audit +Committee investigation that the Company incorrectly calculated its 1Q14 AFFO and +that “this error was identified but intentionally not corrected, and other AFFO and +financial statement errors were intentionally made” for the three and six month periods +covered by the 2Q14 reports, and that at the request of the Audit Committee the CFO and +CAO had resigned. +35. ARCP’s Audit Committee continued its investigation thereafter and +provided timely updates to the Commission staff. ARCP voluntarily produced +compilations of documents and other information at the staff’s request, made timely +disclosure of relevant factual information, and facilitated making its employees available +for interviews with the staff. After issuing restatements in March 2015, ARCP continued +to cooperate with the Commission staff’s investigation, including providing certain +information relevant to the Commission’s action entitled SEC v. AR Capital, LLC, et al., +No. 19 Civ. 6603 (AT) (S.D.N.Y). +36. ARCP also promptly undertook a series of remedial measures, including +reforming policies, procedures, and controls; instituting enhanced annual trainings; and +reporting the remediation as of December 31, 2015 of all material weaknesses identified +in its restated financials. In addition, the Company replaced the CEO, Chief Operating +Officer, General Counsel, CFO, and CAO—constituting an entirely new senior +management team—as well as its entire board of directors (including a new independent +Chairman) and numerous other employees. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent ARCP’s Offer. +Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, it is hereby ORDERED that: +A. Respondent ARCP cease and desist from committing or causing any +violations and any future violations of Section 17(a) of the Securities Act and Sections +10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-11, and +13a-13 thereunder. +B. Respondent ARCP shall, within 14 days of the entry of this Order, pay a +civil money penalty in the amount of $8,000,000 to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. §3717. + +10 + +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 ARCP 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, 200 Vesey +Street, Suite 400, New York, NY 10281. + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, +a Fair Fund is created for the civil penalties paid as referenced in paragraph B above. +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To preserve +the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment +of a civil penalty in this action (“Penalty Offset”). If the court in any Related Investor +Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 days after +entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and shall not +be deemed to change the amount of the civil penalty imposed in this proceeding. For +purposes of this paragraph, a “Related Investor Action” means a private damages action +brought against Respondent by or on behalf of one or more investors based on substantially +the same facts as alleged in the Order instituted by the Commission in this proceeding. + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4150.txt b/raw/aaer/2020/AAER-4150.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc7671ffab0ea9199cebbeb87a1e24a7f72aeb44 --- /dev/null +++ b/raw/aaer/2020/AAER-4150.txt @@ -0,0 +1,641 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89149 / June 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4150 / June 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19835 + +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 that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 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, 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 out of improper activities by subsidiaries and affiliates of +Novartis AG, a global pharmaceutical and healthcare company headquartered in Basel, Switzerland, +to increase the use of products in several geographic markets between 2012 and 2016. + +2. In Korea, Vietnam, and Greece, Novartis or Alcon local subsidiaries and affiliates +engaged in schemes to make improper payments or to provide benefits to public and private +healthcare providers (“HCPs”) in exchange for prescribing or using Novartis or Alcon products. +These schemes varied in method and amount but were known among certain managers of the local +subsidiaries or affiliates. Within Novartis’ former Alcon Asia business, internal accounting +controls weaknesses associated with Equipment Financing Arrangements (“EFAs”) in China from +2013 to 2015 resulted in forged contracts, missing surgical equipment, as well as a significant EFA +accounts receivable balance associated with poor performing EFAs, for which Alcon China +recorded large bad-debt provisions. + +3. False books and records were maintained in connection with the various schemes, +and Novartis also lacked sufficient internal accounting controls with respect to certain aspects of +the operations of these subsidiaries and affiliates. As a result, Novartis violated the books and +records and internal accounting controls provisions of the Foreign Corrupt Practices Act of 1977 +(the “FCPA”) [15 U.S.C. § 78m], and was unjustly enriched by approximately $92.3 million. + +Respondent + +4. Novartis AG (“Novartis”) is a global provider of pharmaceutical and healthcare +products. Novartis’ products are available in approximately 155 countries and Novartis Group +companies employ approximately 104,000 individuals. It is a corporation organized under the +laws of Switzerland with headquarters in Basel, Switzerland. During the relevant period, Novartis +was the sole owner of Alcon Inc., an eye care company, until it was spun off in 2019. Novartis +issued and maintains a class of publicly traded securities registered pursuant to Section 12(b) of the +Exchange Act, which are traded on the New York Stock Exchange under the ticker symbol +“NVS.“2 + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +2 On March 23, 2016, Novartis settled a FCPA action with the Commission alleging violations arising from +conduct in China. In the Matter of Novartis AG, Sec. Exch. Act Release No. 77431, available at +http://www.sec.gov/litigation/admin/2016/34-77431-s.pdf + + 3 +Other Relevant Entities + + 5. Novartis (Hellas) S.A.C.I. (“Novartis Greece”), a Greek corporation headquartered +in Athens, Greece, is an indirect wholly-owned subsidiary of Novartis. Novartis Greece conducts +sales and marketing activities throughout Greece for Novartis prescription drugs. Novartis Greece +financial statements were consolidated with those of Novartis. + + 6. Novartis Korea Ltd (“Novartis Korea”) is an indirect majority-owned subsidiary +of Novartis. Novartis Korea conducts sales and marketing activities throughout the Republic of +South Korea with annual sales of between $300 million and $400 million during the relevant +period. Novartis Korea financial statements were consolidated with those of Novartis. + +7. Alcon, Inc. (“Alcon”) was a multinational eye care company with headquarters in +Fort Worth, Texas, and was incorporated in Hünenberg, Switzerland. In or around April 2011, +Alcon merged with Novartis, after which Alcon became an indirect wholly-owned subsidiary of +Novartis. Alcon’s financial statements were consolidated with those of Novartis during the +relevant period. Alcon Inc. was spun off of Novartis in 2019 and currently maintains a class of +publicly traded securities registered pursuant to Section 12(b) of the Exchange Act, which are +traded on the New York Stock Exchange. Alcon Inc. is currently the largest eye care company in +the world with 20,000 employees conducting business in more than 140 countries. + +8. Alcon Pte Ltd (“Alcon Singapore”) was an affiliate of Alcon between 2011 and +2014. Among other functions, Alcon Singapore provided management oversight over two Alcon +representative offices in Vietnam (collectively, “Alcon Vietnam”). Alcon Singapore’s and Alcon +Vietnam’s financial statements were consolidated with those of Novartis during the relevant +period. + +FACTS + +Conduct Relevant to Greece + +9. From approximately 2012 through 2015, Novartis Greece engaged in a scheme to +corruptly provide improper benefits and things of value to HCPs, including employees of state- +owned and state-controlled hospitals and clinics, to obtain an improper advantage and to increase +sales of Lucentis in Greece. In addition, from approximately 2009-2012, Novartis Greece +conducted certain Phase IV and epidemiological studies that were primarily designed to promote +sales of Novartis products in Greece, resulting in improper payments to HCPs. + +10. The misuse of seemingly legitimate educational and scientific activities for +improper purposes included the Novartis Greece Ophthalmology franchise (“Ophtha”), and was +known and approved by Novartis Greece Ophtha managers of various levels, including brand +managers and sales managers, who provided guidance to subordinate staff on the use of +“investment” activities. Novartis Greece improperly recorded the payments related to these +activities as legitimate advertising and promotion or marketing and sales expenses. + + 4 +11. Certain Novartis Greece Ophtha employees ranked HCPs by their prescribing +product preference and volume and, based upon their likelihood to prescribe, provided them with +improper inducements as “investments” to increase their use of Novartis products. This was +internally described as a return on investment ("ROI"), and sales and marketing staff were +encouraged to plan their activities so as to maximize ROI. In strategy planning documents within +the Ophtha business franchise, sales staff remarked that HCPs were reminded of their investment +and obligation to prescribe. If an HCP was not meeting their return on investment, investment +activities were reduced or eliminated. + +12. Novartis Greece’s Ophtha franchise misused international congress sponsorships to +induce HCPs to write prescriptions for Lucentis, a drug sold by Novartis Greece that was used to +treat neovascular (wet) age-related macular degeneration, among other indications. Novartis +Greece targeted Greek HCPs that it designated Key Opinion Leaders (“KOLs”) and paid their costs +to attend the congresses, many of which exceeded $5,000 per HCP. Internal documents written by +members of Novartis Greece Ophtha franchise and minutes of meetings within the ophthalmology +business discussed use of international congresses, including to the United States, to “undermine [a +competitor company’s] aggressive congress policy,” and described the need to increase pressure on +HCPs to prescribe Lucentis, including stating that HCPs “must understand that their participation +in [specific congresses in the United States and Europe] will be cancelled if sales performance is +not improved significantly.” An internal document went on to describe that Novartis Greece sales +representatives “must make clear to their [HCP] customers that Lucentis is facing real difficulties +in the market and for this reason there will be serious consequences.” In his 2013 Action Plan, the +Novartis Greece Ophtha KOL manager wrote that he would convey to one ophthalmology KOL, +“to get you must write. No presents any more.” + +13. In certain instances, sales representatives also demanded that KOLs agree to “NON +USE of [a competitor’s product and] TOTAL COOPERATION,” in exchange for Novartis Greece +considering “DOUBLING THE GIFT IN 2014.” Those Greek HCPs that were perceived to have a +lower potential to prescribe Novartis drugs, and thus lower potential ROI, were excluded from +obtaining sponsorships and other ostensibly educational and scientific activities. + +14. Novartis Greece also engaged in improper conduct with respect to Phase IV and +epidemiological studies. The Phase IV clinical studies were supposed to be used to assess the +safety and efficacy of the studied prescription drug with a publication announcing the results of the +study in order to inform medical decisions. In a phase IV clinical study, HCPs are selected by +Novartis’ Medical Affairs group. However, in certain instances, sales personnel made the selection +of HCPs to participate in order to inappropriately promote particular products or induce HCPs to +increase prescription sales. + +15. As described in a 2012 Novartis Internal Audit review of the phase IV studies +conducted by Novartis Greece, there was a lack of transparency outside of the Medical Affairs +function in the planning, design, and execution of clinical studies in Greece, and it determined that +weaknesses in process and control design in execution did not ensure that the studies were of a +non-promotional nature. The review identified numerous control deficiencies surrounding Phase +IV studies conducted in Greece, including (1) unsupported medical or scientific rationale to + 5 +perform the studies; and (2) indications the studies were promotional and designed to achieve +commercial advantage. Internal audit also found controls weaknesses in the collection of data and +publication of study results. In response to the internal audit review, Novartis Greece agreed to +engage in a remediation plan, and to improve the Finance Department’s oversight of clinical +studies. + +16. Internal audit reported its findings to Novartis corporate security, which conducted +its own review in 2012. Among the studies that Novartis corporate security reviewed were +EXACTLY related to the products Diovan, Exforge, and Rasilez; OBVIOUS related to product +Aclasta; and REGINA related to product Xolair. Novartis corporate security had similar findings. +In summary, corporate security found weak scientific rationales for several clinical studies, +suggesting that some clinical studies were used primarily, and inappropriately, as a marketing tool +to increase sales of Novartis products. Corporate security also found control weaknesses that made +it difficult to ensure that HCPs were paid the correct amounts for their participation in the clinical +studies. For example, in the EXACTLY study, approximately four times as many HCP names +were submitted to the local health authority than actually received payments. Additionally, some +payments were made to HCPs using a vendor named “dummy vendor.” + +17. Of the patient medical information submitted on 42,000 clinical research forms, +25,500 forms had mistakes. Further, an audio recording of a debrief following the EXACTLY +study showed that some Novartis Greece employees were aware that some HCPs who participated +in EXACTLY believed that they were obtaining payments in return for their prescriptions of +Novartis products and not for their role in the study. For instance: + + “you all know this very well, I just repeat, that the doctor believes that he/she +participates in a study and gets paid for what he prescribes in reality and not for +what he/she write in the study…” + “To be honest, the studies were conducted in a similar way in the past as well; they +were conducted as marketing projects. That’s within quotation markes. Between +us.” + +18. From the perspective of Novartis Greece’s Finance Department, clinical studies +were a “black box,” in that the Finance Department lacked visibility into clinical study budgets and +due to a lack of internal accounting controls there was no proper reconciliation between budget and +actual spend. Moreover, in some instances, because of deficiencies in Novartis Greece’s internal +accounting and supplier management controls, Novartis Greece used “dummy vendors” to try to +track which HCPs were paid for which studies and to monitor payments relative to the approved +budget. Some HCPs received approximately 60 euros (then approximately $83 USD) per patient +clinical form and some received as much as 38,000 euros (then approximately $52,820 USD) for +completing clinical forms. A follow-up Internal Audit review in 2013 concluded that Novartis +Greece addressed many of the deficiencies identified in the 2012 review. Over the next several +years, Novartis Greece reduced the number of local Phase IV studies it performed and eventually +stopped conducting them altogether. + + 6 +19. As described in a 2013 Novartis Internal Audit review, Novartis Greece also lacked +sufficient controls around grants provided to HCPs, and they were sometimes provided without +complete due diligence of the recipient, without clear details regarding the use of the funds, and in +circumstances where there was an improper connection to sales strategies. In response to the +internal audit review, Novartis Greece agreed to improve internal controls over the grant approval +and governance processes. + +20. During the relevant period, Novartis was unjustly enriched byover $70.1 million +from sales in Greece of Lucentis and products related to the OBVIOUS and REGINA studies. + +Conduct Relevant to Alcon Vietnam + +21. Alcon conducted its business operations in Vietnam through two representative +offices (collectively “Alcon Vietnam”). Alcon Vietnam’s management and financial reporting +were overseen by the regional management team of Alcon Singapore, which was an indirect +wholly-owned subsidiary of Novartis. In light of local laws, Alcon Vietnam conducted all sales +and marketing activities of Alcon surgical equipment (e.g., phacoemulsification and refractive +surgery lasers) and consumables (e.g., intraocular lenses (“IOLs”)) through a Vietnamese +distributor (“Distributor Company”). Under a 2006 distributorship agreement, the Distributor +Company was guaranteed a margin of 24.7% for “importation, technical service, product +registration, and distribution services.” + +22. Beginning in approximately 2007 and continuing into 2014, Alcon Vietnam and +Distributor Company engaged in a scheme to make improper payments to HCPs, both private and +publicly employed at Vietnam state-owned and state-controlled hospitals and clinics, to increase +the sale of Alcon’s IOLs. In connection with the scheme, from 2008 to late 2011, the Distributor +Company implemented a “consultancy program” through which it paid bribes to HCPs in +exchange for their agreement to recommend the benefits of Alcon products to patients and thereby +increase sales of Alcon products. Distributor Company made the improper payments directly to +the HCPs with the approval of Alcon Vietnam managers and employees, who reimbursed +Distributor Company for up to 50 percent of the costs associated with the payments through the +use of credit notes. + +23. Alcon Vietnam personnel and Distributor Company coordinated the amounts of the +improper payments to HCPs through the consultancy program and also coordinated which types of +doctors to target for the payments. For example, in July 2008 the Distributor Company proposed +payments to, “Doctor in consult[ation] room,” “Doctor in the exam room,” “Nurse in +consult[ation] room,” “and the “Chief of [Operating Room] in certain eye hospitals in Vietnam. +Other communications made clear that the purpose of the payments was to “encourage[] doctors to +introduce and use Alcon’s IOLs and … speed up IOLs sales.” + +24. Following the 2011 merger of Novartis and Alcon, Novartis failed to take sufficient +steps to ensure the improper payments to HCPs halted. After 2011, the program was instead +revised and referred to by different names (e.g., “patient education”), and Distributor Company’s +payments to HCPs continued. For example, a profit-and-loss statement provided by the Distributor + 7 +Company to Alcon Vietnam Representative Office personnel in June 2014 showed a line item for +“[c]onsultant cost” through mid-2014. Despite awareness by some personnel at the representative +offices of ongoing payments to HCPs by Distributor Company, Alcon Vietnam approved +Distributor Company’s inflated requests to Alcon Vietnam for reimbursement for marketing, +human resources, and margin reconciliation funds. + +25. Up until June 2014, Alcon Vietnam allowed for the Distributor Company to be paid +annually as partial reimbursement for payments that it made to HCPs (for instance, reimbursing up +to approximately $180,000 in 2010, and up to $100,000 in 2013 and 2014), pursuant to the +consultancy program and the post-2011 variations of the program. + +26. During a phone call in or around late summer 2014, a Distributor Company +executive told an Alcon Singapore executive that it had used up all of its funds to pay for Alcon +surgical equipment and could no longer pay the “usual considerations” to HCPs to ensure they +purchased Alcon products. A former Alcon Singapore executive who was aware of the improper +payments signed and transmitted two false Sarbanes-Oxley sub-certification letters to Alcon’s +Chief Executive Officer and Chief Financial Officer in which the executive did not identify the +improper reimbursements to the Distributor Company. The payments were falsely recorded as +legitimate consultant payments in the consolidated books and records of Novartis. + +27. During the relevant period, Novartis was unjustly enriched by approximately $8.4 +million as a result of improper conduct in Vietnam. + +Conduct Relevant to Korea + +28. Between 2011 and August, 2016, Novartis Korea employees made corrupt +payments to HCPs to increase prescriptions and sales of Novartis products over that of its +competitors. These payments were made through one of several means, and each of which was +improperly recorded in Novartis’ consolidated books and records. One scheme to make improper +payments to HCPs was disguised as payments made for ostensible medical journal activities +organized by a third party vendor. Under local law, pharmaceutical companies are prohibited from +making any type of payment directly to HCPs for the purpose of promoting sales. One intent of +the local restriction was to discourage pharmaceutical companies from concentrating more on +marketing and promotional activities towards HCPs rather than on competition based on product +quality through research and development. + +29. In an effort to circumvent local law, certain employees of Novartis Korea made the +improper payments to HCPs via certain third-party medical journals that forwarded the payments +to the HCPs for participating in roundtable meetings organized by the medical journal. Novartis +Korea sales personnel selected HCPs to participate in editorial and roundtable meetings, at some of +which Novartis Korea sales representatives marketed Novartis products, and some meetings were +followed by recreational activities with the HCPs. + +30. HCPs who participated in the round-table meetings received honoraria in amounts +ranging from $268 to $447 USD per event, and the amount of fees paid to HCPs averaged $2550 + 8 +USD per journal. The honoraria came from advertising fees Novartis Korea paid to the medical +journals and were improperly recorded in the books and records as such. Novartis Korea paid the +medical journals over $16.3 million between 2011 and 2015, some of which was improperly +passed on to HCPs as honoraria. As these events were conducted through a vendor, they were not +subjected to compliance review as otherwise required by Novartis’ policies. + +31. For the conduct described above, the Korean Ministry of Health and Welfare and +the Korean Ministry of Food and Drug Safety imposed in 2017 civil administrative fines totaling +approximately $50.3 million USD on Novartis Korea and suspended sales and reimbursements of +certain Novartis products for 3-6 months. In 2020, criminal proceedings by the South Korean +authorities against Novartis Korea and several former Novartis Korea employees found Novartis +Korea and one of its former sales staff guilty for the same conduct, and Novartis Korea was fined +approximately $35,000 USD. + +32. In another scheme, Novartis Korea sales managers and employees organized the +sponsorship of HCPs to international medical conferences as an inducement for HCPs to increase +their prescriptions of Novartis products. Between 2011 and August 2016, Novartis Korea provided +funding for 2,032 HCPs to attend 381 international conferences at a combined cost of +approximately $7 million. Of those conferences, 645 HCPs attended 112 conferences in the +United States at a cost of approximately $2.5 million. The types of conferences varied across +therapeutic area, including oncology, cardiometabolic, neuroscience, and ophthalmology. As a +result of internal accounting controls weaknesses, certain of these ostensibly legitimate congress +sponsorship fees were used to improperly influence HCPs. In connection with some congresses, +Novartis Korea employees took into account the prescription sales activities of certain HCPs when +targeting them for sponsorships in an effort to encourage the HCPs to increase their prescriptions. + +33. Novartis Korea incorrectly recorded the improper payments on its books and +records as legitimate advertising and promotional fees. Novartis Korea failed to have in place a +control system reasonably designed to ensure that its sales staff were not using sponsorships as +improper inducements. Novartis Korea also failed to have adequate internal accounting controls +over its payments for these trips. In June 2017, Novartis Korea was charged and fined +approximately $446,000 by the Korea Fair Trade Commission with unfair trade practices for the +conduct described above. + +34. In yet a third scheme, Novartis Korea employees in the neuroscience business unit +devised a local non-interventional clinical study with 17 pre-selected HCPs to improve +relationships with those HCPs. The study was organized in May 2013 through a local medical +journal with Novartis Korea providing the list of HCPs to participate and the $100,000 funding +necessary to complete the study. Novartis Korea recorded the funding to complete the study as +advertising expenses and failed to have the study reviewed and approved by medical affairs as +required by internal procedures. + +35. Over the relevant time period, Novartis was unjustly enriched by over $13.8 +million from the improper conduct in Korea. + + 9 +Conduct Relevant to Alcon Asia + +36. In 2011, Novartis merged with Alcon, which until that time had publicly traded +securities in the United States. After the merger, Novartis operated Alcon as a separate reporting +segment through which it sold vision care equipment and other products, such as IOLs and other +consumables. + +37. From 2013 to 2015, within Novartis’ Alcon Asia business, including its operations +in China, employees placed Alcon surgical equipment at hospitals or clinics for no or little money +down in exchange for contractual assurances that those hospitals or clinics would either pay for the +equipment directly or finance it over several years through payments associated with the purchase +of Alcon’s IOLs and consumables during the contract’s term. + +38. This business model was in place both before and after Novartis merged with +Alcon, and it facilitated long-term relationships between Alcon and its customers. Beginning in +2013, Alcon called these agreements “equipment financing arrangements” (i.e., EFAs). Certain +Alcon Asia managers used aggressive sales techniques and employees in China at times falsified +documents in order to enter into these EFAs. Novartis lacked adequate internal accounting controls +to ensure the appropriate accounting treatment for the arrangements and to appropriately record the +transactions in its books and records. + +39. Before 2013, Novartis generally accounted for Alcon’s equipment placement +agreements as operating leases, and recognized associated revenue as payment was received, +whether on the equipment or on associated sales of Alcon IOLs and/or consumables. In 2013, +Novartis generally started accounting for Alcon’s EFAs as finance leases or sales, recognizing +revenue up front at the time of placement (after installation and training). + +40. Novartis lacked sufficient internal accounting controls needed in light of the +degree of accounting, contractual, and financial complexity presented by EFAs. For +example, in connection with Alcon EFA’s in China, Novartis lacked appropriate internal +accounting controls to ensure that a written instrument reflected the terms negotiated with a +hospital, that agreements were signed or “chopped” by the counterparty hospital, and that +agreements contained the price of consumables to be purchased or the premium to be paid. +Other controls issues existed with respect to Alcon China’s credit assessments of +counterparty hospitals, allowances for bad debt established at inception, compliance billing, +equipment repossession, proof of delivery or installation and completion of required +training associated with EFAs. + +41. Particularly in markets such as China, where the customer base of Alcon’s +local subsidiary (“Alcon China”) was dominated by public hospitals and state HCPs, EFAs +presented issues of validity, profitability, and misaligned incentives. A significant portion +of Alcon’s surgical sales in China were derived from EFAs with state HCPs. + +42. After the switch to finance lease accounting, sales personnel – who until mid-2015 +were compensated, in part, based upon the amount of equipment placed under EFAs rather than + 10 +upon how EFAs ultimately performed – entered into certain EFAs that did not satisfy relevant +revenue recognition criteria or that inaccurately projected future IOL and/or consumable purchases. +Despite knowing that customers’ “compliance rates” with respect to EFA contractual purchase +obligations were sometimes very low, Alcon China continued entering into certain EFAs that +lacked adequate profitability safeguards. + +43. In late 2015, a new management team of Alcon China initiated a +comprehensive review of most equipment placed in hospitals and clinics and the associated +contractual paperwork. The on-site check was completed in the summer of 2016 and +revealed that of the 1348 pieces of equipment in scope (with about 700 customers) that 844 +pieces of equipment had been placed pursuant to 466 contracts, with which Alcon China +had identified potential issues. Nearly half of the 844 pieces of equipment in question had +been placed pursuant to contracts that lacked a formal hospital “chop” but had been +validated by the hospital; the remaining pieces of equipment either could not be located, +had been moved to other hospitals, or were obtained pursuant to forged or unverified +contracts. Group, Division, region, and local management became aware of the controls +deficiencies through various internal audit reports, remediation exercises, and local +financial certifications, including the 2016 internal audit of Alcon China, which resulted in +a “Needs Major Improvement” rating for the second consecutive audit. + +44. Over time, efforts to ensure that EFAs in China were properly executed and +recorded were unsuccessful, and Novartis management became aware of EFA-related controls +deficiencies. As described by a senior Alcon executive in a letter to several senior Novartis +executives in response to a 2016 internal audit, + +A historically high pressure sales culture that prioritized meeting sales targets over +compliance and a high tolerance of unacceptable risks still persists residually in the +organization. A very poorly executed legal EFA remediation exercise characterized +by high pressure and coercion to obtain remediated contracts resulted in a large +number of fraudulent, falsified, invalid and unenforceable contracts. This resulted +in a number of non-performing EFAs that are difficult to remediate commercially +as the underlying agreement itself is in question. + +The letter observed that “[d]eveloping a strong compliance culture requires a +comprehensive program and holistic approach with clear commitment from senior management” +and then laid out the specific actions that Alcon’s new management team intended to take in late +2016 to implement enhanced compliance processes to address the historical issues. + +45. During the relevant period, Novartis and Alcon attempted to strengthen controls to +address these issues through various remediation exercises. Novartis and Alcon ultimately +abandoned the EFA business model for surgical sales in China and moved to a cash-sale business +model beginning in late 2016. The lack of appropriate internal accounting controls throughout the +relevant period contributed to Novartis and Alcon ultimately provisioning over $50M in bad debt +due to the poor performance of its EFAs in China. + + 11 +Legal Standards and Violations + + 46. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + + 47. As a result of the conduct described above, Novartis violated Section 13(b)(2)(A) of +the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and disposition of their assets. [15 U.S.C. § +78m(b)(2)(A)]. + +48. As a result of the conduct described above Novartis violated Section 13(b)(2)(B) of +the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. [15 U.S.C. § +78m(b)(2)(B)]. + +Cooperation and Remediation + +49. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. Novartis’ +cooperation included providing translations of certain relevant documents, making current or +former employees available to the Commission staff, and timely providing facts developed during +the course of its own internal investigation. Novartis’ remediation included the termination of +select personnel and third-party entities involved in the misconduct and certain additions to and +strengthening of its internal accounting controls. Novartis also retained a dedicated chief +compliance officer, improved its due diligence and business justification process for third parties, +and enhanced training provided to employees. + +Undertakings + +50. Respondent shall report to the Commission staff periodically during a three-year +term, the status of its remediation and implementation of compliance measures, particularly as to +the areas of due diligence on prospective and existing third-party consultants and vendors, FCPA + 12 +training and the testing of relevant controls including the collection and analysis of compliance +data. During this period, should Respondent discover credible evidence, not already reported to +Commission staff, that questionable or corrupt 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 two follow-up reviews and reports, as described below: + +a. Respondent shall submit to the Commission staff a written report within 360 +calendar days of the entry of this Order setting forth a complete description of its +FCPA and anti-corruption related remediation efforts to date, its proposals +reasonably designed to improve the policies and procedures of Respondent for +ensuring compliance with the FCPA and other applicable anticorruption laws, and +the parameters of the subsequent review (the “Initial Report”). The Initial Report +shall be transmitted to Tracy L. Price, Deputy Chief, FCPA Unit, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, +DC 20549-5631. Respondent may extend the time period for issuance of the Initial +Report with prior written approval of the Commission staff. + +b. Respondent shall undertake two follow-up reviews, incorporating any comments +provided by the Commission staff on the previous report, to further monitor and +assess whether the policies and procedures of Respondent are reasonably designed +to detect and prevent violations of the FCPA and other applicable anti-corruption +laws (the “Follow-Up Reports”). + +c. The Follow-up Report shall be completed by no later than 720 days after the Initial +Report. The second Follow-up Report shall be completed by no later than 1050 +days after the completion of the Initial Report. Respondent may extend the time +period for issuance of the Follow-up Reports with prior written approval of the +Commission staff. + +d. The periodic reviews and reports submitted by Respondent will likely include +proprietary, financial, confidential, and competitive business information. Public +disclosure of the reports could discourage cooperation, impede pending or potential +government investigations and thus undermine the objectives of the reporting +requirement. For these reasons, among others, the reports and the contents thereof +are intended to remain and shall remain nonpublic, except (a) pursuant to court +order, (b) as agreed by the parties in writing, (c) to the extent that the Commission +staff determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (d) is otherwise +required by law. + +e. During this three-year period of review, Respondent shall provide its external +auditors with its annual internal audit plan and reports of the results of internal audit + 13 +procedures and its assessment of its FCPA compliance policies and procedures. + +f. During the three-year period of review, Respondent shall provide Commission staff +with any written reports or recommendations provided by Respondent’s external +auditors in response to Respondent’s annual internal audit plan, reports of the +results of internal audit procedures, and its assessment of its FCPA compliance +policies and procedures. + +51. Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of compliance in the form +of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission +staff may make reasonable requests for further evidence of compliance, and Respondent agrees to +provide such evidence. The certification and supporting material shall be submitted to Tracy L. +Price, Deputy Chief, FCPA Unit, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-5631 no later than sixty (60) days from the date of the +completion of the undertakings. + +Deferred-Prosecution Agreements + + 52. Novartis Hellas S.A.C.I., a Novartis subsidiary, has entered into a three-year +deferred prosecution agreement with the U.S. Department of Justice, in which it acknowledged +responsibility for criminal conduct relating to certain findings in the Order. See United States v. +Novartis Hellas S.A.C.I, Crim No. 20-CR-538 (DNJ Jun 25, 2020) (SDW). Alcon Pte Ltd, a +current subsidiary of Alcon Inc. and a former subsidiary of Novartis, independently entered into a +three-year deferred prosecution agreement with the U.S. Department of Justice, in which Alcon Pte +Ltd acknowledged responsibility for criminal conduct relating to certain findings in the Order. See +United States v. Alcon Pte Ltd, Crim No. 20-CR-539 (DNJ Jun 25, 2020) (SDW). + +Non-Imposition of a Civil Penalty + + 53. Novartis acknowledges that the Commission is not imposing a civil penalty based +upon the imposition of a $233,925,000 criminal fine as part of the above referenced resolutions +with the U.S. Department of Justice. + + 14 +IV. + + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Novartis’ Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +B. Respondent shall comply with the und ertakings enumerated in paragraphs 50-51 +above. + +C. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement +of $92,300,000 and prejudgment interest of $20,500,000 for a total of $112,800,000 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. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + 15 +Payments by check or money order must be accompanied by a cover letter identifying +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 Tracy L. Price, FCPA Deputy Unit +Chief, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5631. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4151.txt b/raw/aaer/2020/AAER-4151.txt new file mode 100644 index 0000000000000000000000000000000000000000..1fcf86b75c6a58fc7d97b597f8a3079dc6b6fd08 --- /dev/null +++ b/raw/aaer/2020/AAER-4151.txt @@ -0,0 +1,370 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89214 / July 2, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4151 / July 2, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19852 + + +In the Matter of + +Alexion 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 that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against Alexion Pharmaceuticals, Inc. +(“Alexion” 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 Alexion’s violations of the internal accounting +controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977. +2. From 2010 to 2015, Alexion’s subsidiary in Turkey made payments to foreign +officials in order to influence them to provide favorable regulatory treatment for Alexion’s +primary drug, Soliris, and to approve Soliris prescriptions for individual patients. In addition, +from 2011 to 2015, Alexion’s subsidiary in Russia made payments to foreign officials in order +to influence the allocation of regional healthcare budgets for Soliris, increase the number of +approved Soliris prescriptions, and favorably influence the regulatory treatment of Soliris. The +payments were made in a variety of ways, including through the use of a third-party consultant, +honoraria, and grants. +3. In connection with these improper payments, false books and records were +maintained by Alexion’s subsidiaries in Turkey and Russia. Alexion had insufficient internal +accounting controls to detect and prevent these payments and to provide reasonable assurances +that these transactions were recorded accurately in the books and records of these subsidiaries, +which were consolidated into Alexion’s books and records. The payments continued through +2015 due to Alexion’s inadequate internal accounting controls and the lack of an effective anti- +corruption compliance program. As a result, Alexion was unjustly enriched by over $14 +million. +4. In addition, Alexion’s inadequate internal accounting controls resulted in the +failure of Alexion’s subsidiaries in Brazil and Colombia to maintain accurate books and records +regarding third-party payments. +Respondent +5. Alexion is a global biopharmaceutical company that develops and sells drugs for +patients with life-threatening rare and ultra-rare diseases. Alexion is incorporated in Delaware +with its headquarters in Boston, Massachusetts. Alexion began commercial sales of its first drug, +Soliris, in 2007. During the relevant time period, Soliris was approved to treat two ultra-rare +diseases, paroxysmal nocturnal hemoglobinuria (“PNH”) and atypical hemolytic uremic +syndrome (“aHUS”). +6. Alexion serves patients in approximately 50 countries and employs +approximately 3,000 people worldwide. + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + 3 +7. Alexion issued and maintains a class of publicly-traded securities registered +pursuant to Section 12(b) of the Exchange Act, which have traded on the Nasdaq Stock Market +LLC since 1996. +Other Relevant Entities +8. Alexion Ilaç Ticaret Limited Sirketi (“Alexion Turkey”) is a wholly-owned +Alexion subsidiary incorporated in 2010. Alexion Turkey’s books and records were consolidated +into Alexion’s financial statements. + +9. Alexion Pharma OOO (“Alexion Russia”) is a wholly-owned Alexion subsidiary +incorporated in 2012. Alexion Russia’s books and records were consolidated into Alexion’s +financial statements. + +10. Alexion Pharma Brazil (“Alexion Brazil”) is a wholly-owned Alexion subsidiary +incorporated in 2009. Alexion Brazil’s books and records were consolidated into Alexion’s +financial statements. + +11. Alexion Pharma Colombia SAS (“Alexion Colombia”) is a wholly-owned +Alexion subsidiary incorporated in 2009. Alexion Colombia’s books and records were +consolidated into Alexion’s financial statements. + +Facts +Turkey +12. Alexion began selling Soliris through Turkey’s named patient sales (“NPS”) +program in 2009. Under Turkish law, each patient’s application to begin Soliris therapy +required review and approval by health care providers (“HCPs”) appointed to serve on +commissions in Turkey’s Ministry of Health, separate approvals to pay for the prescription, and +recurring approvals to continue the patient on Soliris therapy. Alexion Turkey paid HCPs +employed at state-owned healthcare institutions for services, including research and educational +events. +13. Alexion initially struggled to get these approvals for Soliris. In January 2010, a +senior Ministry of Health official suggested to an Alexion Turkey regional account manager +that, to obtain more patient approvals, Alexion Turkey may need to make payments to +government officials. Thereafter, Alexion Turkey hired a consultant (“Consultant”) to assist +Alexion Turkey with the patient approval process. The Consultant was hired in significant part +due to the Consultant’s connections to top Ministry of Health officials. +14. From 2010 to 2015, Alexion Turkey paid the Consultant over $1.3 million, +consisting of consulting fees and purported expense reimbursements. The Consultant passed a +portion of these funds on to Turkish government officials, in the form of cash, meals, or gifts, to +secure favorable treatment for Soliris. As a result of these payments, Alexion Turkey not only +secured approvals for patient prescriptions, but also received confidential information and + 4 +advance feedback from government officials on regulatory submissions. Alexion Turkey +recorded these improper payments inaccurately, claiming them as legitimate expenses. +15. Two Alexion Turkey managers made some of the payments to the Consultant by +asking a third-party vendor to pay the Consultant and provide falsified invoices for +reimbursement to Alexion Turkey. Certain Alexion Turkey employees recorded these payments +inaccurately in Alexion Turkey’s books and records. Further, an Alexion Turkey manager +directed that the description of the Consultant’s claimed expenses should be written in pencil. +The use of pencil would allow the description of the expenses to be easily changed or +concealed. +16. Alexion Turkey failed to require that the Consultant provide sufficient +documentation of expenses or services provided in return for the payments. From 2010 to 2015, +the Consultant provided little or no explanation for many expenses, and failed to provide +independent documentation for most of the purported expenses. Expense documentation that +was submitted often sought reimbursement for large, vague expenses (e.g., categorized only as +“other expense”). Even so, expense documentation associated with some of the payments +indicates that the funds were for the benefit of government officials (e.g., noting first names of +known government officials on submitted expense reports or notes attached thereto). +17. In addition to paying government officials through the Consultant, from 2012 to +2015, Alexion Turkey managers paid over $100,000 to or at the request of HCPs serving on +Ministry of Health commissions. These HCPs were responsible for approving or denying +patient prescriptions for Soliris and had influence over key regulatory matters, such as treatment +guidelines and reimbursement criteria. Alexion Turkey paid these HCPs to influence them to +approve patient prescriptions and support regulatory actions favorable to Soliris. These +payments were recorded inaccurately in Alexion Turkey’s books and records as honoraria and +grants. +18. For example, from 2012 to 2014, Alexion Turkey paid over $15,000 to or at the +request of an HCP who Alexion Turkey senior management recognized was “the decision +maker for the reimbursement criteria[]” for aHUS and the decision-maker for the approval of +patient prescriptions for Soliris. Alexion Turkey began paying the HCP once the HCP assumed +responsibility for approving or denying patient prescriptions. Alexion Turkey made these +payments to improperly influence the HCP to make decisions that would favor Alexion, +including approving patient prescriptions for Soliris. +19. At the time these payments were made, Alexion Turkey employees had received +limited training regarding anti-bribery compliance. Further, despite Alexion’s knowledge of the +risk of doing business in Turkey, Alexion failed to devise and maintain internal accounting +controls that were sufficient to provide reasonable assurances that payments to third parties, +including consultants and HCPs, were supported by adequate documentation and were for +legitimate purposes. +20. As a result of the conduct described above in Turkey, Alexion was unjustly +enriched by over $6.6 million. + 5 +Russia + +21. Alexion began selling Soliris in Russia in 2012. At that time, Soliris was sold +through an NPS process and reimbursed through regional healthcare spending, which required the +various regions in Russia to allocate funds to Soliris from regional healthcare budgets. + +22. Alexion Russia paid HCPs employed at state-owned healthcare institutions for +services, including research, consulting on specific topics, and hosting educational events and +activities. Certain state-employed HCPs also served in official roles at the regional and federal +levels of the Russian government healthcare system. These HCPs provided expert opinions relied +upon by decision-makers regarding the allocation of regional healthcare budgets and the +regulatory treatment of Soliris. Alexion Russia senior managers believed that these HCPs had +decision-making authority regarding regional healthcare budgets and regulatory decisions. From +2011 to 2015, Alexion Russia made over $1 million in payments to these HCPs, which included +funds paid to influence the HCPs to take positions favorable to Alexion Russia in connection with +regional budget allocations, to increase the number of approved Soliris prescriptions, and to +favorably influence the regulatory treatment of Soliris. These payments were recorded +inaccurately in Alexion Russia’s books and records as honoraria, educational expenses, business +meeting expenses, and scientific research. + +23. Some specific examples of Alexion Russia’s improper payments to HCPs in +Russia are as follows: + +a. In 2011 and 2012, certain Alexion Russia managers prioritized +strengthening Alexion Russia’s relationship with Physician A because Physician A was the chair +of a committee that made recommendations concerning the allocation of rare disease funds in one +region of Russia and because Physician A was tasked by the Russian government with proposing +medical standards used to diagnose and treat PNH. Alexion Russia made honoraria and research +payments to Physician A in significant part to influence the regional budget and standards in favor +of Soliris. Physician A provided Alexion Russia with a copy of draft diagnostic standards and the +ability to comment and revise the standards before they were submitted to the Ministry of Health. +Patients requiring Soliris treatment were allocated 52% of the regional Ministry of Health budget +in Physician A’s region in 2013. Physician A received approximately $100,000 from Alexion +Russia from 2012 to 2015. + +b. From 2011 to 2015, Alexion Russia paid over $85,000 to Physicians B and +C in the form of honoraria, research, and educational expenses, and in the form of a grant to the +institution that employed Physician C. Physicians B and C were each geneticists and chief non- +staff specialist advisors to the Ministry of Health. Physician B was tasked by the Ministry of +Health with developing and submitting a list of rare diseases to the Ministry of Health, while +Physician C was tasked with reviewing and advising the Ministry of Health on Alexion Russia’s +application to include Soliris on a list of drugs used to treat certain diseases. Internal Alexion +Russia documents reflect that payments to Physicians B and C were made in significant part to +improperly influence these Physicians in favor of Soliris. For example, Alexion Russia began +paying Physician C and Physician C’s organization after learning that Physician C was tasked + 6 +with advising the Ministry of Health regarding Soliris. After making payments to Physician C +and Physician C’s organization, an Alexion Russia employee recommended providing another +payment to Physician C’s organization and stated that Alexion Russia hoped to “receive support +to include [ultra-rare diseases treated by Alexion drugs] in all possible lists,” which would +facilitate the prescription and reimbursement of Alexion’s products. After making payments to +Physician C and his organization, an Alexion Russia employee stated that Physician C +“cooperated” with Alexion Russia on the “programs within [Physician C’s] influence on regions +in terms of standards and funding, through [Physician C’s] specialized committee.” + +24. Despite Alexion’s knowledge of the risk of doing business in Russia, Alexion +failed to devise and maintain internal accounting controls that were sufficient to provide +reasonable assurances that payments to HCPs in Russia were supported by adequate +documentation and were for legitimate business purposes. + +25. As a result of the conduct described above in Russia, Alexion was unjustly +enriched by over $7.5 million. + +Brazil and Colombia + +26. From 2013 to 2015, certain employees at Alexion Brazil and Alexion Colombia +created or directed third parties to create inaccurate financial records concerning payments to third +parties, including patient advocacy organizations (“PAOs”). + +27. For example, in 2013 and 2014, an Alexion Brazil manager caused a PAO to pay +for the manager’s personal expenses for alcohol and personal travel, and to submit a fictitious +invoice, which was then reimbursed by Alexion Brazil. In 2014 and 2015, the same manager and +an employee in Alexion Brazil submitted grant requests to Alexion’s global grant review +committee that misstated how the requested funds would be allocated to the different activities +covered in the grant request. + +28. As a further example, on one occasion in 2014, in order to provide funds to a PAO, +an Alexion Colombia senior manager directed a PAO to submit an invoice that falsely described +that the funds would be used for “legal support” services. This inaccurate invoice allowed +Alexion Colombia to approve the payment locally instead of obtaining approval for the payment +through the global grant process, as required by Alexion’s policies. + +29. Further, Alexion Brazil and Alexion Colombia failed to maintain adequate books +and records of certain of its financial transactions involving payments to third parties. Notably, +both subsidiaries failed to regularly maintain certain documents underlying a substantial number +of financial transactions. Additionally, Alexion failed to prevent the destruction of relevant +documents by certain employees of Alexion Brazil. + + + + + 7 +Legal Standards and Violations + +30. 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. +31. As a result of the conduct described above, Alexion 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. As a result of the conduct described above, Alexion 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. +32. As a result of the conduct described above, Alexion violated Section 13(b)(2)(A) +of the Exchange Act because its books and records did not accurately reflect certain expenses +and payments, including improper payments to foreign officials and third parties. Alexion +violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and maintain sufficient +internal accounting controls over the payments to foreign officials and third parties. +Alexion’s Remedial Efforts and Cooperation +33. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Alexion and cooperation afforded to the Commission staff. +34. Alexion’s cooperation included providing regular briefings to Commission staff +regarding the facts developed in its internal investigation in multiple countries and the forensic +accounting review that Alexion undertook, and identifying and providing translations of key +documents. +35. Alexion’s remediation included strengthening and expanding its global +compliance organization; enhancing its policies and procedures regarding payments to third +parties, including the implementation of a centralized system to track and monitor third-party +payments; revamping its HCP engagement process and oversight; enhancing its internal audit +function; conducting proactive compliance market reviews; and improving training provided to +employees regarding anti-corruption. + + 8 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Alexion’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Alexion 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 +$14,210,194 and prejudgment interest of $3,766,337 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. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $3,500,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(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 Alexion’s +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 Melissa Hodgman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To + 9 +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors +based on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4152.txt b/raw/aaer/2020/AAER-4152.txt new file mode 100644 index 0000000000000000000000000000000000000000..51fb86bc69f9ba4002c4662c4fc8ea13a4c58167 --- /dev/null +++ b/raw/aaer/2020/AAER-4152.txt @@ -0,0 +1,73 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89326 / July 15, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4152 / July 15, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19879 + + +In the Matter of + + PAUL J. KONIGSBERG, + +Respondent. + + + + +ORDER OF FORTHWITH SUSPENSION +PURSUANT TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities and Exchange Commission deems it appropriate and in the public interest to +issue an order of forthwith suspension against Paul J. Konigsberg 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. Paul J. Konigsberg, age 84, was previously licensed as an attorney and holds an +inactive accounting license in the State of New York. + +2. On June 24, 2014, Konigsberg pled guilty to three federal felony charges relating to +his falsification of investor account records of Bernard L. Madoff Investment Services, LLC. +Judgment in that matter was entered against him on July 16, 2015. U.S. v. Konigsberg, 10-CR-228 +(S.D.N.Y.). + +3. On June 27, 2014, in a parallel SEC civil matter, Konigsberg agreed to a permanent +injunction against aiding or abetting violations of Section 17(a) of the Securities Exchange Act of + +1 Rule 102(e)(2) provides, in pertinent part, that “[a]ny 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.” 17 C.F.R. § 201.102(e)(2). +1934, and Rule 17a-3 thereunder, and Section 204 of the Investment Advisers Act of 1940, and +Rule 204 2(b)(l)-(4) thereunder. SEC v. Konigsberg, 13-cv-6859 (S.D.N.Y.).2 + +III. + + In view of the foregoing , the Commission finds that Konigsberg 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 J. Konigsberg is forthwith suspended from appearing +or practicing as an attorney or an accountant before the Commission pursuant to Rule 102(e)(2) of +the Commission’s Rules of Practice. + + By the Commission. + + + Vanessa A. Countryman + Secretary + + +2 On September 23, 2015, Konigsberg was disbarred by the State of New York retroactively +effective to June 24, 2014 (i.e., the day he pled guilty). \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4153.txt b/raw/aaer/2020/AAER-4153.txt new file mode 100644 index 0000000000000000000000000000000000000000..77df63d894e87a5ad9c7e43e4aa94671fbdd254c --- /dev/null +++ b/raw/aaer/2020/AAER-4153.txt @@ -0,0 +1,586 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10809 / July 31, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89442 / July 31, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4153 / July 31, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19899 + + +In the Matter of + +VALEANT PHARMACEUTICALS +INTERNATIONAL, INC., n/k/a +BAUSCH HEALTH COMPANIES +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 Valeant Pharmaceuticals International, Inc., now known as Bausch Health +Companies Inc. (“Bausch Health” 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- + +2 +and-Desist Proceedings Pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, 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. Respondent is a publicly-traded global pharmaceutical and medical device company +that develops, manufactures, and markets a broad range of branded, generic and branded generic +pharmaceuticals, over-the-counter products, and medical devices. During the relevant period, +Respondent was known as Valeant Pharmaceuticals International, Inc. (“Valeant”). Due to its +growth-by-acquisition business strategy in 2014 and 2015, Valeant supplemented its disclosures +pursuant to Generally Accepted Accounting Principles (“GAAP”) with non-GAAP financial +measures as “a meaningful, consistent comparison of the company’s core operating results and +trends.” Among those non-GAAP financial measures were same store organic growth (“organic +growth”), which represented growth rates for businesses owned for one year or more, and “Cash +EPS,” which excluded costs associated with business development, among other things. When +announcing certain GAAP and non-GAAP financial measures, Valeant failed to disclose to +investors certain material information about these measures. + +2. Valeant helped establish a mail order pharmacy, Philidor Rx Services, LLC, in +2013 and played a significant role in Philidor’s business. In 2013, Respondent provided an +advance of $2 million and entered into agreements with Philidor to dispense Valeant’s products. +From Q3 2014 through Q3 2015, Valeant expanded its sales to Philidor. Philidor increasingly +contributed to Valeant’s U.S. organic growth in particular. By Q3 2015, Valeant announced +double-digit U.S. organic growth for the fifth consecutive quarter, with U.S. organic growth of +22%. By this time, Philidor sales had grown to such an extent that it alone accounted for over +14% of U.S. organic growth. Excluding those sales to Philidor, Valeant’s U.S. organic growth for +the quarter was over 7%. Valeant disclosed for the first time it had, since December 2014, an +option to purchase Philidor in its Q3 2015 earnings call. + +3. In Q2 2015, Valeant recorded revenue resulting from price appreciation credits +(“PACs”) it received pursuant to its Distribution Services Agreements (“DSAs”) with its major +wholesalers, which impacted certain reported GAAP and non-GAAP measures. A provision in the +DSAs provided for Valeant to offset distribution fees owed to wholesalers with credits for price +increases on Valeant products held in wholesalers’ inventory. Thus, price increases generated +additional net revenue to Valeant not just from prospective products sales at the incrementally +higher prices, but also from previously sold products still held by wholesalers. On June 18, 2015, +Valeant recorded approximately $110 million in net PAC revenue through a 500% price increase + +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 +on Glumetza, a drug acquired on April 1, 2015. Rather than reflecting any of the PAC generated +by the Glumetza price increase as revenue attributable to Glumetza in its records, Valeant +erroneously allocated the entire $110 million Glumetza PAC as net revenue to over 100 other +products. The allocation of the Glumetza PAC resulted in numerous misleading disclosures in +Valeant’s Q2 2015 earnings presentation and Commission periodic reports filed for Q2 and Q3 +2015 and year ended 2015. + +4. On October 26, 2015, in response to media and analyst attention over its +relationship with Philidor, Valeant gave an investor presentation concerning Philidor. On April +29, 2016, in its annual report for 2015 (“2015 Form 10-K”), Valeant restated its financial +statements for the year ended December 31, 2014 to reduce previously reported fiscal year 2014 +revenue from sales to Philidor by approximately $58 million due to such revenue being recognized +prematurely. Among other things, Valeant acknowledged the existence of material weaknesses in +its internal control over financial reporting. Valeant also disclosed the existence of PACs for the +first time but failed to disclose the impact PACs earned in 2015 had on certain GAAP and non- +GAAP measures. + +5. Based on the foregoing and the conduct described herein, Valeant violated Sections +17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 and Rule 100(b) of Regulation G +thereunder. + +Respondent + +6. Valeant Pharmaceuticals International, Inc., now known as Bausch Health +Companies Inc. (“Bausch Health”), is a British Columbia corporation headquartered in Laval, +Quebec with its principal administrative offices in Bridgewater, New Jersey. On July 13, 2018, +Valeant changed its name to Bausch Health. Bausch Health’s common stock is registered under +Section 12(b) of the Exchange Act and is dually listed on the New York and Toronto Stock +Exchanges. + +Other Relevant Entity + +7. Philidor Rx Services LLC is a defunct Delaware limited liability company that +was formed in January 2013. Philidor was a licensed pharmacy based in Hatboro, Pennsylvania. +Approximately 95% of the product dispensed by Philidor and its affiliated pharmacies (collectively, +“Philidor”) consisted of Valeant branded drugs. Valeant acquired an option to purchase Philidor on +December 15, 2014, and terminated its relationship with Philidor on October 30, 2015, shortly +after extensive media reports discussing Valeant’s relationship with Philidor. Valeant fully paid +for but never exercised its option to purchase Philidor. + + +4 +Facts + +Philidor + +8. Valeant management identified Philidor as a “key strategy” to turnaround the +dermatology unit in 2014. Valeant’s agreements with Philidor included similar terms as with any +wholesaler, but there were several other important aspects to Valeant’s relationship with Philidor. +Valeant: 1) provided an advance of $2 million to Philidor; 2) was involved in setting up its +infrastructure and hiring of key employees; 3) maintained a sales force to promote access to its +products through Philidor to health care providers; and 4) advised and assisted Philidor on its +launch and expansion to other states. In addition, Valeant agreed to reimburse Philidor for the +cost of Valeant drugs that the third-party payors and insurance companies did not cover and +deducted this obligation from gross revenue. Valeant internally recorded this obligation as the +“alternative fulfilment subsidy” or “AF subsidy.” Valeant’s sales to Philidor increased throughout +2014 and 2015 and Philidor sales became one of the growth drivers for Valeant’s dermatology +products. + +9. Toward the end of Q3 2014, Valeant received a $75 million order from Philidor, +which was put on hold because it exceeded Philidor’s credit limit. Valeant approved a $70 million +credit increase to process this order, and did so without proper justification as required by +Valeant’s Standard Operating Procedure (“SOP”) for credit limits. At the time of the credit +increase, Philidor’s accounts receivable balance was $32 million, with $8.5 million of the balance +over 61 days past due. + +10. In Q4 2014, Valeant received a $130 million order from Philidor in early +December. Once more Valeant approved Philidor’s credit increase, and also granted extended +payment terms, without proper justification as required under Valeant’s SOP for credit limits. +Philidor’s accounts receivable balance was approximately $78.3 million, of which approximately +$41 million was past due. + +11. The $130 million order included one-time special pricing implemented for Philidor +orders placed between November 24 and December 5, 2014, in which Philidor paid 4% over the +wholesale cost. Since none of Valeant’s other customers purchased Valeant products at prices +above the wholesale cost, Valeant had to manually input the price changes. + +12. When Valeant learned that one of the products on the order was out of stock, +Philidor acquiesced to Valeant’s request to substitute the out-of-stock product, a topical +medication for mild acne, with an oral antibiotic for severe acne in a sufficient quantity to meet +the dollar amount of the out-of-stock product. Valeant also took steps to ensure product was +delivered to Philidor on a Saturday, rather than the customary business day of Monday. + +13. The timing and amount of the $130 million order, with its one-time pricing, +product substitution, and Saturday product delivery, occurred less than two weeks before the +December 15, 2014 date when Valeant acquired the option to purchase Philidor for $100 million +cash and began consolidating Philidor in its financial statements. Upon the closing of the option +agreement, Valeant knew that it would consolidate Philidor in its financial statements and would + +5 +have to wait to recognize the Philidor revenue until Philidor sold the product through to patients. +Valeant’s actions with respect to the $130 million order enabled it to conclude at the time that it +could recognize revenue when the product was delivered to Philidor. Valeant later restated the +revenue from this order. + +14. Valeant evaluated its disclosure obligations in light of the option agreement. As +of December 1, 2014, Valeant’s disclosure thresholds required Valeant to disclose details about +transactions the size of the Philidor transaction, including mentioning the acquiree by name, in +its annual report on Form 10-K for 2014. On December 10, 2014, Valeant increased its +thresholds in an amount that exceeded the anticipated total option purchase price for Philidor +such that Valeant would no longer disclose transactions of Philidor’s size by name in the 2014 +Form 10-K. Management informed the Board’s audit and risk committee about the increased +disclosure threshold, including its impact on disclosure of the Philidor option transaction. In +early 2015, Valeant learned that certain pharmacy benefit managers had informed Philidor it was +in violation of certain terms of its pharmacy network agreements. In August 2015, Valeant +received an economic analysis of products it sold to Philidor, and was told that the product sales +growth through Philidor had been mostly “subsidized (free) through Philidor.” The analysis +characterized the AF subsidy to Philidor as “‘free goods’ that are fully reimbursed by [Valeant].” + +Valeant’s Misleading Disclosures Regarding Philidor + +15. Valeant reported its results for the quarters ended September 30, 2014 through +September 30, 2015 in earnings calls and presentations, and in periodic reports filed with the SEC. +Valeant, through its management, knew or should have known that its disclosures did not reveal +the material impact of the Philidor sales on certain of Valeant’s GAAP and non-GAAP financial +measures. + +a. Same Store Organic Growth: Valeant announced U.S. organic growth in +the double digits for each quarter from Q3 2014 through Q3 2015. Philidor +represented an increasingly larger portion of Valeant’s U.S. organic growth, +ranging from 5% to over 14%. Valeant would have failed to achieve +double digit U.S. organic growth in Q3 2015 without Philidor. + +b. Cash EPS: Valeant exceeded its guidance and analyst consensus +estimates of $2.55 for Q4 2014 when it announced Cash EPS of $2.58 in +its earnings presentation. Valeant’s sales to Philidor contributed $0.12 to +Valeant’s Q4 2014 Cash EPS. + +c. Dermatology unit revenue: Valeant announced its dermatology unit’s +revenue of $273 million for Q3 2014 and $425 million for Q4 2014 in its +earnings calls. Valeant conveyed no information regarding the material +contribution of the sales made by Philidor, which represented over 13% of +the third quarter dermatology revenue or over 16% of the fourth quarter +dermatology revenue. + + +6 +d. Dermatology unit’s performance: Valeant highlighted the performance of +the dermatology unit in its earnings calls, variously describing it as +experiencing a “turnaround” (Q3 2014), having “strong growth for +promoted brands” (Q4 2014), experiencing “positive organic growth” for all +promoted brands (Q1 2015), and “outperforming” (Q2 and Q3 2015). From +time to time, Valeant referred to an alternative fulfillment channel, but it did +not provide details about its relationship with Philidor or explain how sales +to Philidor contributed to dermatology performance. + +16. Valeant failed to disclose requisite material information about Philidor in +Management’s Discussion and Analysis of Financial Condition and Results of Operations +(“MD&A”) in its quarterly report on Form 10-Q for Q3 2014, annual report on Form 10-K for +2014, and quarterly reports on Forms 10-Q for Q1, Q2, and Q3 2015. Item 303(b)(2) requires +issuers to disclose in quarterly reports “any material changes in the registrant’s results of +operations … with respect to that fiscal quarter and the corresponding fiscal quarter in the +preceding fiscal year.” Item 303(b)(2) of Regulation S-K, 17 C.F.R. § 229.303(b)(2). Regulation +S-K also requires that the discussion of material changes in results of operations during the quarter +“shall identify any significant elements of the registrant’s income or loss from continuing +operations which do not arise from or are not necessarily representative of the registrant’s ongoing +business.” 17 C.F.R. § 229.303(b), Instruction 4. Additionally, reporting companies must disclose +in the MD&A section of Form 10-K information “necessary to an understanding of [the +company’s] financial condition, changes in financial condition and results of operations” and “any +known trends or uncertainties” or “any unusual or infrequent events or transactions” that materially +affected a company’s operations. Item 303(a) of Regulation S-K, 17 C.F.R. § 229.303(a). + +a. Relationship with Philidor: Valeant sold to Philidor dermatology drugs +facing eroding market share or reimbursement blocks, or newly launched +products to boost prescription volume. Valeant’s MD&A made no mention +of its unique relationship with Philidor, even as Valeant’s sales to Philidor +increased each quarter. + +b. Risks related to Philidor: Valeant’s MD&A contained no discussion of the +risks arising from its relationship with Philidor, particularly beginning in +Q1 2015, when it learned that three pharmacy benefit managers had +informed Philidor that it was in violation of certain terms of its pharmacy +network agreements. + +17. Valeant improperly recognized revenue and net income relating to Philidor sales for +the second half of 2014 by $58 million and $33 million, respectively, for which Valeant issued a +restatement in April 2016. Rule 4.01 of Regulation S-X states that financial statements filed with +the Commission that are not prepared in accordance with GAAP are presumed to be misleading or +inaccurate. Accounting Standards Codification (ASC) 605, “Revenue Recognition,” states that +revenue should not be recognized until it is realized or realizable and earned. One criteria +generally necessary for revenue to be realizable is for collectability to be reasonably assured. +During Q3 and Q4 2014, Valeant approved increases to Philidor’s credit limit to process the + +7 +orders. These approvals did not comport with Valeant’s SOPs for credit limit increases and +Valeant knew or should have known that collectability was not reasonably assured. + +18. On October 26, 2015, Valeant gave an investor presentation concerning Philidor. In +this presentation, Valeant did not fully disclose its Philidor relationship or explain how sales to +Philidor had impacted certain GAAP and non-GAAP measures Valeant presented in earlier +quarters. Valeant also claimed that disclosure of the Philidor purchase option was not required +under its pre-established internal disclosure threshold. Valeant increased its disclosure thresholds +on an ad hoc basis as the company grew, and it did so in early December 2014, shortly before the +purchase option closed. + +Price Appreciation Credits + +19. Valeant’s largest customers are major U.S. drug wholesalers, who enter into +distribution service agreements (“DSAs”) that, among other things, set the fees Valeant pays +wholesalers for their distribution and inventory management services. Through at least 2015, these +DSAs contained price appreciation clauses whereby Valeant was entitled to credits from such +wholesalers for price increases on products currently held by the wholesalers. This PAC was +calculated based on the wholesaler’s inventory of the product subject to a price increase, multiplied +by the amount of the price increase. Pursuant to the terms of the DSAs, PACs offset the DSA fees +Valeant owed to wholesalers. Valeant recorded the net revenue impact of PACs at the time +customers were notified of the price increase. + +20. Valeant acquired a diabetes drug called Glumetza on April 1, 2015, through its +acquisition of Salix Pharmaceuticals, Ltd. Valeant initially planned to raise Glumetza’s price by +50% effective May 15, 2015. Throughout Q2 2015, Valeant forecasted the net revenue to be +generated by the corresponding Glumetza PAC, which was based on the projected amount of +Glumetza inventory held by wholesalers. + +21. On June 3, 2015, Valeant management approved a price increase for Glumetza of +500% and notified customers of the price increase approximately two weeks later. Valeant’s +accounting practice was to record PACs to the product whose price increase generated the PAC, +thereby offsetting DSA fees accrued on sales of that product and increasing net revenue +attributable to that product. In this instance, however, most of the wholesalers’ Glumetza +inventory had been purchased from Salix, which had accrued no DSA fees to offset the Glumetza +PAC. Rather than record the $110.4 million Glumetza PAC as revenue to Glumetza, Valeant +allocated the entire PAC generated by the Glumetza price increase as revenue to 106 other +products. Valeant did not record any of the Glumetza PAC as revenue attributable to Glumetza, +even though Valeant had sold at least $26 million of Glumetza to wholesalers and accrued +corresponding DSA fees in Q2 2015. + + + +8 +22. On July 31, 2015, Valeant raised Glumetza’s price again by 50%, which generated +$21.5 million in net PAC revenue. In October 2015, Valeant allocated $11.9 million of the Q3 2015 +Glumetza PAC to 27 other products. This allocation was based on the amount of wholesaler’s +Glumetza inventory that had been purchased from Salix rather than Valeant. The two Glumetza +PAC allocations in Q2 2015 and Q3 2015 were the only instances in which Valeant allocated PACs +as revenue to products other than the one that generated the PAC. + +Valeant’s Disclosures Regarding the Glumetza PAC and Its Allocation + +23. Valeant reported its results for the quarter ended June 30, 2015 in an earnings call, +presentation, and Form 8-K on July 23, 2015 and filed its Form 10-Q on July 28, 2015. Valeant, +through its management, knew or should have known that its Q2 2015 disclosures did not reveal the +material impacts of the $110.4 million in net revenue from the Glumetza PAC and that PAC’s +allocation to 106 other products to several GAAP and non-GAAP financial measures: + +a. Cash EPS: Valeant’s earnings presentation and Form 8-K reported Cash +EPS of $2.56. Absent the Glumetza PAC, Cash EPS for the quarter would +have been $2.34, falling short of Valeant’s guidance for the quarter ($2.40 +– $2.50) and analyst’s consensus estimate ($2.46). + +b. Same Store Organic Growth: Valeant’s earnings presentation and Form +8-K reported 19% same store organic growth for Q2 2015, but failed to +disclose that this calculation included $85 million of the Glumetza PAC +allocated from a recent acquisition (Salix) to businesses owned for one year +or more. Without the Glumetza PAC allocation, same store organic growth +for the quarter would have been 14%. + +c. Top 20 Brands: Valeant’s earnings presentation reported Glumetza as the +company’s #18 product based on revenue of $26 million. Had Glumetza’s +PAC been recorded entirely as Glumetza’s revenue, as was Valeant’s +practice, Glumetza would have been Valeant’s #2 product based on revenue +of $136 million. + +d. Revenues by Business Unit: Valeant’s Form 8-K reported business unit +revenues but did not disclose the impact of the Glumetza PAC allocation, +which resulted in an increase in reported revenue to Valeant’s neurology +($62.2 million), dermatology ($32.6 million), and ophthalmology ($15.1 +million) business units and a reduction in gastrointestinal (Salix) revenue +($110.4 million) because of the Glumetza PAC’s allocation to other +products. + +e. Incremental Revenues and Profits from Acquisitions and Existing Business: +Valeant’s Form 10-Q did not disclose the impact of the Glumetza PAC +allocation on reported incremental revenues and profits. The allocation +resulted in a reduction in the reported incremental revenue and profit from + +9 +acquisitions by $85 million, and an increase in the reported revenue and +profits from existing business by the same amount. + +f. MD&A: Valeant’s Q2 2015 Form 10-Q did not disclose the existence of +PACs generally or the material impact of the $110.4 million in net revenue +recorded from the Glumetza PAC to Q2 2015 results. In Q2 2015, the +Glumetza PAC alone represented 32% of Valeant’s operating income that +quarter. + +24. Valeant reported its results for the quarter ended September 30, 2015 in an earnings +call, presentation, and Form 8-K on October 19, 2015 and filed its Q3 2015 Form 10-Q on October +26, 2015. Similar to the prior quarter, Valeant, through its management, knew or should have +known that its Q3 2015 disclosures did not reveal the material impacts of the Q2 Glumetza PAC +and the Q2 and Q3 PAC allocations to certain GAAP and non-GAAP financial measures for the +nine months ended September 30, 2015. + +25. On April 29, 2016, Valeant filed its Form 10-K for the year ended December 31, +2015. In this filing, Valeant disclosed the existence of PACs, which had a net revenue impact of +$171 million in 2015. Valeant, though its management, knew or should have known that the +2015 Form 10-K did not disclose that two price increases on Glumetza accounted for $132 million +(or 77%) of total PACs or that $122 million from the two Glumetza PACs were allocated to other +products. Although the report stated that $130 million in PACs came from pricing actions in +Valeant’s existing business, that amount included $96 million in PACs from pricing actions on +Glumetza, a recent acquisition. The 2015 Form 10-K also included $96 million in Glumetza PACs +as incremental revenue and profits from Valeant’s existing business rather than from acquisitions. + +Valeant’s Internal Accounting Control Failures + +26. Valeant did not design and maintain sufficient internal accounting controls. +Valeant failed to implement accounting controls with respect to the Philidor sales transactions +and PACs, sufficient to provide reasonable assurances that transactions were recorded as +necessary to, among other things, permit the preparation of financial statements in conformity +with GAAP and to maintain the accountability of assets. Valeant did not have sufficient controls +relating to non-standard journal entries and manual price changes. Valeant’s existing controls +also were not sufficient to address how exceptions to policies and procedures should be +documented and approved, which made it possible for management to override internal +accounting controls when they approved the Philidor credit limit increases to facilitate sales to +Philidor during Q3 and Q4 of 2014. + +Valeant’s Restatement, Internal Investigation, and Cooperation + +27. On October 21, 2015, following media reports discussing Valeant’s relationship +with Philidor, Valeant formed an ad hoc committee of its board to review allegations related to the +company’s business relationship with Philidor and related matters. On October 30, 2015, Valeant +announced it had terminated its relationship with Philidor. + + +10 +28. On April 29, 2016, Valeant filed its 2015 Form 10-K, which restated its audited +consolidated financial statements for the year ended December 31, 2014 and certain unaudited +quarterly results related to the three months ended December 31, 2014, the three months ended +March 31, 2015, the six months ended June 30, 2015 and the nine months ended September 30, +2015. The restatement reduced previously-reported fiscal year 2014 revenue by approximately $58 +million, net income attributable to Valeant by approximately $33 million, and basic and diluted +earnings per share by $0.09, although a substantial part of the earnings impact of these +misstatements was reversed in Q1 2015. + +29. The 2015 Form 10-K also disclosed management’s determination that internal +control over financial reporting, as well as the company’s disclosure control and procedures, were +not effective due to the existence of material weaknesses. Separately, Valeant announced that the +ad hoc committee’s review was complete and had not identified any additional items that would +require restatements beyond those required by matters previously disclosed. + +30. Valeant cooperated in the staff’s investigation and undertook extensive remedial +efforts, including: (a) replacing its executive management team; (b) conducting a review of its +existing accounting policies, which resulted in substantial revisions to those policies; (c) revising +existing or implementing new controls; and (d) providing to employees accounting training +conducted by outside consultants. Valeant also voluntarily formed an ad hoc committee of its +board to review the relationship between Valeant and Philidor and reported to the staff on the +results of that review. In addition, Valeant conducted its own investigation, met with staff on +multiple occasions, and voluntarily provided information of interest to the staff. + +Offer and Sale of Securities + +31. Valeant offered and sold securities throughout the relevant time period. On +March 18, 2015, Valeant issued and sold 7.3 million shares of common stock pursuant to a +prospectus supplement to a Form S-3 registration statement filed on June 10, 2013. During Q1 +2015, Valeant also issued four senior notes with the total par value of $9.5 billion. From Q3 +2014 through Q4 2015, Valeant also offered and sold 59,075 shares of common stock to its +employees pursuant to the company’s employee stock purchase plan. + +Violations + +32. As a result of the conduct described above: + +a. Respondent 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 directly or +indirectly obtaining money or property by means of any untrue statement of +a material fact or any omission to state a material fact necessary in order to +make the statements made, in light of the circumstances under which they +were made, not misleading, or engaging in any transaction, practice, or +course of business which operates or would operate as a fraud or deceit +upon the purchaser. Claims under Sections 17(a)(2) and 17(a)(3) of the +Securities Act do not require a showing of scienter; instead, a showing of + +11 +negligence is sufficient. Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. +Hughes Capital Corp., 124 F.3d 449, 453-54 (3d Cir. 1997). + +b. Respondent violated Section 13(a) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11, and 13a-13 thereunder, which require issuers of securities +registered pursuant to Section 12 of the Exchange Act 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. + +c. Respondent 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. + +d. Respondent 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. + +e. Respondent violated Rule 100(b) of Regulation G, which prohibits a +registrant, or a person acting on its behalf, from making public a non-GAAP +financial measure that, taken together with the information accompanying +that measure and any other accompanying discussion of that measure, +contains an untrue statement of a material fact or omits to state a material +fact necessary in order to make the presentation of the non-GAAP financial +measure, in light of the circumstances under which it is presented, not +misleading. By its express terms, scienter is not required in order to violate +Regulation G. + +Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondent and cooperation afforded the Commission staff. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + +12 +A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 and +Rule 100(b) of Regulation G thereunder. + +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $45,000,000.00 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Bausch Health as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Alka Patel, Associate Regional +Director, Division of Enforcement, Securities and Exchange Commission, Los Angeles Regional +Office, 444 South Flower Street, Suite 900, Los Angeles, CA 90071. + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph IV.B above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. + +13 +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4154.txt b/raw/aaer/2020/AAER-4154.txt new file mode 100644 index 0000000000000000000000000000000000000000..54c28c8b95501c39276b14c7a7631bb9f55c7086 --- /dev/null +++ b/raw/aaer/2020/AAER-4154.txt @@ -0,0 +1,542 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10810 / July 31, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89443 / July 31, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4154 / July 31, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19900 + + +In the Matter of + +J. MICHAEL PEARSON, + +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 J. Michael Pearson (“Pearson” 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 + +2 +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the +Securities Act and Section 21C of the Exchange Act, Making Findings, and Imposing a Cease-and- +Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter involves material misstatements and omissions in quarterly earnings +presentations and calls and quarterly and annual filings for 2014 and 2015 that were made, +approved, and/or signed by J. Michael Pearson (“Pearson”) during his tenure as the chief +executive officer and chairman of the board of Valeant Pharmaceuticals International, Inc. +(“Valeant”), now known as Bausch Health Companies Inc. (“Bausch Health”). Bausch Health is +a publicly-traded global pharmaceutical and medical device company that develops, manufactures, +and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the- +counter products, and medical devices. During the relevant period, Bausch Health was known as +Valeant Pharmaceuticals International, Inc. Due to its growth-by-acquisition business strategy in +2014 and 2015, Valeant supplemented its disclosures pursuant to Generally Accepted Accounting +Principles (“GAAP”) with non-GAAP financial measures as “a meaningful, consistent comparison +of the company’s core operating results and trends.” During earnings call presentations, Valeant +management, including Pearson, presented on same store organic growth (“organic growth”), +which represented growth rates for businesses owned for one year or more, and “Cash EPS,” +which excluded costs associated with business development, among other things. When +discussing certain GAAP and non-GAAP financial measures, Valeant and Pearson failed to +disclose to investors certain material information about these measures. + +2. In 2013, Valeant helped establish a mail order pharmacy, Philidor Rx Services, +LLC and played a significant role in Philidor’s business. Valeant provided an advance of $2 +million and entered into agreements with Philidor to dispense Valeant’s products. From Q3 +2014 through Q3 2015, Valeant expanded its sales to Philidor. Philidor increasingly contributed to +Valeant’s U.S. organic growth in particular. By Q3 2015, Valeant announced double-digit growth +for the fifth consecutive quarter, with U.S. organic growth of 22%. Philidor sales had grown to +such an extent that it alone accounted for over 14% of U.S. organic growth. Excluding those +sales to Philidor, Valeant’s U.S. organic growth for the quarter was over 7%. Valeant disclosed +for the first time it had, since December 2014, an option to purchase Philidor in its Q3 2015 +earnings call. + +3. In Q2 2015, Valeant recorded revenue resulting from price appreciation credits +(“PACs”) it received pursuant to its Distribution Services Agreements (“DSAs”) with its major +wholesalers, which impacted certain reported GAAP and non-GAAP measures. A provision in 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 +DSAs provided for Valeant to offset distribution fees owed to wholesalers with credits for price +increases on Valeant products held in wholesalers’ inventory. Thus, price increases generated +additional net revenue to Valeant not just from prospective products sales at the incrementally +higher prices, but also from previously sold products still held by wholesalers. On June 18, 2015, +Valeant recorded approximately $110 million in net PAC revenue through a 500% price increase +on Glumetza, a drug acquired on April 1, 2015. Based on options presented by an internal +accountant as available alternatives, Valeant’s management, including Pearson, approved the +allocation of the $110 million Glumetza PAC as net revenue to products other than Glumetza. The +erroneous allocation of the Glumetza PAC resulted in misleading statements in Valeant’s Q2 +2015 earnings presentation and Commission periodic reports filed for Q2 and Q3 2015 and year +ended 2015. + +4. On October 26, 2015, in response to media and analyst attention over its +relationship with Philidor, Valeant gave an investor presentation concerning Philidor. On April +29, 2016, in its annual report for 2015 (“2015 Form 10-K”) as signed and certified by Pearson, +Valeant restated its financial statements for the year ended December 31, 2014 to reduce +previously reported fiscal year 2014 revenue from sales to Philidor by approximately $58 million. +Among other things, Valeant acknowledged the existence of material weaknesses in its internal +control over financial reporting. + +5. Based on the foregoing and the conduct described herein, Pearson violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act, Section 304(a) of the Sarbanes-Oxley Act, +and Rule 100(b) of Regulation G of the Exchange Act and caused Valeant’s violations of +Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a- +13 thereunder. + +Respondent + +6. J. Michael Pearson (“Pearson”), age 61, is a resident of Fort Lauderdale, Florida. +Pearson became Valeant’s CEO and chairman of the board of directors in 2008. Pearson +resigned from Valeant in May 2016. As CEO, Pearson approved, signed, and certified the filing +of Valeant’s quarterly and annual filings. He also reviewed and ultimately approved Valeant’s +earnings presentations and spoke during earnings calls. + +Relevant Entities + +7. Valeant Pharmaceuticals International, Inc., now known as Bausch Health +Companies Inc. (“Bausch Health”), is a British Columbia corporation headquartered in Laval, +Quebec with its principal administrative offices in Bridgewater, New Jersey. On July 13, 2018, +Valeant changed its name to Bausch Health. Bausch Health’s common stock is registered under +Section 12(b) of the Exchange Act and is dually listed on the New York and Toronto Stock +Exchanges. + +8. Philidor Rx Services LLC is a defunct Delaware limited liability company that +was formed in January 2013. Philidor was a licensed pharmacy based in Hatboro, Pennsylvania. +Approximately 95% of the product dispensed by Philidor and its affiliated pharmacies (collectively, + +4 +“Philidor”) consisted of Valeant branded drugs. Valeant acquired an option to purchase Philidor on +December 15, 2014, and terminated its relationship with Philidor on October 30, 2015. Valeant +fully paid for but never exercised its option to purchase Philidor. + +Facts + +Philidor + +9. Valeant management, including Pearson, identified Philidor as a “key strategy” to +turnaround the dermatology unit in 2014. Valeant’s agreements with Philidor included similar +terms as with any wholesaler, but there were several other important aspects to Valeant’s +relationship with Philidor. Valeant: 1) provided an advance of $2 million to Philidor; 2) was +involved in setting up its infrastructure and hiring of key employees; 3) maintained a sales force to +promote access to its products through Philidor to health care providers; and 4) advised and +assisted Philidor on its launch and expansion to other states. In addition, Valeant agreed to +reimburse Philidor for the cost of Valeant drugs that the third-party payors and insurance +companies did not cover and deducted this obligation from gross revenue. Valeant internally +recorded this obligation as the “alternative fulfilment subsidy” or “AF subsidy.” Valeant’s sales to +or through Philidor increased throughout 2014 and 2015 and Philidor sales became one of the +growth drivers for Valeant’s dermatology products. + +10. During the relevant period, Pearson received information on product sales as the +quarters progressed and participated in weekly calls in which Valeant’s business unit heads +discussed their latest revenue numbers and expected sales against targets, which Pearson +participated in setting. Pearson also received regular updates on product sales that indicated +increases in quarterly sales made to Philidor. + +11. Valeant evaluated its disclosure obligations in light of the option agreement. As +of December 1, 2014, Valeant’s disclosure thresholds required Valeant to disclose details about +transactions the size of the Philidor transaction, including mentioning the acquiree by name, in +its annual report on Form 10-K for 2014. On December 10, 2014, during a meeting Pearson +attended, Valeant increased its thresholds in an amount that exceeded the anticipated total option +purchase price for Philidor such that Valeant would no longer disclose transactions of the size of +the Philidor transaction by name in the 2014 Form 10-K. Management informed the Board’s +audit and risk committee about the increased disclosure threshold, including its impact on +disclosure of the Philidor option transaction. + +12. In early 2015, Valeant management, including Pearson, was informed that +Philidor was found to have violated certain terms of the pharmacy network agreements that +governed Philidor’s participation in three of the pharmacy networks for health plans or pharmacy +benefit managers. + +Valeant’s Disclosures Regarding Philidor + +13. Valeant reported its results for the quarters ended September 30, 2014 through +September 30, 2015 in earnings calls and presentations. Pearson approved the content of + +5 +Valeant’s earnings presentations and spoke during the earnings calls. From time to time, Valeant +and Pearson referred to an alternative fulfillment channel, but they did not disclose the material +impact of Philidor sales on certain of Valeant’s GAAP and non-GAAP financial measures. + +a. Same Store Organic Growth: Valeant announced U.S. organic growth in +the double digits for each quarter from Q3 2014 through Q3 2015. Philidor +represented an increasingly larger portion of Valeant’s U.S. organic growth, +ranging from 5% to over 14%. Valeant would have failed to achieve +double digit U.S. organic growth in Q3 2015 without Philidor. + +b. Cash EPS: Valeant exceeded its guidance and analyst consensus +estimates of $2.55 for Q4 2014 when it announced Cash EPS of $2.58 in +its earnings presentation. Valeant’s sales to Philidor contributed $0.12 to +Valeant’s Q4 2014 Cash EPS. + +c. Dermatology unit revenue: Valeant announced its dermatology unit’s +revenue of $273 million for Q3 2014 and $425 million for Q4 2014 in its +earnings calls. Valeant conveyed no information regarding the material +contribution of the sales made by Philidor, which represented over 13% of +the third quarter revenue or over 16% of the fourth quarter revenue. + +d. Dermatology unit’s performance: Valeant highlighted the performance of +the dermatology unit in its earnings calls, variously describing it as +experiencing a “turnaround” (Q3 2014), having “strong growth for +promoted brands” (Q4 2014), experiencing “positive organic growth” for all +promoted brands (Q1 2015), and “outperforming” (Q2 and Q3 2015). +Valeant and Pearson did not disclose that sales specifically to Philidor had +been a key strategy for dermatology, that Philidor was one of the growth +drivers for the unit, or that Valeant had increased sales to Philidor. + +14. During Valeant’s earnings calls, Pearson made the following statements which +omitted material information regarding the contributions from the sales made to Philidor: + +a. Q1 2015: “Dermatology revenue grew 38% year on year and script +growth grew 37% year on year.” + +b. 2Q 2015: “… our overall same-store total company organic growth was +19% for the quarter” and “we have now delivered four consecutive +quarters of more than 15% same-store organic growth.” + +15. Valeant failed to disclose requisite material information about Philidor in the +Management’s Discussion and Analysis of Financial Condition and Results of Operations +(“MD&A”) in its quarterly reports on Form 10-Q for Q3 2014, annual report on Form 10-K for +2014, and quarterly reports on Forms 10-Q for Q1, Q2, and Q3 2015. Item 303(b)(2) requires +issuers to disclose in quarterly reports “any material changes in the registrant’s results of operations +… with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal + +6 +year.” Item 303(b)(2) of Regulation S-K, 17 C.F.R. § 229.303(b)(2). Regulation S-K also requires +that the discussion of material changes in results of operations during the quarter “shall identify +any significant elements of the registrant’s income or loss from continuing operations which do not +arise from or are not necessarily representative of the registrant’s ongoing business.” 17 C.F.R. § +229.303(b), Instruction 4. Additionally, reporting companies must disclose in the MD&A section +of Form 10-K information “necessary to an understanding of [the company’s] financial condition, +changes in financial condition and results of operations” and “any known trends or uncertainties” +or “any unusual or infrequent events or transactions” that materially affected a company’s +operations. Item 303(a) of Regulation S-K, 17 C.F.R. § 229.303(a). Pearson knew or should have +known that Valeant did not specifically include disclosures about Philidor in its MD&A section +of Forms 10-K and 10-Q for these periods. + +a. Relationship with Philidor: Valeant made sales to Philidor of dermatology +drugs facing eroding market share or reimbursement blocks, or newly +launched products to boost prescription volume. Valeant’s MD&A made no +mention of its unique relationship with Philidor, even as Valeant’s sales to +Philidor increased each quarter. + +b. Risks related to Philidor: Valeant failed to disclose in its MD&A the risks +arising from its relationship with Philidor, particularly beginning in Q1 +2015, when management was informed that three pharmacy benefit +managers had notified Philidor that it was in violation of certain terms of its +pharmacy network agreements. + +16. Pearson signed and certified Valeant’s Forms 10-Q for Q3 2014 and Q1, Q2, and +Q3 2015, and Form 10-K for 2014. + +17. On October 26, 2015, Valeant gave an investor presentation concerning Philidor. In +this presentation, Valeant did not fully disclose its Philidor relationship or explain how Philidor +sales had impacted certain GAAP and non-GAAP measures Valeant presented in earlier quarters. +Valeant also failed to disclose that it had changed its internal disclosure threshold before +determining that no disclosures were required when it purchased the option to acquire Philidor. +Pearson participated in reviewing and approving the contents of the October 26, 2015 investor +presentation. + +Price Appreciation Credits + +18. Valeant’s largest customers are major U.S. drug wholesalers, who enter into +distribution service agreements (“DSAs”) that, among other things, set the fees Valeant pays +wholesalers for their distribution and inventory management services. Through at least 2015, these +DSAs contained price appreciation clauses whereby Valeant was entitled to credits from such +wholesalers for price increases on products currently held by the wholesalers. This PAC was +calculated based on the wholesaler’s inventory of the product subject to a price increase, multiplied +by the amount of the price increase. Pursuant to the terms of the DSAs, PACs offset the DSA fees + +7 +Valeant owed to wholesalers. Valeant recorded the net revenue impact of PACs at the time +customers were notified of the price increase. + +19. Valeant acquired a diabetes drug called Glumetza on April 1, 2015, through its +acquisition of Salix Pharmaceuticals, Ltd. Valeant initially planned to raise Glumetza’s price by +50% effective May 15, 2015. Throughout Q2 2015, Valeant forecasted the net revenue to be +generated by the corresponding Glumetza PAC, which was based on the projected amount of +Glumetza inventory held by wholesalers. + +20. On June 3, 2015, Valeant management approved a price increase for Glumetza of +500% and notified customers of the price increase approximately two weeks later. Valeant’s +accounting practice was to record PACs to the product whose price increase generated the PACs, +thereby offsetting DSA fees accrued on sales of that product and increasing net revenue +attributable to that product. In this instance, however, most of the Glumetza inventory had been +purchased from Salix, which had accrued no DSA fees to offset the Glumetza PAC. Rather than +recording any of the $110.4 million Glumetza PAC as revenue to Glumetza, Valeant allocated the +entire PAC generated by the Glumetza price increase as revenue to 106 other products. Pearson +knew or should have known that Valeant did not record the Glumetza PAC as revenue +attributable solely to Glumetza. + +21. Valeant management approved a second Glumetza price increase of 50%, effective +July 31, 2015, that generated $21.5 million in net PAC revenue. In October 2015, Valeant similarly +allocated $11.9 million of the net revenue arising from the Q3 2015 Glumetza PAC to other +products. This allocation was based on the amount of wholesaler’s Glumetza inventory that had +been purchased from Salix rather than Valeant. + +Valeant’s Disclosures Regarding the Glumetza PAC and Its Allocation + +22. Valeant reported its results for the quarter ended June 30, 2015 in an earnings call, +presentation, and Form 8-K on July 23, 2015 and filed its Form 10-Q on July 28, 2015. Pearson +spoke during the earnings call, approved the earnings presentation, and signed and certified the +Form 10-Q. Pearson knew or should have known that Valeant’s Q2 2015 disclosures did not +include the material impacts of the $110.4 million in net revenue from the Glumetza PAC and the +PAC’s allocation to other products to certain GAAP and non-GAAP financial measures. + +a. Cash EPS: Valeant’s earnings presentation and Form 8-K reported Cash +EPS of $2.56. Valeant’s guidance for the quarter was $2.40 – $2.50 and +analyst’s consensus estimate was $2.46. + +b. Same Store Organic Growth: Valeant’s earnings presentation and Form +8-K reported 19% same store organic growth for Q2 2015, but failed to +disclose that this calculation included approximately $85 million of the +Glumetza PAC net revenue. During the earnings call, Pearson stated that +“our overall same store total company organic growth was 19% for the +quarter” and “we have now delivered four consecutive quarters of more +than 15% same store organic growth.” + +8 + +c. Top 20 Brands: Valeant’s earnings presentation reported that Glumetza was +the company’s #18 product based on revenue of $26 million. Had +Glumetza’s PAC been recorded entirely as Glumetza’s revenue, Glumetza +would have been among Valeant’s Top 5 products. + +d. Revenues by Business Unit: Valeant’s Form 8-K did not disclose that the +Glumetza PAC allocation impacted reported business unit revenues, +resulting in greater revenue by Valeant’s neurology, dermatology, and +ophthalmology business units and lower gastrointestinal (Salix) revenue +because of the Glumetza PAC’s allocation to other products. + +e. Incremental Revenues and Profits from Acquisitions and Existing Business: +Valeant’s Form 10-Q did not disclose the impact of the Glumetza PAC +allocation on the reported incremental revenues and profits. The allocation +reduced the reported incremental revenue and profits from acquisitions by +$85 million, and increased the reported revenue and profits from existing +business by the same amount. + +f. MD&A: Valeant’s Q2 2015 Form 10-Q did not disclose that the Glumetza +PAC alone represented approximately one-third of Valeant’s operating +income that quarter. + +23. Valeant reported its results for the quarter ended September 30, 2015 in an earnings +call, presentation, and Form 8-K on October 19, 2015 and filed its Q3 2015 Form 10-Q on October +26, 2015. Pearson spoke during the earnings call, approved the earnings presentation, and signed +and certified the Form 10-Q. Similar to the prior quarter, Valeant’s Q3 2015 disclosures did not +include the material impacts of the Q2 Glumetza PAC and the Q2 and Q3 PAC allocations to +certain GAAP and non-GAAP financial measures for the nine months ended September 30, 2015. + +24. On April 29, 2016, Valeant filed its Form 10-K for the year ended December 31, +2015, following an internal investigation directed by a special committee of the company’s board +of directors and conducted by outside legal and accounting professionals. In this filing, signed +and certified by Pearson after the Company announced his replacement as CEO and based on the +results of the internal investigation as reported to Pearson by members of the company’s board, +Valeant disclosed the existence of PACs, which had a net revenue impact of $171 million in 2015. +The 2015 Form 10-K, however, did not disclose that two price increases on Glumetza accounted +for $132 million (or 77%) of total PACs or that $122 million from the two Glumetza PACs were +allocated to other products. The two Glumetza PAC allocations lowered by $96 million the +reported $130 million in PACs that came from pricing actions in existing business, lowered the +reported revenues and profits from existing business by $96 million, and increased the reported +incremental revenue and profits from acquisitions by the same amount. + +Offer and Sale of Securities + +25. Valeant offered and sold securities throughout the relevant time period. On + +9 +March 18, 2015, Valeant issued and sold 7.3 million shares of common stock pursuant to a +prospectus supplement to a Form S-3 registration statement filed on June 10, 2013. During Q1 +2015, Valeant also issued four senior notes with the total par value of $9.5 billion. From Q3 +2014 through Q4 2015, Valeant also offered and sold 59,075 shares of common stock to its +employees pursuant to the company’s employee stock purchase plan. + +Violations + +26. As a result of the conduct described above: + +a. Respondent Pearson 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 directly or indirectly obtaining money or property by means of any +untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading, or engaging in +any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser. Claims under Sections +17(a)(2) and 17(a)(3) of the Securities Act do not require a showing of +scienter; instead, a showing of negligence is sufficient. Aaron v. SEC, 446 +U.S. 680, 697 (1980); SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 +(3d Cir. 1997). + +b. Pearson caused Valeant’s violations of Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require +issuers of securities registered pursuant to Section 12 of the Exchange Act +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. + +c. Pearson caused Valeant’s violations of Section 13(b)(2)(A) of the +Exchange Act, which requires reporting companies to make and keep +books, records, and accounts which, in reasonable detail, accurately and +fairly reflect their transactions and dispositions of their assets. + +d. Pearson violated Rule 100(b) of Regulation G, which prohibits a registrant, +or a person acting on its behalf, from making public a non-GAAP financial +measure that, taken together with the information accompanying that +measure and any other accompanying discussion of that measure, contains +an untrue statement of a material fact or omits to state a material fact +necessary in order to make the presentation of the non-GAAP financial +measure, in light of the circumstances under which it is presented, not +misleading. By its express terms, scienter is not required in order to violate +Regulation G. + + +10 +e. 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 twelve-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 +the misconduct that resulted in the restatement to trigger the +reimbursement requirement, and the Commission does not allege that +Pearson participated in the internal accounting control violations that +resulted in the restatement. Pearson has not, to date, reimbursed Bausch +Health for any portion of his incentive-based compensation or stock sale +profits received during the 12-month periods following the filing of +inaccurate financial statements described above and, therefore, Pearson +violated Sarbanes-Oxley Section 304. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + A. Respondent Pearson 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, and 13a-13 and Rule 100(b) of +Regulation G thereunder, and Section 304(a) of the Sarbanes-Oxley Act. + + B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $250,000.00 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +11 + +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 +Pearson as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Alka Patel, Associate Regional Director, +Division of Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 +South Flower Street, Suite 900, Los Angeles, CA 90071. + + C. Respondent shall, within 14 days of the entry of this Order, reimburse Bausch +Health for a total of $450,000.00 representing incentive-based compensation pursuant to Section +304(a) of the Sarbanes-Oxley Act. Pearson shall simultaneously deliver proof of satisfying this +reimbursement obligation to Alka Patel, Associate Regional Director, Division of Enforcement, +Securities and Exchange Commission, Los Angeles Regional Office, 444 South Flower Street, +Suite 900, Los Angeles, CA 90071. If timely payment is not made, additional interest shall +accrue pursuant to 31 U.S.C. § 3717. + +D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph IV.B above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, he shall not argue that he 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 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 + + +12 +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4155.txt b/raw/aaer/2020/AAER-4155.txt new file mode 100644 index 0000000000000000000000000000000000000000..5fc6fcd6d9fc6e9f8e13547ec1ccfa6b1b5535d9 --- /dev/null +++ b/raw/aaer/2020/AAER-4155.txt @@ -0,0 +1,705 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10812 / July 31, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89445 / July 31, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4155 / July 31, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19902 + + +In the Matter of + +TANYA R. CARRO, 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”) and 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 against Tanya R. Carro, CPA (“Carro” 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 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 Section 8A of the Securities Act, Sections 4C and 21C of the Exchange Act, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter involves material misstatements and omissions in quarterly earnings +presentations and calls and periodic filings of Valeant Pharmaceuticals International, Inc. +(“Valeant”), now known as Bausch Health Companies Inc. (“Bausch Health”), in fiscal years +2014 and 2015. As Valeant’s corporate controller and senior vice president during the relevant +time period, Tanya R. Carro, CPA (“Carro”) helped prepare the company’s earnings +presentations and call scripts and periodic filings. Bausch Health is a publicly-traded global +pharmaceutical and medical device company that develops, manufactures, and markets a broad +range of branded, generic and branded generic pharmaceuticals, over-the-counter products, and +medical devices. During the relevant period, Bausch Health was known as Valeant +Pharmaceuticals International, Inc. Due to its growth-by-acquisition business strategy in 2014 +and 2015, Valeant supplemented its disclosures pursuant to Generally Accepted Accounting +Principles (“GAAP”) with non-GAAP financial measures as “a meaningful, consistent comparison +of the company’s core operating results and trends.” Among those non-GAAP financial measures +were same store organic growth (“organic growth”), which represented growth rates for +businesses owned for one year or more, and “Cash EPS,” which excluded costs associated with +business development, among other things. When announcing certain GAAP and non-GAAP + +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 +financial measures, Valeant failed to disclose to investors certain material information about these +measures. + +2. Valeant helped establish a mail order pharmacy, Philidor Rx Services, LLC, in +2013 and played a significant role in Philidor’s business. In 2013, Valeant provided an advance +of $2 million and entered into agreements with Philidor to dispense Valeant’s products. From +Q3 2014 through Q3 2015, Carro tracked Valeant’s expanding sales to Philidor. Philidor +increasingly contributed to Valeant’s U.S. organic growth in particular. By Q3 2015, Valeant +announced double-digit growth for the fifth consecutive quarter, with U.S. organic growth of 22%. +By this time, sales to Philidor had grown to such an extent that it alone accounted for over 14% of +U.S. organic growth. Excluding those sales to Philidor, Valeant’s U.S. organic growth for the +quarter was over 7%. Valeant disclosed for the first time it had, since December 2014, an option +to purchase Philidor in its Q3 2015 earnings call. + +3. In Q2 2015, Valeant recorded revenue resulting from price appreciation credits +(“PACs”) it received pursuant to its Distribution Services Agreements (“DSAs”) with its major +wholesalers, which impacted certain reported GAAP and non-GAAP measures. A provision in the +DSAs provided for Valeant to offset distribution fees owed to wholesalers with price increases on +Valeant products held in wholesalers’ inventory. Thus, price increases generated additional net +revenue to Valeant not just from prospective products sales at the incrementally higher prices, but +also from previously sold products still held by wholesalers. On June 18, 2015, Valeant recorded +approximately $110 million in net PAC revenue through a 500% price increase on Glumetza, a +drug acquired on April 1, 2015. Rather than reflecting any of the PAC generated by the +Glumetza price increase as revenue attributable to Glumetza in its records, Carro implemented +management’s decision to erroneously allocate the entire $110 million Glumetza PAC as net +revenue to over 100 other products. The allocation of the Glumetza PAC resulted in misleading +statements in Valeant’s Q2 2015 earnings presentation and Commission periodic reports filed for +Q2 and Q3 2015 and year ended 2015. + +4. On October 26, 2015, in response to media and analyst attention over its +relationship with Philidor, Valeant gave an investor presentation concerning Philidor. On April +29, 2016, after Carro was placed on administrative leave, Valeant filed its annual report for the +year ended December 31, 2015 (“2015 Form 10-K”). Valeant restated its financial statements for +the year ended December 31, 2014 to reduce previously reported fiscal year 2014 revenue from +sales to Philidor by approximately $58 million due to such revenue being recognized prematurely. +Among other things, Valeant acknowledged the existence of material weaknesses in its internal +control over financial reporting, including “tone at the top of the organization, with its +performance-based environment, in which challenging targets were set and achieving those +targets was a key performance expectation.” Valeant also disclosed the existence of PACs for +the first time but failed to disclose the impact PACs earned in 2015 had on certain GAAP and +non-GAAP measures. + + + +4 +5. Based on the foregoing and the conduct described herein, Carro willfully4 violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Rule 13b2-1 and Rule 100(b) of +Regulation G of the Exchange Act and caused Valeant’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. + +Respondent + +6. Tanya R. Carro, CPA (“Carro”), age 51, is a resident of Branchburg, New +Jersey and holds an inactive CPA license from New Jersey. Carro was Valeant’s corporate +controller and senior vice president of finance from 2011 to February 2016, when she was placed +on administrative leave. Carro left Valeant in October 2016. As corporate controller, Carro +helped prepare Valeant’s quarterly, annual, and current reports and earnings presentations and +call scripts. + +Relevant Entities + +7. Valeant Pharmaceuticals International, Inc., now known as Bausch Health +Companies Inc. (“Bausch Health”), is a British Columbia corporation headquartered in Laval, +Quebec with its principal administrative offices in Bridgewater, New Jersey. On July 13, 2018, +Valeant changed its name to Bausch Health. Bausch Health’s common stock is registered under +Section 12(b) of the Exchange Act and is dually listed on the New York and Toronto Stock +Exchanges. + +8. Philidor Rx Services LLC is a defunct Delaware limited liability company that +was formed in January 2013. Philidor was a licensed pharmacy based in Hatboro, Pennsylvania. +Approximately 95% of the product dispensed by Philidor and its affiliated pharmacies (collectively, +“Philidor”) consisted of Valeant branded drugs. Valeant acquired an option to purchase Philidor on +December 15, 2014, and terminated its relationship with Philidor on October 30, 2015. Valeant +fully paid for but never exercised its option to purchase Philidor. + +Facts + +Philidor + +9. Valeant management identified Philidor as a “key strategy” to turnaround the +dermatology unit in 2014. Valeant’s agreements with Philidor included similar terms as with any +wholesaler, but there were several other important aspects to Valeant’s relationship with Philidor. + +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)). “There is no requirement that the actor also be aware that he is +violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965) (citing Gilligan, Will & Co. +v. SEC, 267 F.2d 461, 468 (2d Cir.), cert. denied, 361 U.S. 896 (1959). The decision in The Robare Group, +Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory +provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing +required to establish that a person has “willfully omit[ted]” material information from a required disclosure +in violation of Section 207 of the Advisers Act). + + +5 +Valeant: 1) provided an advance of $2 million to Philidor; 2) was involved in setting up its +infrastructure and hiring of key employees; 3) maintained a sales force to promote access to its +products through Philidor to health care providers; and 4) advised and assisted Philidor on its +launch and expansion to other states. In addition, Valeant agreed to reimburse Philidor for the +cost of Valeant drugs that the third-party payors and insurance companies did not cover and +deducted this obligation from gross revenue. Valeant internally recorded this obligation as the +“alternative fulfilment subsidy” or “AF subsidy.” Valeant’s sales to Philidor increased throughout +2014 and 2015 and Philidor sales became one of the growth drivers for Valeant’s dermatology +products. + +10. During the relevant period, Carro tracked product sales as the quarters progressed +and prepared for and participated in weekly calls in which business unit heads discussed their +latest revenue numbers and expected sales against targets. Philidor sales were included and +tracked as part the dermatology unit’s performance. + +11. Toward the end of Q3 2014, Valeant received a $75 million order from Philidor, +which was put on hold because it exceeded Philidor’s credit limit. Carro and others approved a +$70 million credit increase to process this order without proper justification and documentation as +required by Valeant’s Standard Operating Procedure (“SOP”) for credit limits. At the time of the +credit increase Philidor’s accounts receivable balance was $32 million, with $8.5 million of the +balance over 61 days past due. + +12. In Q4 2014, Valeant received a $130 million order from Philidor in early +December. Once more Carro and others approved Philidor’s credit increase, and also granted +extended payment terms. Philidor’s accounts receivable balance was approximately $78.3 million, +of which approximately $41 million was past due. + +13. The $130 million order included one-time special pricing implemented for Philidor +orders placed between November 24 and December 5, 2014, in which Philidor paid 4% over the +wholesale cost. Carro approved the one-time pricing and knew or should have known that others +overrode the prices in the system to process these orders. + +14. The timing and amount of the $130 million order, with its one-time pricing, +occurred less than two weeks before the December 15, 2014 date when Valeant acquired the +option to purchase Philidor for $100 million cash and began consolidating Philidor in its +financial statements. Carro knew that upon the closing of the option agreement, Valeant would +consolidate Philidor in its financial statements and would have to wait to recognize the Philidor +revenue until Philidor sold the product through to patients. Valeant’s actions through +management, including Carro, with respect to the $130 million order enabled it to conclude at +the time that it could recognize revenue when the products were delivered to Philidor. Valeant +later restated the net revenue from this order. + +15. Valeant management, including Carro, evaluated Valeant’s disclosure obligations +in light of the option agreement. Valeant maintained internal disclosure thresholds concerning +whether and how to disclose acquisitions. As of December 1, 2014, Valeant’s disclosure +thresholds called for Valeant to disclose details about transactions of the size of the Philidor + + +6 +transaction, including mentioning the acquiree by name, in its annual report on Form 10-K for +2014. On December 10, 2014, Valeant management increased the thresholds to amounts that +exceeded the anticipated total option purchase price for Philidor. Under the increased thresholds, +Valeant would no longer disclose transactions of the size of the Philidor transaction by name in +the 2014 Form 10-K. Management informed the Board’s audit and risk committee about the +increased disclosure threshold, including its impact on disclosure of the Philidor option +transaction. + +16. In August 2015, Valeant management, including Carro, received an economic +analysis of products it sold to Philidor, and was told that the product sales growth through +Philidor had been mostly “subsidized (free) through Philidor.” + +Valeant’s Disclosures Regarding Philidor + +17. Valeant reported its results for the quarters ended September 30, 2014 through +September 30, 2015 in earnings calls and presentations and in periodic reports filed with the SEC. +Carro participated in drafting Valeant’s presentations and knew or should have known that +Valeant’s disclosures did not reveal the material impact of the Philidor sales on certain of +Valeant’s GAAP and non-GAAP financial measures. + +a. Same Store Organic Growth: Valeant announced U.S. organic growth in +the double digits for each quarter from Q3 2014 through Q3 2015. Philidor +represented an increasingly larger portion of Valeant’s U.S. organic growth +and Valeant would have failed to achieve it without Philidor. + +b. Cash EPS: Valeant exceeded its guidance and analyst consensus +estimates of $2.55 for Q4 2014 when it announced Cash EPS of $2.58 in +its earnings presentation. Valeant’s sales to Philidor contributed $0.12 to +Valeant’s Q4 2014 Cash EPS. + +c. Dermatology unit revenue: Valeant announced its dermatology unit’s +revenue of $273 million for Q3 2014 and $425 million for Q4 2014 in its +earnings calls. Valeant conveyed no information regarding the material +contribution of the sales made by Philidor, which represented over 13% of +the third quarter dermatology revenue or over 16% of the fourth quarter +dermatology revenue. + +d. Dermatology unit’s performance: Valeant highlighted the performance of +the dermatology unit in its earnings calls, variously describing it as +experiencing a “turnaround” (Q3 2014), having “strong growth for +promoted brands” (Q4 2014), experiencing “positive organic growth” for all +promoted brands (Q1 2015), and “outperforming” (Q2 and Q3 2015). From +time to time, Valeant referred to an alternative fulfillment channel, but it did +not provide details about its relationship with Philidor or explain how sales +to Philidor contributed to dermatology performance. + + + +7 +18. Valeant failed to disclose requisite material information about Philidor in +Management’s Discussion and Analysis of Financial Condition and Results of Operations +(“MD&A”) in its quarterly reports on Form 10-Q for Q3 2014, annual report on Form 10-K for +2014, and quarterly reports on Forms 10-Q for Q1, Q2, and Q3 2015. Carro helped draft and +reviewed Valeant’s MD&A disclosure. Item 303(b)(2) requires issuers to disclose in quarterly +reports “any material changes in the registrant’s results of operations … with respect to that fiscal +quarter and the corresponding fiscal quarter in the preceding fiscal year.” Item 303(b)(2) of +Regulation S-K, 17 C.F.R. § 229.303(b)(2). Regulation S-K also requires that the discussion of +material changes in results of operations during the quarter “shall identify any significant elements +of the registrant’s income or loss from continuing operations which do not arise from or are not +necessarily representative of the registrant’s ongoing business.” 17 C.F.R. § 229.303(b), +Instruction 4. Additionally, reporting companies must disclose in the MD&A section of Form 10- +K information “necessary to an understanding of [the company’s] financial condition, changes in +financial condition and results of operations” and “any known trends or uncertainties” or “any +unusual or infrequent events or transactions” that materially affected a company’s operations. Item +303(a) of Regulation S-K, 17 C.F.R. § 229.303(a). + +a. Relationship with Philidor: Carro knew or should have known that Valeant +sold to Philidor dermatology drugs facing eroding market share or +reimbursement blocks, or newly launched products to boost prescription +volume. Valeant’s MD&A made no mention of its unique relationship with +Philidor, even as Valeant’s sales to Philidor increased each quarter. + +b. Risks related to Philidor: Carro knew or should have known that Valeant’s +MD&A contained no discussion of the risks arising from its unique +relationship with Philidor. + +19. Valeant improperly recognized net revenue and net income relating to sales to +Philidor for the second half of 2014 by $58 million and $33 million, respectively. Rule 4.01 of +Regulation S-X states that financial statements filed with the Commission that are not prepared in +accordance with GAAP are presumed to be misleading or inaccurate. Accounting Standards +Codification (ASC) 605, “Revenue Recognition,” states that revenue should not be recognized +until it is realized or realizable and earned. One criterion generally necessary for revenue to be +realized is for collectability to be reasonably assured. During Q3 and Q4 2014, Carro and others +approved increases to Philidor’s credit limit to process the orders. These approvals did not +comport with Valeant’s SOPs for credit limit increases and Valeant did not reasonably assure +collectability. + +20. On October 26, 2015, Valeant gave an investor presentation concerning Philidor, +and Carro was one of the speakers. In this presentation, Valeant did not fully disclose its Philidor +relationship or explain how sales to Philidor had impacted certain GAAP and non-GAAP +measures Valeant presented in earlier quarters. Carro presented a slide that claimed Valeant was +not required to disclose the Philidor purchase option under its pre-established internal disclosure +threshold. Carro knew or should have known this was not accurate. Valeant increased its +disclosure threshold on an ad hoc basis as the company grew, and it did so in early December +2014, shortly before the purchase option closed. + + +8 + +21. From Q3 2014 through Q3 2015, Carro helped prepare and reviewed Valeant’s +earnings presentations and Forms 10-Q for Q3 2014 and Q1, Q2 and Q3 2015, and Form 10-K +for 2014. + +Price Appreciation Credits + +22. Valeant’s largest customers are major U.S. drug wholesalers, who enter into +distribution service agreements (“DSAs”) that, among other things, set the fees Valeant pays +wholesalers for their distribution and inventory management services. Through at least 2015, these +DSAs contained price appreciation clauses whereby Valeant was entitled to credits from such +wholesalers for price increases on products currently held by the wholesalers. This PAC was +calculated based on wholesalers’ inventory of the product subject to a price increase, multiplied by +the amount of the price increase. Pursuant to the terms of the DSAs, PACs offset the DSA fees +Valeant owed to wholesalers. Valeant recorded the net revenue impact of PACs at the time +customers were notified of the price increase. + +23. Valeant acquired a diabetes drug called Glumetza on April 1, 2015, through its +acquisition of Salix Pharmaceuticals, Ltd. Carro knew that Valeant initially planned to raise +Glumetza’s price by 50% effective May 15, 2015. Throughout Q2 2015, Carro and her +subordinates created forecasts of the net revenue to be generated by the corresponding Glumetza +PAC, which was based on the projected amount of Glumetza inventory held by wholesalers. + +24. On June 3, 2015, Valeant management approved a price increase for Glumetza of +500% and notified customers of the price increase approximately two weeks later. Valeant’s +accounting practice was to record PACs to the product whose price increase generated the PACs, +thereby offsetting DSA fees accrued on sales of that product and increasing net revenue +attributable to that product. In this instance, however, most of the Glumetza inventory had been +purchased from Salix, which had accrued no DSA fees to offset the Glumetza PAC. Carro +therefore implemented management’s decision to allocate the Glumetza PAC as revenue to other +products. Carro knew or should have known that Valeant recorded none of the Glumetza PAC as +revenue attributable to Glumetza, even though Valeant had sold at least $26 million of Glumetza +to wholesalers and accrued corresponding DSA fees in Q2 2015. + +25. On July 31, 2015, Valeant raised Glumetza’s price again by 50%, which generated +$21.5 million in net PAC revenue. In October 2015, Carro implemented management’s decision +to allocate $11.9 million of the Q3 2015 Glumetza PAC to other products. This allocation was +based on the amount of wholesalers’ Glumetza inventory that had been purchased from Salix rather +than Valeant. Carro knew or should have known that the two Glumetza PAC allocations in Q2 +2015 and Q3 2015 were the only instances in which Valeant allocated PACs as revenue to products +other than the one that generated the PAC. + +Valeant’s Disclosures Regarding the Glumetza PAC and Its Allocation + +26. Valeant reported its results for the quarter ended June 30, 2015 in an earnings call, +presentation, and Form 8-K on July 23, 2015 and filed its Form 10-Q on July 28, 2015. Carro + + +9 +helped prepare and reviewed the earnings presentation and periodic filings. Carro knew or +should have known that Valeant’s Q2 2015 disclosures did not reveal the details of PACs or the +material impacts of the $110.4 million in net revenue from the Glumetza PAC and that PAC’s +allocation to 106 other products to several GAAP and non-GAAP financial measures: + +a. Cash EPS: Valeant’s earnings presentation and Form 8-K reported Cash +EPS of $2.56. Absent the Glumetza PAC, Cash EPS for the quarter would +have been $2.34, falling short of Valeant’s guidance for the quarter ($2.40 +– $2.50) and analyst’s consensus estimate ($2.46). + +b. Same Store Organic Growth: Valeant’s earnings presentation and Form 8- +K reported 19% same store organic growth for Q2 2015, but failed to +disclose that this calculation included $85 million of the Glumetza PAC +allocated from a recent acquisition (Salix) to businesses owned for one year +or more. Without the Glumetza PAC allocation, same store organic growth +for the quarter would have been 14%. + +c. Top 20 Brands: Valeant’s earnings presentation reported Glumetza as the +company’s #18 product based on revenue of $26 million. Had Glumetza’s +PAC been recorded entirely as Glumetza’s revenue, as was Valeant’s +accounting practice, Glumetza would have been Valeant’s #2 product based +on revenue of $136 million. + +d. Revenues by Business Unit: Valeant’s Form 8-K did not disclose that the +Glumetza PAC allocation impacted reported business unit revenues, +resulting in greater revenue by Valeant’s neurology ($62.2 million), +dermatology ($32.6 million), and ophthalmology ($15.1 million) business +units and lower gastrointestinal (Salix) revenue ($110.4 million) because +of the Glumetza PAC’s allocation to other products. + +e. Incremental Revenues and Profits from Acquisitions and Existing Business: +Valeant’s Form 10-Q did not disclose the impact of the Glumetza PAC +allocation on reported incremental revenues and profits. The allocation +reduced the reported incremental revenue and profit from acquisitions by +$85 million, and increased the reported revenue and profits from existing +business by the same amount. + +f. MD&A: Valeant’s Q2 2015 Form 10-Q did not disclose the existence of +PACs generally or the material impact of the $110.4 million in net revenue +recorded from the Glumetza PAC to Q2 2015 results. In Q2 2015, the +Glumetza PAC alone represented 32% of Valeant’s operating income that +quarter. + +27. Valeant reported its results for the quarter ended September 30, 2015 in an earnings +call, presentation, and Form 8-K on October 19, 2015 and filed its Q3 2015 Form 10-Q on October +26, 2015. Carro helped prepare and reviewed the earnings presentation and filings. Similar to + + +10 +the prior quarter, Valeant’s Q3 2015 disclosures did not reveal the material impacts of the Q2 +Glumetza PAC and the Q2 and Q3 PAC allocations to certain GAAP and non-GAAP financial +measures for the nine months ended September 30, 2015. + +28. On April 29, 2016, after Carro was placed on administrative leave, Valeant filed +its Form 10-K for the year ended December 31, 2015. In this filing, Valeant disclosed the +existence of PACs, which had a net revenue impact of $171 million in 2015. + +Valeant’s Internal Accounting Control Failures + +29. Valeant did not design and maintain sufficient internal accounting controls. As +Valeant’s corporate controller during the relevant time period, Carro was responsible for the +implementation and execution of internal accounting controls and procedures for, among other +things, revenue recognition and credit limits. Valeant failed to implement sufficient accounting +controls with respect to the Philidor sales transactions and PACs, such that there were no +reasonable assurances that transactions are recorded as necessary to, among other things, permit +the preparation of financial statements in conformity with GAAP and to maintain the +accountability of assets. Valeant did not have sufficient controls relating to non-standard journal +entries and price changes above wholesale cost. Valeant’s existing controls also were not +sufficient to address how exceptions to policies and procedures should be documented and +approved, which made it possible for management to override internal accounting controls when +Carro and others approved the Philidor credit limit increases to facilitate sales to Philidor during +Q3 and Q4 of 2014. + +Offer and Sale of Securities + +30. Valeant offered and sold securities throughout the relevant time period. On +March 18, 2015, Valeant issued and sold 7.3 million shares of common stock pursuant to a +prospectus supplement to a Form S-3 registration statement filed on June 10, 2013. During Q1 +2015, Valeant also issued four senior notes with the total par value of $9.5 billion. From Q3 +2014 through Q4 2015, Valeant also offered and sold 59,075 shares of common stock to its +employees pursuant to the company’s employee stock purchase plan. + +Violations + +31. As a result of the conduct described above: + +a. Respondent Carro willfully 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 directly or indirectly obtaining money or property by means of any +untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading, or engaging in +any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser. Claims under Sections +17(a)(2) and 17(a)(3) of the Securities Act do not require a showing of + + +11 +scienter; instead, a showing of negligence is sufficient. Aaron v. SEC, 446 +U.S. 680, 697 (1980); SEC v. Hughes Capital Corp., 124 F.3d 449, 453-54 +(3d Cir. 1997). + +b. Carro caused Valeant’s violations of Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require +issuers of securities registered pursuant to Section 12 of the Exchange Act +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. + +c. Carro caused Valeant’s violations of Section 13(b)(2)(A) of the Exchange +Act, which requires reporting companies to make and keep books, records, +and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +d. Carro caused Valeant’s violations of 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. + +e. Carro willfully violated Rule 13b2-1, which prohibits any person from +directly or indirectly falsifying any book, record, or account required to be +kept by a reporting company under Section 13(b)(2)(A) of the Exchange +Act. + +f. Carro willfully violated Rule 100(b) of Regulation G, which prohibits a +registrant, or a person acting on its behalf, from making public a non-GAAP +financial measure that, taken together with the information accompanying +that measure and any other accompanying discussion of that measure, +contains an untrue statement of a material fact or omits to state a material +fact necessary in order to make the presentation of the non-GAAP financial +measure, in light of the circumstances under which it is presented, not +misleading. By its express terms, scienter is not required in order to violate +Regulation G. + +g. Carro 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. + +Findings + +32. Based on the foregoing, the Commission finds that Carro willfully violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act and Rule 13b2-1 and Rule 100(b) of + + +12 +Regulation G of the Exchange Act and caused Valeant’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. + +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) of the Commission’s Rules of Practice, it is hereby ORDERED +that: + +A. Respondent Carro cease and desist from committing or causing any violations and +any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and +13b2-1 and Rule 100(b) of Regulation G thereunder. + +B. Respondent is denied the privilege of appearing or practicing before the Commission +as an accountant. + +C. After one (1) year from the date of this order, Respondent Carro may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Respondent Carro’s work in +her practice before the Commission as an accountant will be reviewed either +by the independent audit committee of the public company for which she +works or in some other acceptable manner, as long as she practices before +the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +3. an independent accountant. + + + +13 + Such an application must satisfy the Commission that: + +a) Respondent Carro, 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 Carro, 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 Respondent Carro will not receive appropriate supervision; + +(c) Respondent Carro 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 Carro 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. + +D. The Commission will consider an application by Respondent Carro 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 Carro’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be considered +on a facts and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +E. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $75,000.00 to the Securities and Exchange Commission. 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: + + + +14 + +(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 +Carro as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Alka Patel, Associate Regional Director, +Division of Enforcement, Securities and Exchange Commission, Los Angeles Regional Office, 444 +South Flower Street, Suite 900, Los Angeles, CA 90071. + +F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalties referenced in paragraph IV.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, she shall not argue that she 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 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 + + +15 +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4156.txt b/raw/aaer/2020/AAER-4156.txt new file mode 100644 index 0000000000000000000000000000000000000000..07ada8bb25b5d2a079e79ada5be40032c67aac51 --- /dev/null +++ b/raw/aaer/2020/AAER-4156.txt @@ -0,0 +1,115 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89475 / August 4, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4156 / August 4, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-18292 + +In the Matter of +Tommy Shek, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION OTHER +THAN AS A MEMBER OF AN AUDIT COMMITTEE + +On July 12, 2018, Tommy Shek, CPA (“Shek”) 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 him pursuant to Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.1 This order is issued in response to Shek’s application for +reinstatement to appear and practice before the Commission as an accountant responsible for the +preparation or review of financial statements required to be filed with the Commission other than +as a member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities +and Exchange Act of 1934. +The Commission found that Shek, an audit manager at Anton & Chia LLP, engaged in +improper professional conduct with respect to his work on the interim reviews of the financial +statements of CannaVEST Corp. (“CannaVEST”) for the first through third quarters of 2013. In +performing the interim reviews of CannaVEST’s financial statements, Shek engaged in improper +professional conduct by failing to adhere to standards of the Public Company Accounting +Oversight Board and ignoring a number of red flags that indicated that CannaVEST’s financial +information contained material misstatements. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, other than +as a member of the audit committee, Shek attests that he will undertake to have his work + +1 See Accounting and Auditing Enforcement Release No. 3951 dated July 12, 2018. Shek was permitted, pursuant +to the order, to apply for reinstatement after one year upon making certain showings. + + 2 +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. Shek is not, at this time, seeking to appear or practice before the Commission as an +independent accountant or as a preparer or reviewer, or a person responsible for the preparation +or review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee. If he should wish to resume appearing and practicing before the +Commission as an independent accountant or as a preparer or reviewer, or a person responsible +for the preparation or review, of any public company’s financial statements that are filed with the +Commission as a member of an audit committee 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. Therefore, Shek’s suspension from practice before the Commission as an +independent accountant and as a preparer or reviewer, or a person responsible for the preparation +or review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee continues in effect until the Commission determines that +sufficient showings have been made in accordance with the terms of the original suspension +order. + +Shek is currently subject to probation under the California State Board of Accountancy. +Failure to abide by the terms of his probation could result in the suspension of Shek’s CPA +license. Shek has attested that he will notify the Commission if he is found to have violated the +terms of the probation. He also has attested that he understands that the suspension of his CPA +license could result in the revocation of the reinstatement of his privilege to appear or practice +before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Shek, it appears that he has complied with the terms of the July 12, 2018 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 Shek, 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 +Tommy Shek, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission, other than as a member of an audit committee as that term is defined in +Section 3(a)(58) of the Securities and Exchange Act of 1934. + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4157.txt b/raw/aaer/2020/AAER-4157.txt new file mode 100644 index 0000000000000000000000000000000000000000..d578ea5611dca7716f7915a176452c1f36a33d09 --- /dev/null +++ b/raw/aaer/2020/AAER-4157.txt @@ -0,0 +1,273 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10816 / August 5, 2020 +SECURITIES EXCHANGE ACT OF 1934 +Re\ease No. 89488 / August 5, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4157 / August 5, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-17546 + +In the Matter of + +SCOTT M. DITTMAN, CPA, + +Respondent. + + + + +ORDER IMPOSING +ADDITIONAL SANCTIONS + + + + +I. + +In connection with these proceedings, Respondent Scott M. Dittman (“Respondent” or +“Dittman”) has submitted an Offer of Settlement (the “Offer”) which the Securities and Exchange +Commission (“Commission”) has determined to accept. Solely for the 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 has admited the Commission’s jurisdiction over him and the +subject matter of these proceedings, and consents to the entry of this Order Imposing Additional +Sanctions (“Order”), as set forth below. +II. + +On the basis of this Order and Respondent’s Offer, the Commission finds 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, + 2 +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 +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, is currently incarcerated at Schuylkill Federal Correctional +Institution in Minersville, PA. 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 Markets Group Inc.’s 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, is currently incarcerated at Florence Federal Correctional +Institution at Florence, CO. 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” + 3 +of Meadpoint. Dittman was a shareholder and Internal Revenue Service Form 1099 employee of +Meadpoint. +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. +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 + 4 +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 $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. + 5 +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. +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 + 6 +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). +Criminal Prosecution +23. Respondent 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]. +24. On February 10, 2020, Judgment in a Criminal Case was entered against +Respondent. Respondent was sentenced to sixty months of imprisonment, ordered to forfeit +$921.094.29 to the United States, and ordered to pay a money judgment in the amount of +$1,160,160.81. +This Proceeding +25. On September 16, 2016, the Commission issued the 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 (“OIP”) in this matter. +26. In the OIP, consistent with an offer of settlement from Respondent, 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 the Commission 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. + 7 +27. The OIP further noted that Respondent agreed 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. +III. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the additional sanctions agreed to in Respondent Dittman’s Offer. Accordingly: + +A. Respondent is ordered to pay disgorgement pursuant to Section 8A(e) of the +Securities Act and Section 21C(e) of the Exchange Act in the amount of $1,393,255. Payment of +such disgorgement is deemed satisfied by the order of forfeiture and money judgment against +Respondent in United States v. William Sears and Scott Matthew Dittman, 16-CR-301-WJM (D. +Colo.) +B. Civil penalties pursuant to Section 8A(g) of the Securities Act and Section 21B(a) +of the Exchange Act are appropriate and in the public interest. Based on Respondent’s +imprisonment, however, the Commission is not imposing a civil penalty. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4158.txt b/raw/aaer/2020/AAER-4158.txt new file mode 100644 index 0000000000000000000000000000000000000000..80a6e932b144c9721809d1468cd8d42fbc6a59a0 --- /dev/null +++ b/raw/aaer/2020/AAER-4158.txt @@ -0,0 +1,325 @@ + + 1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89489 / August 6, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4158 / August 6, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19905 + + +In the Matter of + +World Acceptance +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 World Acceptance Corporation (“WAC” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns violations of the anti-bribery, books and records, and internal +accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by World +Acceptance Corporation, a consumer loan company headquartered in Greenville, South Carolina. +The bribery scheme took place at WAC’s former wholly-owned subsidiary in Mexico, WAC de +Mexico, S.A. de C.V. (“WAC Mexico”), which paid approximately $4.1 million USD in bribes, +directly or through intermediaries, to Mexican government officials and union officials, from at +least December 2010 through June 2017 to obtain and retain business. + +2. WAC failed to make and keep accurate books and records and failed to devise and +maintain a sufficient system of internal accounting controls necessary to detect and prevent these +bribe payments. The bribe payments were inaccurately recorded as legitimate “commission” +expenses in WAC’s books and records. WAC failed to implement sufficient internal accounting +controls over vendor management and accounts payable at WAC Mexico, failed to provide +reasonable assurances that WAC Mexico had implemented an FCPA policy and was adhering to it, +failed to provide FCPA training at WAC and WAC Mexico, and lacked sufficient entity level +controls over WAC Mexico. In addition, WAC management lacked the appropriate tone at the top +regarding internal audit and compliance, thereby undermining the effectiveness of those functions. + +3. As a result of the bribery scheme, WAC was unjustly enriched by approximately +$18 million. + +Respondent + +4. World Acceptance Corporation is a consumer loan company, headquartered in +Greenville, South Carolina. WAC’s common stock is registered under Section 12(b) of the +Exchange Act, and trades on the NasdaqGS under ticker WRLD. WAC sold its wholly-owned +subsidiary, WAC Mexico, effective July 1, 2018. WAC currently does not have any foreign +subsidiaries, or conduct any business internationally. + + + + + + + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + 3 +Facts + +The Bribery Scheme + +5. WAC, through its former wholly-owned subsidiary, WAC Mexico, engaged in a +bribery scheme from at least December 2010 through June 2017, paying approximately $4.1 +million USD ($64 million MXN) in bribes to obtain and retain business related to its Préstamos +Viva business line (“Viva”). + +6. WAC Mexico had two lines of business, Préstamos Avance (“Avance”) and Viva. +Avance offered small loans directly to consumers, while Viva offered small loans to state and +federal government employees. Viva had less collection risk than Avance because government +employees had greater job security, and loan repayments were automatically deducted from the +government employee’s paycheck, collected by the unions, and sent to WAC Mexico. WAC +Mexico entered into at least 30 Viva contracts with government entities and/or worker unions +representing government employees, most of whom worked in healthcare and education. To +obtain Viva business and to ensure that loan repayments continued to be sent to WAC Mexico in a +timely manner, WAC Mexico paid monetary bribes to Mexican government officials and union +officials. + +7. The Viva contracts were signed by government officials (e.g., the secretary of +health or education for a particular state government), and/or union officials (e.g. the general +secretary of a particular union). To enter into these contracts, WAC Mexico paid monetary bribes, +known internally as the “glove,” to Mexican government officials and union officials. During the +performance of these contracts, WAC Mexico also made ongoing payments, referred to as “royalty +payments,” “scholarship,” or “support,” to officials to ensure that loan repayments continued to be +sent to WAC Mexico in a timely manner. Regardless of who signed the contracts with WAC +Mexico, government officials were paid bribes to obtain or retain the ability to make loans to the +government employees under all of the contracts. + +8. The $4.1 million in bribe payments to government officials and union officials were +paid in cash, a bank deposit into their bank account, or a bank deposit into the bank account of a +relative or friend of the official. WAC Mexico also hired third-party intermediaries to assist with +obtaining business, and make ongoing bribe payments to officials. These intermediaries kept a +small portion of the payments as their fee. One of WAC Mexico’s intermediaries flew to different +municipalities in Mexico with large bags of cash to pay officials. Employees at WAC Mexico +communicated with the intermediaries via email through servers located in the U.S. + +9. Of the $4.1 million USD in payments, at least $1.5 million was paid to government +officials, $580,000 paid to union officials, and $480,000 paid to third party intermediaries who +used the funds to pay government officials and union officials. Due to the lack of appropriate +recordkeeping at WAC Mexico, it is unclear how the remaining $1.5 million in payments were +split between those made directly to government officials or union officials, or an intermediary + + 4 +who used the funds to pay the officials. + +WAC’s Inaccurate Books and Records and Insufficient Internal +Accounting Controls to Detect or Prevent Bribery + +10. The bribe payments were inaccurately recorded as legitimate “commission” +expenses in WAC’s books and records. WAC and WAC Mexico lacked the internal accounting +controls sufficient to detect or prevent such payments. For example, WAC Mexico did not have a +vendor management system, did not maintain a master list of approved vendors, did not conduct +formal due diligence on new vendors, and did not have formal procedures or controls in place to +approve new vendors. These internal control failures over vendors allowed WAC Mexico to hire +third party intermediaries to pay bribes to government officials and union officials. + +11. In addition, WAC Mexico did not have a sufficient accounts payable system. +Instead, manual checks were used for payment, which resulted in managers pre-signing blank +checks, making it impossible to enforce authorization limits in place over payments. Moreover, +WAC Mexico manually prepared a monthly spreadsheet that listed the checks paid that month, and +provided an expense category for each check. The payments made to government officials and +union officials were inaccurately categorized as “commission” expenses. WAC Mexico sent the +spreadsheet each month to WAC’s accounting department in Greenville, South Carolina without +invoices or backup support, and WAC failed to require such backup support. WAC then manually +coded each expense, including the “commission” expenses, for recording in WAC’s general ledger, +which was used to prepare WAC’s financial statements. Another example of the lack of controls +over accounts payable was the senior vice president of WAC Mexico approved check payments +with or without invoices, and starting in or about July 2014, WAC increased his authorization limit +to $1 million MXN (about $75,000 USD) to make payments related to any Viva contract. + +12. WAC did not identify the high risk of bribery and corruption in Mexico and did not +implement sufficient internal accounting controls to address that risk. Although starting sometime +in 2013, WAC had an FCPA policy in its corporate compliance manual, there was no effective +formal monitoring, or internal controls in place, to ensure that WAC Mexico was adhering to that +policy. Moreover, neither WAC or WAC Mexico provided FCPA training to its personnel from at +least December 2010 through October 2017. + +13. WAC also lacked entity level controls over WAC Mexico as a result of the lack of +oversight over personnel in Mexico. + +14. Lastly, the tone at the top from WAC management did not support robust internal +audit and compliance functions, and undermined the effectiveness of those functions. For +example, in October 2015 the then-CEO of WAC terminated the vice president of internal audit +after he raised compliance concerns, including concerns about the lack of internal accounting +controls at WAC Mexico. The then-CEO then combined the internal audit function and the +compliance function into one department under one VP, had the VP report to her, and pressured +the VP to eliminate staffing and become more “bare-bones,” according to the VP. Prior to this + + 5 +change, both vice presidents of internal audit and compliance had reported directly to the Board of +Directors and the Audit Committee. In November 2016, the then-CEO told the internal audit and +compliance VP that she would now report to the then-general counsel. Shortly thereafter, the VP +voiced concerns that the internal audit and compliance functions were not sound, and the then- +CEO terminated her. The then-general counsel took over as the head of internal audit and +compliance, even though the general counsel had no prior audit or accounting experience. WAC’s +then-CEO also told the then-general counsel and an internal audit director that she did not care +whether WAC had a “world class [internal] audit function.” + +15. After the bribery allegations came to light in March 2017, WAC’s management and +its independent audit firm reported in WAC’s FYE 2017 Form 10-K (ending March 31, 2017) that +WAC had material weaknesses in its Internal Control over Financial Reporting (“ICFR”) and, as a +result, WAC did not maintain effective ICFR. Specifically, WAC’s independent audit firm +identified the following material weaknesses: “control design gaps in [WAC’s] accounts payable +environment related to vendor management and payment processes in Mexico and in [WAC’s] +entity level control environment related to adherence to U.S. and foreign laws and regulations, +including the FCPA, and corporate governance of the Mexico operations.” WAC’s management +also identified the same material weaknesses. + +Legal Standards and Violations + +16. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, +or would be a cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. + +17. As a result of the conduct described above regarding payments to government +officials, WAC 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. + +18. As a result of the conduct described above related to payments to government +officials and union officials, WAC violated Section 13(b)(2)(A) of the Exchange Act, which +requires every issuer with a class of securities registered pursuant to Exchange Act Section 12 to +make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly +reflect the transactions and disposition of the assets of the issuer. + + + 6 +19. As a result of the conduct described above related to payments to government +officials and union officials, WAC violated Section 13(b)(2)(B) of the Exchange Act which +requires every issuer with a class of securities registered pursuant to Exchange Act Section 12 to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that (i) transactions are executed in accordance with management’s general or specific +authorization; (ii) transactions are recorded as 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. + +WAC’s Cooperation and Remedial Efforts + +20. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by WAC and cooperation afforded the Commission staff, including +facilitating witnesses traveling from Mexico to the U.S. for interviews. WAC’s remedial acts +included personnel changes made in late 2017 and early 2018, such as terminating the senior vice +president of WAC Mexico, and WAC’s CEO and general counsel (on terms previously +disclosed), and in mid-2018 WAC divested itself of WAC Mexico. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent WAC’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, WAC 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. WAC shall, within fourteen days of the entry of this Order, pay disgorgement of +$17,826,000, prejudgment interest of $1,900,000, and civil penalties of $2,000,000, for a total +payment of $21,726,000 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 the civil 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; + + 7 + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +WAC as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Charles Cain, FCPA Unit Chief, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, N.E., 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, WAC 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 WAC shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4159.txt b/raw/aaer/2020/AAER-4159.txt new file mode 100644 index 0000000000000000000000000000000000000000..3d4174705995b7103307ad57281253f52bb23a0e --- /dev/null +++ b/raw/aaer/2020/AAER-4159.txt @@ -0,0 +1,440 @@ + +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89552 / August 13, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4159 / August 13, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19914 + + ____________ +: ORDER INSTITUTING PUBLIC +: ADMINISTRATIVE AND CEASE +: AND-DESIST PROCEEDINGS + In the Matter of : PURSUANT TO SECTIONS 4C AND 21C + : OF THE SECURITIES EXCHANGE ACT + BRIAN DEE MATLOCK, CPA : OF 1934 AND RULE 102(e) OF THE + : COMMISSION’S RULES OF PRACTICE, + Respondent : MAKING FINDINGS, AND IMPOSING + : REMEDIAL SANCTIONS AND A CEASE- + : AND-DESIST ORDER + : + _ : + + + I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice2 (“CRP”) against Respondent, Brian Dee Matlock, CPA + +1 Section 4C provides, in relevant part, as follows: + +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 . . . not to possess the requisite +qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged in unethical or +improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any +provision of the securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it . . . + +2 + +(“Matlock” 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 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:3 + +A. SUMMARY + + 1. Rothstein, Kass & Company, P.C. (“RK”), formerly a PCAOB-registered audit firm +headquartered in Roseland, New Jersey, was retained to audit the financial statements of Breitling +Energy Corporation, Inc. (“Breitling” or “the company”), a Dallas-based oil and gas company, for +the two-year period ended December 31, 2013.4 Over the course of that audit, RK, and Matlock as +the engagement partner, engaged in improper professional conduct, and RK violated, and Matlock +caused violations of Section 10A(b)(1)(A)(i) of the Exchange Act, by failing to take appropriate +steps in relation to potential illegal activity on the part of Breitling and its management.5 + + 2. Over the course of the Breitling audit, RK and Respondent Matlock, who served as +the engagement partner on the Breitling engagement, were advised that Breitling’s predecessor, +Breitling Oil and Gas Corporation (“BOG”), was misrepresenting its business model to the +investors who purchased oil-and-gas interests sold by BOG, and in so doing, inflating the return + +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 RK was also retained to audit the financial statements of Breitling’s predecessor entities for the two-year period ended +December 31, 2012, but that audit is not the subject of this Order. + +5 On June 24, 2016, the Commission filed an action in the U.S. District Court for the Northern District of Texas (Civil +Action No. 3:16-cv-01735-D), alleging, inter alia, transactional registration, antifraud, reporting, Sarbanes-Oxley +certification, accounting controls, books and records, proxy, and lying to auditor violations in connection with an alleged +$80 million oil and gas fraud, naming as defendants in its action Breitling, Breitling Oil and Gas Corporation, Crude +Energy LLC, and Patriot Energy, Inc., and eight individuals associated with the defendant entities. The case is pending. + + +3 + +on investment the investors could reasonably expect to receive. RK and Respondent were also +advised over the course of the audit that certain procedures designed to safeguard investor funds +and ensure their appropriate use, specifically, the segregation of investor funds, delimited +authorization to substitute the investors’ interests, and validation of claimed business expenses +were not, in fact, being implemented. Respondent Matlock became aware of this misconduct, and +was therefore aware that illegal acts may have occurred, but Respondent failed to determine +whether illegal acts likely occurred. Respondent’s failure caused violations by RK of Section +10A(b)(1)(A)(i) of the Exchange Act. In addition, Matlock, by failing to comply with a certain +PCAOB auditing standard, engaged in improper professional conduct pursuant to CRP Rule +102(e)(1)(ii), and caused violations by RK of Rule 2-02(b)(1) of Regulation S-X. + +B. RESPONDENT + + 3. Brian Dee Matlock, age 41, is a resident of Colleyville, Texas, and a CPA licensed +in Texas. Matlock served as the lead engagement partner on the Breitling audit. + +C. RELEVANT ENTITIES + + 4. Breitling Energy Corporation is a corporation organized in Nevada with its +principal place of business in Dallas. Breitling is the result of an asset-for-stock sale transaction +between Bering Exploration, Inc. (OTC: BERX), on the one hand, and BOG and Breitling +Royalties Corporation (“BRC”) on the other.6 Breitling’s common stock was registered with the +Commission under Section 12(g) of the Exchange Act until November 1, 2016, when the +Commission declared final the ALJ’s decision de-registering all Breitling securities due to +Breitling’s filing delinquency.7 Breitling’s stock (ticker: BECC), before de-registration, had been +quoted on OTC Link operated by OTC Markets Group, Inc., had one or more market makers, and +was eligible for the “piggyback” exception of Exchange Act Rule 15c2-11(f)(3). + + 5. Rothstein, Kass & Company, P.C. was a public accounting firm that had been +registered with the PCAOB since at least 2006, and was headquartered in Roseland, New Jersey. +At all relevant times, RK had approximately 83 partners operating out of eight offices and serving +approximately 40 issuer/audit clients. On June 30, 2014, RK’s assets were acquired by another +public accounting firm, at which point RK resigned as Breitling’s auditor, and RK ceased +operations. + +D. FACTS + + BOG’s Offering Fraud + +6 BOG is a limited liability company originally organized in the state of Oklahoma in 2004 under the name Southwest +Energy Exploration, LLC. Christopher Faulkner (CEO, President, and Chairman of Breitling) controlled Southwest Energy, +and changed its name to Breitling Oil and Gas Corporation in July 2010 when he started the company. BOG’s principal +place of business was in Dallas, until December 9, 2013, when it was part of the asset-for-stock sale transaction that created +Breitling. BOG is not registered with the Commission. + +7 Breitling failed to file its 2014 and 2015 annual reports and its quarterly reports for the quarters ended March 31, 2015, +June 30, 2015 and September 30, 2015. + + +4 + + + 6. Commencing at least as early as 2011, Chris Faulkner, Breitling’s CEO, orchestrated +a massive fraudulent scheme that ultimately bilked investors of $80 million. The scheme involved +the unregistered and fraudulent offer and sale by Faulkner-controlled entities of working interest +investments in more than 20 oil-and-gas prospects in several states. Faulkner conducted three +versions of this core fraud, initially using BOG to offer the investments. The confidential +information memoranda (“CIMs”) and marketing brochures Faulkner drafted and that were +provided to prospective investors were replete with material misrepresentations and omissions. + + 7. BOG commenced operations at least as early as 2011, when it began offering and +selling unregistered investments – in the form of working interests in oil-and-gas prospects in +Texas, Oklahoma, and North Dakota – to investors across the country on a turnkey basis. In this +turnkey arrangement, investors made lump-sum payments to BOG for a fractionalized working +interest in an oil-and-gas prospect. BOG represented to investors that the amounts of these lump- +sum payments equaled the reasonable estimated costs to drill, test, and complete the prospects. In +return, BOG agreed to assume the risk of any cost overruns; i.e., BOG would not require +additional contributions from investors. BOG offered and sold these turnkey investments through +a combination of cold-calling and general advertising on its website. From January 2011 through +December 2013, BOG offered and sold more than $43 million in investments in oil-and-gas +working interests in fifteen prospects (collectively the “BOG Offerings”), none of which were +registered with the Commission. + + 8. In Authorizations for Expenditures (“AFEs”) included in BOG’s offering materials, +BOG and Faulkner provided detailed line-item estimates of costs BOG claimed it reasonably +expected to incur in drilling, testing and completing the prospect wells. As mentioned, the +purchase price for the working interest units purportedly equaled these estimated costs. For +example, if a prospect well was estimated to cost $5 million to drill, test, and complete, BOG +would offer investments in one percent of that prospect for $50,000 (1% x $5 million). BOG’s +offering documents repeatedly linked and cross-referenced BOG’s estimated costs, the AFEs, and +the purchase prices of working interest units. + + 9. Well operators for the BOG prospects created the AFEs and provided them to BOG +and Faulkner at the time they were hired to operate a new well; however the operators’ AFEs +were never included in the BOG offering documents provided to prospective investors. Instead, +Faulkner either: (i) significantly inflated the line items in the AFEs provided by the well +operators, or (ii) simply concocted exorbitant line item estimates. Faulkner and BOG then +included these doctored AFEs in BOG’s offering documents, representing that they were +estimates of costs BOG reasonably expected to incur in drilling, testing, and completing the wells. +By grossly inflating the estimated costs in the AFEs, Faulkner locked in huge profits for BOG, +because there was no possibility that the actual costs would equal, or even approach, Faulkner’s +grossly inflated “estimates.” Faulkner even re-used AFEs from prior offerings, even though they +were for prospects that were in different locations and for wells that were to be drilled to different +depths and by different operators. + + 10. Representations that the prices investors were paying for working interests were +reasonable estimates of actual costs, and that BOG’s profits would flow from a share in any + +5 + +ultimate production revenue, presented a business model in which the financial interests of BOG +mirrored those of the investors. However, given Faulkner’s fraudulent inflation of the AFEs, that +mirror inverted reality: BOG’s profits flowed, not on the back end of the investment as disclosed +– as a portion of the total production revenue – but rather on the front end, as the difference +between BOG’s bloated AFEs and its actual prospect costs. + + 11. In the CIMs for the BOG Offerings, BOG and Faulkner represented that investor +funds would be deposited into segregated bank accounts in the name of the particular offering or +prospect, and that payments for drilling, testing, and completing costs would be paid from these +segregated bank accounts. Maintaining the funds intact in the segregated accounts offered +assurance to investors that their funds would be available to drill, test, and complete their +prospect. However, BOG’s representations that they would maintain funds intact in the segregated +accounts were false. BOG – typically at Faulkner’s request – transferred purchaser funds into a +commingled BOG operating account shortly after receipt. BOG then paid costs associated with +multiple prospects out of this BOG operating account. The result was that BOG often had +difficulty paying bills on its prospects, and later lost investors’ interests in prospects when it failed +to pay bills. This mismanagement is all the more egregious and shocking in light of the fact that +BOG raised vastly more money than it needed to drill, test and complete the prospects. + + 12. BOG also regularly oversold working interests in its prospects, i.e., it sold interests it +had not, itself, acquired. A material portion of BOG’s working interest sale revenues were the +product of these oversales. BOG often transferred the oversold investors’ interests to other BOG +prospects, even though BOG had no authority under the CIMs to do so. A provision in the CIMs +allowed the company to substitute working interests to “a comparable drilling site” only in the +event that the operator or company obtained “additional geological information” warranting the +substitution, not in the event of oversales. Further, the CIMs required that any substituted original +drill site “compare favorably with the general character of the proposed [original] [w]ell regarding +degree of risks, drilling depth and cost.” BOG improperly substituted working interests due to +oversales, not additional geological information, and BOG did not adequately determine whether +the original and substitute wells compared favorably as defined in the CIMs. + + 13. BOG’s and Faulkner’s misrepresentations and deceptive practices misled investors +about the expected costs of the prospects and how their funds would be safeguarded and used, and +saddled many of the investors with working interests in prospects they had not bargained for. +Making matters worse, BOG and Faulkner never disclosed to investors the negative impact of +these practices on their potential investment returns. + + 14. Faulkner also misappropriated a significant portion of the investor funds. His modus +operandi was two-fold: He directed payments to American Express (“Amex”) for expenses he +incurred on the Amex cards he and his wife used; and (ii) he received checks issued to him or +entities he controlled for claimed expense reimbursements and service fees. Faulkner used his +Amex cards for BOG-related expenses such as advertising and lead fees, but he also used them +extensively for personal expenditures. Without segregating personal expenditures or providing +statements detailing his charges, Faulkner repeatedly requested that BOG pay his Amex bills in +their entirety. As a result, in 2013, BOG paid approximately $6.9 million for charges incurred by +Faulkner on his credit cards. In addition to these payments to Amex, Faulkner sought payments + +6 + +from BOG for personal expenses through claimed expense reimbursements and phony service +fees. Even though he often failed to provide supporting documentation for these claims, BOG +issued checks or wired funds totaling approximately $4 million directly from BOG to him +personally or to entities he controlled during this time period. + + RK’s Audit of Breitling’s Financial Statements + + 15. In an engagement letter dated December 9, 2013, RK agreed to audit the +consolidated and combined balance sheets of Breitling, and the related consolidated and combined +statements of operations, changes in stockholders’ deficit, and cash flows, as of and for the +periods ended March 31, 2014 and 2013 (or December 31, 2013 if Breitling filed a transition +filing with the SEC on Form 8-K). + + 16. Breitling included these financial statements, together with RK’s unqualified audit +report, dated March 31, 2014, in the Form 10-K “Transition Report” Breitling filed with the +Commission on March 31, 2014, for the “transition period from March 31, 2013 to December 31, +2013.” + + 17. During the audit, RK and Matlock identified several of the issues identified above, +including: + + The costs listed in the AFEs were substantially greater than the company’s actual costs. + + Most if not all of BOG’s profits derived from the difference between BOG’s AFEs and +its lower actual prospect costs, not from participation in production revenue. + + A material amount of Breitling revenue was the result of the “oversold” prospects. +Matlock also learned that the company, in some cases, had substituted oversold interests +for interests in dissimilar prospects. + + The company reimbursed Faulkner for highly questionable purported business expenses. + + The company transferred cash out of segregated cash accounts before the prospects were +drilled and completed. + + RK and Matlock Failed to Conduct the Breitling Audit + in Accordance with PCAOB Standards. + + Failure to determine whether illegal acts likely occurred (AU § 317) + + 18. AU § 317.07 provides that “[t]he auditor should be aware of the possibility that … +illegal acts may have occurred. If specific information comes to the auditor’s attention that +provides evidence concerning the existence of possible illegal acts [“violations of laws or +governmental regulations” AU § 317.02] that could have a material indirect effect on the financial +statements, the auditor should apply audit procedures specifically directed to ascertaining whether +an illegal act has occurred. AU § 317.10 prescribes that “[w]hen the auditor becomes aware of + +7 + +information concerning a possible illegal act, the auditor should obtain an understanding of the +nature of the act, the circumstances in which it occurred, and sufficient other information to +evaluate the effect on the financial statements,” and “the auditor should apply additional +procedures, if necessary, to obtain further understanding of the nature of the acts.” AU § 317.10.b. + + 19. During the audit, RK reviewed the company’s CIMs to determine their audit +significance. During RK’s initial review, the company’s management provided shifting, +incomplete, or erroneous answers to questions about identical and inflated AFEs, substituted +oversold interests, failed cash segregation, and Faulkner’s expenses. Matlock separately +concluded that each of the four categories of misconduct was caused by the company’s lack of +proper internal technical expertise and controls, without determining whether the misconduct +constituted illegal acts, or whether it was likely that illegal acts had occurred. + + 20. Matlock’s failure was a violation of AU § 317. + + E. VIOLATIONS + + 21. Section 10A(b)(1)(A)(i) of the Exchange Act requires registered public accounting +firms that, in the course of conducting an audit, “detect[ ] or otherwise become[ ] aware of information +indicating that an illegal act (whether or not perceived to have a material effect on the financial statements +of the issuer) has or may have occurred” to “determine whether it is likely that an illegal act has +occurred.” No showing of scienter is necessary to establish a violation of Section 10A. As a result +of the conduct described above, Matlock caused RK’s violation of Section 10A(b)(1)(A)(i). + + 22. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34- +49708 (May 14, 2004). Through the conduct described above, Matlock caused RK to violate +Regulation S-X Rule 2-02(b)(1) when RK issued the Breitling audit report stating that it had +conducted the audit in accordance with PCAOB standards when, in fact, it had not. + + 23. Section 4C of the Exchange Act and CRP Rule 102(e)(1)(ii) provide, in part, that the +Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have +engaged in improper professional conduct. With respect to persons licensed to practice as +accountants, “improper professional conduct” includes “intentional or knowing conduct, including +reckless conduct that results in a violation of applicable professional standards.” CRP Rule +102(e)(1)(iv)(A). In addition, under CRP Rule 102(e)(1)(iv)(B), negligent conduct can constitute +“improper professional conduct.” The conduct described above constituted “improper +professional conduct” within the meaning of Exchange Act Section 4C(a)(2) and CRP Rule +102(e)(1)(ii). + + F. FINDINGS + + +8 + + 24. Based on the foregoing, the Commission finds that Respondent caused violations of +Section 10A(b)(1)(A)(i) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X. + + 25. Based on the foregoing, the Commission finds that Respondent engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Matlock’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent Matlock shall cease and desist from committing or causing any +violations and any future violations of Section 10A(b)(1)(A)(i) of the Exchange Act and Rule 2- +02(b)(1) of Regulation S-X. + + B. Respondent Matlock is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After one year from the date of this Order, Matlock 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 Matlock’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 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) Matlock, or the public accounting firm with which he is associated, is +registered with the Public Company Accounting Oversight Board (“Board”) in accordance with + +9 + +the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Matlock, 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 Matlock will not receive appropriate supervision; + + (c) Matlock 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) Matlock acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + + D. The Commission will consider an application by Matlock 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 Matlock’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. + + V. + + It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4160.txt b/raw/aaer/2020/AAER-4160.txt new file mode 100644 index 0000000000000000000000000000000000000000..2067229decfdd4e8256935a4a52f19f2d3e9c488 --- /dev/null +++ b/raw/aaer/2020/AAER-4160.txt @@ -0,0 +1,1401 @@ + + + + + + + + + + + + + + + + SEC.gov | Mark P. Frissora + + + + + + + + !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\/524841","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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Frissora + + + + + + + + + + + + Mark P. Frissora + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Hertz's Former CEO with Aiding and Abetting Company's Financial Reporting and Disclosure Violations + + Litigation Release No. 24869 / August 14, 2020 + + Accounting and Auditing Enforcement Release No. 4160 / August 14, 2020 + + Securities and Exchange Commission v. Mark P. Frissora , No. 20-cv-10453 (D.N.J. filed August 13, 2020) + + + + + + + + + The Securities and Exchange Commission charged former Hertz CEO and Chairman Mark Frissora with aiding and abetting the company in its filing of inaccurate financial statements and disclosures. Frissora has agreed to settle the charges and repay Hertz nearly $2 million in incentive-based compensation. + + The SEC's complaint alleges that as Hertz's financial results fell short of its forecasts throughout 2013, Frissora pressured subordinates to "find money," principally by re-analyzing reserve accounts, causing Hertz's staff to make accounting changes that rendered the company's financial reports materially inaccurate. According to the complaint, Frissora also led Hertz to hold rental cars in its fleet for longer periods and thus lower its depreciation expenses, without properly disclosing the change - and the risks of relying on older vehicles - to investors. In addition, the complaint alleges that Frissora approved Hertz's reaffirming its earnings guidance in November 2013, despite Hertz's internal calculations that projected lower earnings per share figures. Hertz revised its financial results in 2014 and restated them in July 2015, reducing its previously reported pretax income by $235 million. + + The SEC's complaint, filed in federal district court in New Jersey, charges Frissora with aiding and abetting Hertz's reporting and books and records violations and with violating Section 304 of the Sarbanes-Oxley Act by failing to reimburse Hertz for the requisite amount of incentive-based compensation he received. Without admitting or denying the allegations, Frissora consented to a judgment permanently enjoining him from aiding and abetting any future violations of the applicable federal securities laws, requiring him to reimburse Hertz for $1,982,654 in bonus and other incentive-based compensation and requiring him to pay a $200,000 civil penalty. The settlement is subject to court approval. + + In December 2018, Hertz agreed to pay $16 million to settle related fraud and other charges brought by the SEC and in December 2019, the SEC issued a settled Order against Hertz's former Controller Jatindar Kapur. + + The SEC's investigation was conducted by Jess Velona, Kenneth Byrne, Christopher Mele, and Adam Grace of the New York Regional Office, and was supervised by Sanjay Wadhwa. + + + + + + + + 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/2020/AAER-4161.txt b/raw/aaer/2020/AAER-4161.txt new file mode 100644 index 0000000000000000000000000000000000000000..5b7da7c5d45b8c19b83b8681768fff781f7bfbee --- /dev/null +++ b/raw/aaer/2020/AAER-4161.txt @@ -0,0 +1,531 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10822 / August 25, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89656 / August 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4161 / August 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19927 + + +In the Matter of + +SUPER MICRO +COMPUTER, 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 Super Micro Computer, Inc. (“Super Micro” or “Respondent”). + + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over 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. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. Super Micro Computer, Inc., a producer of computer servers headquartered in +California, engaged in improper accounting—prematurely recognizing revenue and understating +expenses from at least fiscal year (“FY”) 2015 through FY 2017.2 As a result, Super Micro filed +with the Commission materially misstated financial statements in its annual, quarterly and current +reports during the period. + +2. Super Micro’s executives pushed employees to maximize end-of-quarter revenue +and minimize expenses, without devising and maintaining sufficient internal accounting controls to +record revenue and expenses in conformity with U.S. Generally Accepted Accounting Principles +(“GAAP”). Super Micro improperly accelerated revenue recognition and reporting by: (1) +recognizing revenue before delivering the goods to customers; (2) sending goods to customers +prior to the customer-specified delivery date; (3) improperly changing the shipment terms to a +large Super Micro customer in order to recognize revenue upon shipment rather than when the +goods were delivered to the customer; (4) recognizing revenue with respect to transactions that +included customer acceptance terms before the customers had accepted the goods; (5) sending +incomplete or mis-assembled goods to customers at the end of quarters; (6) recognizing revenue on +sales to a large distributor upon shipment, when the revenue should have been recognized when +Super Micro received payment from the distributor; (7) holding the bill of lading for certain + +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 Each of Super Micro’s quarterly reports on Form 10-Q and annual reports on Form 10-K +beginning with the period ended September 30, 2014 through the period ended March 31, +2017 contained materially misstated financial statements. The Company’s current reports +on Form 8-K, announcing the financial and operational results for each of these periods, +along with the current report filed on August 3, 2017, announcing results for the year +ended June 30, 2017, also contained materially misstated financial information. + 3 +overseas customers and thus preventing the customers from taking possession of the goods as a +means to ensure payment, but nevertheless improperly recognizing the revenue upon shipment; +and (8) recognizing certain extended warranty revenue at the time of sale, rather than amortizing +the revenue over the length of the warranty. + +3. Super Micro also improperly under-reported certain expenses by misusing its +cooperative marketing program to pay a variety of unrelated expenses, such as warehousing costs +for goods at quarter end, shipping costs, and product repair costs. Super Micro employees also +submitted claims for funds to which Super Micro was not entitled in connection with a vendor’s +cooperative marketing program. In addition, Super Micro over-valued inventory and under-stated +expenses by failing to reduce inventory and record an associated expense in instances where Super +Micro no longer held the inventory for sale. + +4. Accordingly, Super Micro violated certain antifraud, reporting, books and records, +and internal accounting controls provisions of the federal securities laws. + +Respondent + +5. Super Micro is a global producer of computer servers and equipment, incorporated +in Delaware, with its principal place of business in San Jose, California. Super Micro’s securities +are registered under Section 12(b) of the Exchange Act. The company’s fiscal year ends on June +30. Super Micro’s shares currently trade on the NASDAQ Global Select Market. Because of +Super Micro’s pervasive accounting, reporting and internal accounting control issues, Super Micro +was unable to file periodic reports for nearly two years and, as a result, trading in the company’s +stock was suspended in August 2018 and the stock was then delisted from March 2019 through +January 2020. During the relevant period, Super Micro offered and sold stock to its employees +pursuant to registration statements on Forms S-8 dated April 26, 2007 and April 22, 2016. + +Facts + +A. Premature Revenue Recognition and Reporting + +6. In determining whether to recognize and report revenue during the relevant period, +GAAP required public companies to consider whether (1) the revenue is realized or realizable; and +(2) the revenue is earned. Consistent with GAAP, Super Micro’s revenue recognition policy +provides that revenue is realized and earned when all of the following criteria are met: (a) +persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been +rendered; (c) the seller’s price to the buyer is fixed or determinable; and (d) collectability is +reasonably assured. + +7. Super Micro executives pressed employees to maximize revenue at the end of +quarters but failed to devise and maintain sufficient internal accounting controls with respect to +proper revenue recognition. For instance, Super Micro delegated responsibility for identifying +sales terms that may affect revenue recognition to salespeople without training them on revenue +recognition. During the period from at least FY 2015 through the end of FY 2017, Super Micro + 4 +systemically recognized, recorded in its books and records, and reported revenue prematurely by +engaging in the following improper practices. + +Premature Revenue Recognition Prior to Customer Delivery + +8. Super Micro engaged in a number of transactions where it recognized revenue prior +to customer delivery in order to maximize revenue at the end of quarters. In certain instances, +Super Micro employees sent goods to warehouses or other storage facilities controlled by third +parties at quarter-end and paid for the storage fees until the goods were delivered to its customer. +In other instances, Super Micro asked its freight forwarders to hold the goods until the date that the +customer was prepared to accept the goods, rather than ship and deliver them on the date agreed to +with the customer. There also were instances where Super Micro recorded revenue although goods +remained at its own warehouse. + +9. For example, Super Micro asked a distributor customer to agree to accept +approximately $104,000 of goods before the end of FY 2015 in order to recognize revenue during +that period. The customer, however, did not need additional product at the time and did not have +space for the product. Super Micro ultimately arranged to pay for trailers where the goods would +be stored. At least some of the goods remained in the trailers for approximately six months. + +10. In addition, a different customer requested that Super Micro deliver nearly +$800,000 worth of goods by mid-January 2015. Super Micro requested that its freight forwarder +pick up the goods before the end of December 2014, and improperly recorded the sale in the +second quarter of FY 2015. Super Micro employees instructed its freight forwarder to unload the +goods at the freight forwarder’s dock and then deliver the goods to the customer two weeks later. + +11. In another instance, a Super Micro salesperson stored a small amount of goods in +her car when Super Micro’s customer was unable to pick up the goods by the end of the quarter, +yet Super Micro improperly recognized the revenue on the last day of the quarter. + +12. In all of these transactions and other similar transactions, Super Micro improperly +recorded revenue upon shipment from its own facility but prior to customer delivery or, in a few +instances, before the goods even left its facility. Recognizing the revenue was not in conformity +with GAAP. + +Improper Recognition of Revenue Upon Shipment of Goods Without Customer Authorization + +13. Super Micro—at the end of quarters—shipped goods on multiple occasions prior to +the delivery dates agreed with, or specified by, its customers in order to record and recognize the +revenue prior to quarter-end. + +14. For example, at the end of FY 2017, Super Micro shipped product to a customer +who had not wanted the goods delivered for another month. A few days after the shipment, the +customer stated “Please reject this shipment . . . Why are you shipping this now?” In response, the +Super Micro salesperson requested “Can you please help to approve this shipment to help with our + 5 +quarter end? I was instructed by our management to push all the orders out before our quarter end +which is also our year end. . . . we will just need your special support for this time.” The customer +again rejected the request. Nevertheless, the revenue was improperly recognized at the time of +shipment. + +15. Similarly, on the last day of FY 2017, Super Micro shipped more than $278,000 of +goods to a customer. In the days preceding the shipment, Super Micro employees repeatedly asked +the customer to allow the goods to ship, although the employees understood that the customer did +not have space for the goods. Ultimately, the customer instructed Super Micro not to ship out the +goods until early July 2017. A Super Micro employee, however, informed the customer that the +goods had already been shipped and Super Micro improperly recorded the revenue in the fourth +quarter of FY 2017. + +16. In another example, at the end of the second quarter of FY 2017, a distributor +customer indicated that over $250,000 of goods could not be shipped absent its authorization. A +Super Micro employee still shipped the goods before quarter-end. The customer’s representative +complained that “no one can command you to process [our] order w/o our permission.” Super +Micro improperly recognized the revenue in the second quarter of FY 2017. + +17. Super Micro’s recognition of revenue when it shipped goods in contravention of +customer instructions did not conform with GAAP. + +Improper Recognition of Revenue Upon Shipment to a Large Super Micro Customer Where the +Parties’ Shipping Terms Required Revenue to Be Recognized Upon Delivery + +18. From at least 2014 through 2017, purchase orders submitted by a large Super Micro +customer specified “FOB Destination” as the shipping terms. Sales with FOB Destination +shipping terms are not realized or earned until delivery has occurred at the customer-designated +location and title to the goods has passed to the customer. Super Micro, however, improperly +recorded revenue upon shipment to the customer. +19. Many shipments to this customer occurred near the end of quarters. During most +quarters over the relevant period, Super Micro’s employees sent emails to the customer’s +employees, purporting to change the shipping terms to “ex works”, which generally means that the +goods and title would pass to the customer when picked up at Super Micro’s warehouse. The +emails purporting to change the shipping terms, however, were often sent to the customer after the +goods had been shipped and the quarter had ended. Indeed, in many instances, the purported +change in terms occurred after the customer had already received the goods—i.e., after the +question of who would bear the risk of loss while the goods were in transit was moot. +20. In addition, on one occasion a lower-level sales employee fabricated an email +purporting to be from this customer, stating that Super Micro could use “ex works” shipping terms +for open, current and future orders. The email was used by Super Micro to recognize revenue upon +shipment during several periods. + + 6 +21. In addition to these problems with the timing, and authenticity, of emails purporting +to change shipping terms, the emails were insufficient to override the customer’s purchase order +terms and conditions and allow for both the transfer of title and risk of loss at the point of shipment +under GAAP. For all of these reasons, revenue should not have been recognized upon shipment. + +22. From FY 2015 through FY 2017, Super Micro prematurely recognized more than +$45 million in revenue in connection with sales to this customer. + +Improper Recognition of Revenue Before Obtaining Customer Acceptance + +23. A number of Super Micro’s agreements with customers included acceptance +clauses, meaning that customer acceptance was a condition of the customer’s obligation to pay for +the goods. Under GAAP, revenue is considered to be earned when the seller has substantially +accomplished what it must do to be entitled to the revenue. Accordingly, where an agreement +contains a substantive customer acceptance clause, permitting customers to return the goods if they +did not meet the customer’s specifications, revenue generally should not be recognized until Super +Micro received confirmation of customer acceptance, the customer acceptance provision lapsed, +or, alternatively, Super Micro received payment from the customer. +24. Super Micro’s internal accounting control for tracking customers with acceptance +clauses, and for determining whether those clauses had been satisfied, was lacking for two reasons. +First, Super Micro had no adequate process to identify customers with acceptance clauses. +Acceptance clauses included in purchase orders or other transactional documents that evidenced +the arrangements that Super Micro had with its customers were identified on an ad hoc basis by +operations and sales employees who did not receive proper training or guidance on this topic. +Second, even in instances where Super Micro was aware of customer acceptance provisions, the +determination of whether the condition was satisfied was reached haphazardly. The decision was +typically based on discussions between members of the finance group and sales personnel who did +not receive any relevant training from Super Micro. As a result, Super Micro recognized revenue +in connection with numerous sales before it received customer acceptance. +Improper Recognition of Revenue Upon Shipment of Goods That Were Incomplete or Mis- +Assembled + +25. Super Micro also improperly recognized revenue for products that it sold where +employees knew the goods were incomplete or mis-assembled at the time of shipment. The goods +were shipped to customers at the end of quarters and Super Micro improperly recognized the +revenue before quarter-end. +26. For example, at the end of FY 2016, Super Micro prematurely recognized $384,000 +of revenue, while failing to ship certain products that were part of the customer’s purchase order. +In an email sent several months later concerning shipment of the missing parts, a Super Micro +employee explained “[d]ue to time constraint to meet June’16 year-end revenue target” certain +goods were not originally shipped. The employee went on to explain that “if we ship the accessory +package [that the customer had ordered], we would miss the June year-end revenue.” + 7 +27. In a second example, Super Micro sent a $4 million order to a new customer +towards the end of the same quarter. While the goods were in transit, the customer informed Super +Micro that the product included a wrong component. As a result of the error, the products were +shipped to a warehouse where they remained until Super Micro corrected the error. Super Micro +employees were required to spend significant time and effort over the following nearly two months +to resolve the issue. Nevertheless, Super Micro recognized the sale at the end of FY 2016. +28. In another instance, Super Micro wanted to ship goods to a customer at the end of +the second quarter of FY 2016. However, Super Micro was unable to get all of the units to +function properly before quarter end. In order to recognize the revenue in the second quarter of FY +2016, a Super Micro sales employee instructed Super Micro employees to put green stickers on +eight mis-assembled units. At the time of shipment, the sales employee knew that Super Micro +might have to take back and repair or replace the tagged units. +29. Because Super Micro had not satisfied all of the necessary elements to recognize +revenue under GAAP, Super Micro prematurely recognized revenue in these and other similar +circumstances. +Improper Recognition of Revenue Upon Shipment to a Large Super Micro Distributor +30. Super Micro had a distributor customer to which it sold hundreds of millions of +dollars in products from FY 2015 to FY 2017. The distributor, however, was consistently unable +to pay within its payment terms—its payables were often many months past due. Super Micro +received information on multiple occasions that the distributor’s ability to pay was tied to its +receipt of funds from its own customers (i.e., end-customers). +31. Numerous Super Micro employees, including executives, were aware of the +distributor’s delayed payments and the fact that the distributor could not pay Super Micro until it +sold the products to end-customers and received payment from those customers. +32. In light of these facts, under GAAP, Super Micro was required to recognize revenue +when it received payments from its distributor customer. Super Micro, however, prematurely +recognized more than $150 million in total revenue at the time of shipment from FY 2015 through +FY 2017. +Improper Recognition of Revenue While Holding Customers’ Bills of Lading +33. Super Micro improperly recognized revenue while holding certain customers’ bills +of lading. When Super Micro shipped goods to certain countries—primarily Russia and other +Eastern European countries—Super Micro requested that the freight forwarders return the bills of +lading to it. Super Micro then held the bills of lading until it received payment (either partial or in +full) from its customers. +34. A bill of lading is a shipping document that allows a customer to clear products +through customs. Absent a bill of lading, a customer ordinarily cannot take possession of the +goods. Super Micro’s practice was meant to ensure that Super Micro was paid by customers that +had not paid in advance. + 8 +35. In instances where Super Micro prevented customers from taking possession of +goods until payment was received, revenue was not realized or realizable at the time of shipment +under GAAP. Accordingly, revenue should not have been recognized. +Failure to Properly Account for Extended Warranties +36. Super Micro offered its customers the ability to purchase extended warranties on its +products. At times, these warranties were purchased separately from the cost of Super Micro +products and listed separately on invoices. With respect to certain types of products sold by Super +Micro, however, customers received an extended warranty covering periods ranging from one to +five years beyond the standard warranty, the cost for which was built into the price of the hardware +products purchased. These warranties were not explicitly listed in the invoice, purchase order or +any other documents provided to accounting. +37. Until 2015, Super Micro did not have any internal accounting control or process to +identify products that included embedded warranties. Salespeople and members of the operations +team did not receive training on how to identify embedded warranties. +38. Under GAAP, companies must account for revenue as earned, which for extended +warranties is ratably over the duration of the warranty term. Super Micro, instead, recognized all +of the extended warranty revenue upfront. Accordingly, Super Micro prematurely recognized all +revenue from embedded extended warranties at the time of sale. +B. Super Micro Understated Certain Expenses +Misuse of Cooperative Marketing Funds +39. Super Micro’s customers often were entitled to cooperative, or “co-op”, marketing +funds based on their purchases of product from Super Micro. As Super Micro stated in its SEC +filings, as well as in its internal written policies, these funds were to be used for co-op marketing +activities undertaken by Super Micro’s customers. The customers were entitled to receive +reimbursement for a portion of the cost of these activities. +40. At the time of each sale to customers who were entitled to receive co-op marketing +funds, Super Micro accrued a liability and recorded an offsetting debit to contra revenue and +marketing expense. These liabilities were to pay for future marketing activities that customers +would perform. In reality, however, Super Micro improperly reduced the liabilities to avoid +recognizing a variety of expenses unrelated to marketing. +41. Super Micro used co-op marketing funds, without customer approval, for a variety +of purposes unrelated to marketing. For instance, Super Micro misused these funds to (a) pay +shipping costs that were the responsibility of Super Micro; (b) pay to store goods at third-party +facilities when customers were not prepared or willing to accept the goods before quarter-end; (c) +recoup Super Micro losses in connection with goods that had been returned by customers (e.g., in +instances where the replacement products were more expensive); (d) pay for product repair costs +requested by customers that had extended warranties; (e) pay for Christmas gifts given to + 9 +customers; (f) cover customer short-pays (i.e., instances where invoices were not paid in full); and +(g) pay for installation services that Super Micro performed for its customers. +42. In using co-op marketing funds for purposes unrelated to marketing, Super Micro +understated its expenses and liabilities. Specifically, Super Micro should have recorded expenses +when it incurred costs unrelated to marketing. Instead, Super Micro reduced its co-op marketing +liability account and did not record any expense. +43. Separately, in connection with one of its vendor’s co-op marketing programs (under +which Super Micro was entitled to receive co-op marketing funds), Super Micro employees +submitted claims for approximately $660,000 to which Super Micro was not entitled. As a result +of this conduct, Super Micro understated its expenses and overstated its income from at least FY +2013 through FY 2015. +Overvaluation of Inventory +44. Super Micro engaged in two additional practices over the course of several years +that systemically overstated inventory and understated expenses in Super Micro’s books and +records and publicly reported financial statements. First, Super Micro failed to reduce inventory +and record a research and development expense when its engineers used inventory for internal +purposes, as was required by GAAP. Second, Super Micro improperly continued to keep +inventory on its books that had been provided to customers for testing purposes even when those +products were never returned, as well as instances where it shipped items as replacement products +to its customers. These practices resulted in an understatement of cost of sales and overstatement +of gross profit. +C. Super Micro’s Material Weaknesses +45. On May 17, 2019, Super Micro filed its FY 2017 Form 10-K. In that filing, the +company disclosed numerous material weaknesses in its Internal Control over Financial Reporting. +These material weaknesses prevented Super Micro from recording transactions as necessary to +permit the preparation of financial statements in conformity with GAAP. +46. The company’s material weaknesses included: +a. Aggressively focusing on quarterly revenue without sufficient focus on +compliance; +b. A failure by senior management to establish and promote a control +environment with an appropriate tone of compliance and control +consciousness throughout the entire company; +c. An inappropriate tone at the top; and +d. A failure to hire personnel who had appropriate levels of knowledge and +experience or to provide adequate training to its personnel. + 10 +D. Super Micro was Required to Restate Years’ Worth of Financial Statements Included +in Commission Filings +47. On August 3, 2017, Super Micro filed a Form 8-K with the Commission, +announcing its operating and financial results for the fourth quarter of FY 2017. Several weeks +later, Super Micro announced that it would be unable to file its FY 2017 Form 10-K on time and, +on September 15, 2017, it disclosed that it was performing an audit committee review to permit its +auditor to complete its audit of the financial statements. In November 2018, Super Micro +determined that its previously filed financial statements from FYs 2015 through 2017 could not be +relied upon. Super Micro did not file any annual or quarterly reports from the time it filed its Form +10-Q for the third quarter of FY 2017 until May 2019, when Super Micro filed its FY 2017 Form +10-K. +48. As a result of Super Micro’s inability to file any financial statements for nearly two +years, the company’s stock was suspended from trading on the NASDAQ Stock Market and then +de-listed. +49. In May 2019, Super Micro filed its Form 10-K for the year ended June 30, 2017 +and amended its Form 10-Q filings to restate its financial statements for the first three quarters of +fiscal 2017. The FY 2017 Form 10-K also restated the financial statements for fiscal years 2015 +and 2016. The restatements substantially impacted the company’s revenue/net sales, gross profits, +operating income and net income previously recorded in its books and records and previously +reported in its filings with the Commission. +50. Since discovering and correcting these financial statement errors, Super Micro +improved its internal controls and reorganized its management team. In January 2020, Super +Micro’s stock was relisted on the Nasdaq Global Market. +51. The net effects of Super Micro’s restatement are outlined in the charts below.3 + +3 The “net” effects represent the impact when reporting all errors in their proper periods. +The gross effects of Super Micro’s errors in any individual period are substantially larger, as +revenue that was improperly and prematurely recognized in one period was corrected and +recognized in later periods. + 11 +FY 2015 (ending 6/30/2015) (in 000s) + + As Reported As Restated % Change +Net Sales 1,991,155 1,954,353 (1.88%) +Income from +Operations +146,746 132,646 (10.63%) +FY 2016 (ending 6/30/2016) (in 000s) + + As Reported As Restated % Change +Net Sales 2,215,573 2,225,022 0.42% +Income from +Operations +106,850 107,491 0.60% + +2017 (ending 6/30/2017) (in 000s) + + As Reported4 As Restated % Change +Net Sales 2,529,915 2,484,929 (1.81%) +Income from +Operations +101,877 94,875 (7.38%) + +Super Micro’s Remedial Efforts + +52. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent. +Violations + +53. As a result of the conduct described above, Super Micro violated Section 17(a)(2) +and (3) of the Securities Act, which prohibit any person from directly or indirectly obtaining +money or property by means of any untrue statement of a material fact or any omission to state a +material fact necessary in order to make the statements made, in light of the circumstances under +which they were made, not misleading, or engaging in any transaction, practice, or course of +business which operates or would operate as a fraud or deceit upon the purchaser, in the offer or +sales of securities. +54. As a result of the conduct described above, Super Micro also violated Section 13(a) +of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, which require issuers +to file accurate annual, current and quarterly reports, which include such further information as +may be necessary to make the required statements not misleading. + +4 The FY 2017 reported amounts include fourth quarter FY 2017 net sales and income +from operations reported in Super Micro’s Form 8-K filed on August 3, 2017. + 12 +55. As a result of the conduct described above, Super Micro also violated Section +13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and +disposition of assets. +56. As a result of the conduct described above, Super Micro also violated Section +13(b)(2)(B) of the Exchange Act, which requires an issuer to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that: transactions are +executed in accordance with management’s general and specific authorization; transactions are +recorded as necessary to permit preparation of financial statements in conformity with GAAP or +any other criteria applicable to such statements, and to maintain accountability for assets; access to +assets is permitted only in accordance with management’s general or specific authorization; and +the recorded accountability for assets is compared with the existing assets at reasonable intervals +and appropriate action is taken with respect to any differences. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Super Micro’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 Super Micro cease and desist from committing or causing any violations and any future +violations of Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B), of the Exchange Act and Rules 12b-20, 13a-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 $17,500,000.00 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 + 13 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Super Micro Computer, 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 Lisa Deitch, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5010. + + C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created for the penalties referenced in paragraph IV.B above. Amounts ordered to be paid as civil +money penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent’s payment of a civil penalty in this action ("Penalty Offset"). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. Such +a payment shall not be deemed an additional civil penalty and shall not be deemed to change the +amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a "Related +Investor Action" means a private damages action brought against Respondent by or on behalf of +one or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4162.txt b/raw/aaer/2020/AAER-4162.txt new file mode 100644 index 0000000000000000000000000000000000000000..a743652c7c60262447637dd0d8f0c8fefead121a --- /dev/null +++ b/raw/aaer/2020/AAER-4162.txt @@ -0,0 +1,501 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89657 / August 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4162 / August 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19928 + + +In the Matter of + +HOWARD HIDESHIMA, + + + +Respondent. + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Howard Hideshima (“Hideshima” 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. Howard Hideshima, the former Chief Financial Officer of Super Micro Computer, +Inc. (“Super Micro”), engaged in improper accounting and caused internal accounting controls +failures, which resulted in Super Micro systematically prematurely recognizing and reporting +revenue and understating expenses from at least fiscal year (”FY”) 2015 through FY 2017. + +2. Hideshima pressed employees to maximize end-of-quarter revenue, without +devising and maintaining sufficient internal accounting controls to record revenue in conformity +with U.S. Generally Accepted Accounting Principles (“GAAP”). Hideshima was on notice that +Super Micro employees engaged in a number of improper practices to accelerate revenue +recognition and reporting, and he failed to adequately address the internal accounting control +failures and stop these practices going forward. +3. Hideshima also was responsible for certain accounting decisions that did not +conform with GAAP. For example, Super Micro improperly recognized and reported revenue (a) +upon a large shipment at quarter-end, when Hideshima was informed that Super Micro sent the +wrong goods to a customer and had to perform significant work for months after the shipment to +address the problem, (b) for sales to a large Super Micro distributor upon shipment, when +Hideshima received information indicating that the revenue should have been recognized when +Super Micro received payment from the distributor; and (c) upon shipment to certain overseas +customers, despite Hideshima authorizing employees to hold bills of lading and thus preventing the +customers from taking possession of the goods as a means to ensure payment. +4. In addition, Hideshima knew that Super Micro was misusing its cooperative +marketing program to pay a variety of unrelated expenses and, in certain instances, he proposed +that co-op funds be used for non-marketing purposes, which caused Super Micro to understate +these expenses. Furthermore, Hideshima implemented practices that caused Super Micro to over- +value inventory and under-state expenses by failing to reduce inventory and record an associated +expense when Super Micro no longer held the inventory for sale. +5. From at least FY 2015 through FY 2017, Hideshima signed, and/or approved, +annual, quarterly and current reports with the Commission that contained materially misstated +financial statements.2 + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +2 Hideshima signed each of Super Micro’s quarterly reports on Form 10-Q and annual +reports on Form 10-K beginning with the period ended September 30, 2014 through the +period ended March 31, 2017 containing materially misstated financial statements. + 3 + +6. Hideshima’s conduct violated certain internal accounting controls and books and +records provisions under the Exchange Act, and caused Super Micro’s reporting, books and +records, and internal accounting control violations. + +Respondent + +7. Howard Hideshima, age 60, was the Chief Financial Officer and Senior Vice +President of Super Micro from 2006 through 2018. Among other things, Hideshima was +responsible for designing and implementing the company’s internal accounting controls. +Hideshima approved and signed all of the company’s annual and quarterly reports at issue. He also +reviewed and approved current reports. He previously held senior financial positions at other +private and public companies. He holds Bachelor’s and Master’s degrees in accounting. +Hideshima is not a Certified Public Accountant. + +Related Entity + +8. Super Micro is a global producer of computer servers and equipment, incorporated +in Delaware, with its principal place of business in San Jose, California. Super Micro’s securities +are registered under Section 12(b) of the Exchange Act. The company’s fiscal year ends on June +30th. Super Micro’s shares currently trade on the NASDAQ Global Select Market. Because of +Super Micro’s pervasive accounting, reporting and internal accounting control issues, Super Micro +was unable to file periodic reports for nearly two years and, as a result, trading in the company’s +stock was suspended in August 2018 and the stock was then delisted from March 2019 through +January 2020. + +Facts + +A. Premature Revenue Recognition and Reporting + +9. In determining whether to recognize and report revenue during the relevant period, +GAAP required public companies to consider whether (1) the revenue is realized or realizable; and +(2) the revenue is earned. Consistent with GAAP, Super Micro’s revenue recognition policy, +which Hideshima was responsible for enforcing and interpreting, indicated that revenue is realized +and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement +exists; (b) delivery has occurred or services have been rendered; (c) the seller’s price to the buyer is +fixed or determinable; and (d) collectability is reasonably assured. + +10. Hideshima pressed employees to maximize revenue at the end of quarters— +typically sending dozens of emails to salespeople and other executives at the end of each quarter to + +Hideshima approved the Company’s current reports on Form 8-K, announcing the +financial and operational results for each of these periods, along with the current report +filed on August 3, 2017, announcing results for the year ended June 30, 2017, which also +contained materially misstated financial information. + 4 +try to increase sales—but failed to devise and maintain sufficient internal accounting controls with +respect to proper revenue recognition. For instance, Super Micro’s revenue recognition policy, for +which Hideshima was responsible, delegated responsibility for identifying sales terms that may +affect revenue recognition to salespeople. Yet Hideshima failed to directly or indirectly provide +revenue recognition training to salespeople. Hideshima also adopted policies, and was on notice of +the recording and reporting of certain transactions, that were not in accordance with GAAP. As a +result, during the period from at least FY 2015 through the end of FY 2017, Super Micro +systemically recognized, recorded in its books and records, and reported revenue prematurely by +engaging in a the following improper practices. + +Premature Revenue Recognition Prior to Customer Delivery + +11. Super Micro engaged in a number of transactions where it recognized revenue prior +to customer delivery in order to maximize revenue at the end of quarters. In certain instances, +Super Micro employees sent goods to warehouses or other storage facilities controlled by third +parties at quarter-end and paid for the storage fees until the goods were delivered to its customer. +In other instances, Super Micro asked its freight forwarders to hold the goods until the date that the +customer was prepared to accept the goods, rather than ship and deliver them on the date agreed to +with the customer. There also were instances where Super Micro recorded revenue although goods +remained at its own warehouse. + +12. In all of these transactions and other similar transactions, Super Micro improperly +recorded revenue upon shipment from its own facility or, in a few instances, before the goods even +left its facility. Recognizing the revenue was not in conformity with GAAP. + +13. On multiple occasions, Hideshima received information indicating that revenue was +being recognized prior to customer delivery, but he failed to put in place sufficient internal +accounting controls to address the issue and stop these practices going forward, resulting in the +premature recording and reporting of revenue. + +Improper Recognition of Revenue Upon Shipment of Goods Without Customer Authorization + +14. Super Micro—at the end of quarters—shipped goods on multiple occasions prior to +the delivery dates agreed with, or specified by, its customers in order to record and recognize the +revenue prior to quarter-end. Hideshima failed to put in place sufficient internal accounting +controls to address this practice. + +15. At the end of the second quarter of FY 2017, for example, a distributor customer +indicated that over $250,000 of goods could not be shipped absent its authorization. A Super +Micro employee still shipped the goods before quarter-end. The customer’s representative +complained that “no one can command you to process [our] order w/o our permission.” Hideshima +was informed that the goods were shipped without this customer’s authorization, and that lower +level Super Micro employees misrepresented to the customer that the goods were at the warehouse +when, in fact, they had already been shipped. Even after receiving this information, Hideshima + 5 +failed to put sufficient internal accounting controls in place to address employees’ shipment of +goods without customer authorization. + +16. The recognition of revenue when goods were shipped in contravention of customer +instructions did not conform with GAAP. + +Improper Recognition of Revenue Upon Shipment to a Large Super Micro Customer Where the +Parties’ Shipping Terms Required Revenue to Be Recognized Upon Delivery + +17. From at least 2014 through 2017, purchase orders submitted by a large Super Micro +customer specified “FOB Destination” as the shipping terms. Sales with FOB Destination +shipping terms are not realized or earned until delivery has occurred at the customer-designated +location and title to the goods has passed to the customer. Hideshima received information +indicating that the purchase orders contained FOB Destination terms. Under GAAP, revenue with +FOB Destination terms should ordinarily be recognized upon Super Micro’s delivery to the +customer. +18. Many shipments to this customer occurred near the end of quarters. During most +quarters over the relevant period, Super Micro’s employees sent emails to the customer’s +employees, purporting to change the shipping terms to “ex works”, which generally means that the +goods and title would pass to the customer when picked up at Super Micro’s warehouse. The +emails purporting to change the shipping terms, however, were often sent to the customer after the +goods had been shipped and the quarter had ended. Indeed, in many instances, the purported +change in terms occurred after the customer had already received the goods—i.e., after the +question of who would bear the risk of loss while the goods were in transit was moot. +19. Hideshima received information indicating that Super Micro employees were +routinely sending emails to purportedly change the shipping terms with this customer. He also +received information indicating that, in at least one instance, Super Micro employees sought to +recognize revenue upon shipment to this customer where the purchase order stated FOB +Destination shipping terms and Super Micro had not yet received an email from the customer +purporting to change the terms more than one month after quarter end. + +20. In addition to the problems with the timing of emails purporting to change shipping +terms with this customer, the emails were insufficient to override the customer’s purchase order +terms and conditions and allow for both the transfer of title, and risk of loss, at the point of +shipment under GAAP. + +21. In light of the information Hideshima received, he should have known that +recognition of revenue upon shipment to this customer was not appropriate under GAAP, and +instead should have been recognized upon delivery to the customer. + +22. From FY 2015 through FY 2017, Super Micro prematurely recognized more than +$45 million in revenue in connection with sales to this customer. + + 6 +Improper Recognition of Revenue Before Obtaining Customer Acceptance + +23. A number of Super Micro’s agreements with customers included acceptance +clauses, meaning that customer acceptance was a condition of the customer’s obligation to pay for +the goods. Under GAAP, revenue is considered to be earned when the seller has substantially +accomplished what it must do to be entitled to the revenue. Accordingly, where an agreement +contains a substantive customer acceptance clause, permitting customers to return the goods if they +did not meet the customer’s specifications, revenue generally should not be recognized until Super +Micro received confirmation of customer acceptance, the customer acceptance provision lapsed, +or, alternatively, Super Micro received payment from the customer. Hideshima was aware that +certain customers had acceptance clauses and understood that, under GAAP, revenue could not be +recognized absent customer acceptance or payment. +24. Super Micro’s internal accounting control for tracking customers with acceptance +clauses, and for determining whether those clauses had been satisfied was lacking for two reasons. +First, there was no adequate process to identify customers with acceptance clauses. Acceptance +clauses included in purchase orders or other transactional documents that evidenced the +arrangements that Super Micro had with its customers were identified on an ad hoc basis by +operations and sales employees who did not receive proper training or guidance on this topic from +Hideshima or anyone else at Super Micro. Second, even in instances where Super Micro was +aware of customer acceptance provisions, the determination of whether the condition was satisfied +was reached haphazardly. The decision was typically based on discussions between members of +the finance group and sales personnel who did not receive any relevant training from Hideshima or +anyone else at Super Micro. As a result, Super Micro recognized revenue in connection with +numerous sales before it received customer acceptance. Hideshima oversaw the design and +implementation of this internal accounting control. +Improper Recognition of Revenue Upon Shipment of Goods That Were Incomplete or Mis- +Assembled + +25. Super Micro also improperly recognized revenue for products that it sold where +employees knew the goods were incomplete or mis-assembled at the time of shipment. The goods +were shipped to customers at the end of quarters and Super Micro improperly recognized the +revenue before quarter-end. +26. Because Super Micro had not satisfied all of the necessary elements to recognize +revenue under GAAP, Super Micro prematurely recognized revenue in many instances. +27. Hideshima did not put in place sufficient internal accounting controls to address this +improper practice and, in at least one instance, he failed to reverse the recognition of revenue after +he was on notice that Super Micro sent the wrong goods to a customer and had to perform +significant work in the subsequent months to address the problem. +28. Specifically, Super Micro sent a $4 million order to a new customer towards the +end of the fourth quarter of FY 2016. Hideshima was involved in negotiating the transaction. +While the goods were in transit, the customer informed Super Micro that the product included a + 7 +wrong component. As a result of the error, the products were shipped to a warehouse where they +remained until Super Micro corrected the error. Super Micro employees were required to spend +significant time and effort over the following nearly two months to resolve the issue. Hideshima +was informed of these facts, and therefore he should have known it was improper to recognize the +sale at the end of FY 2016 under GAAP. +Improper Recognition of Revenue Upon Shipment to a Large Super Micro Distributor +29. Super Micro had a distributor customer to which it sold hundreds of millions of +dollars in products from FY 2015 to FY 2017. The distributor, however, was consistently unable +to pay within its payment terms—its payables were often multiple months past due. +30. On several occasions, Hideshima was informed of the distributor’s inability to pay +within payment terms and that the distributor’s ability to pay was tied to its receipt of funds from +its own customers (i.e., end-customers). +31. In light of these facts, under GAAP, Super Micro was required to recognize revenue +when it received payments from its distributor customer. Nevertheless, from FY 2015 through FY +2017, Hideshima approved Super Micro’s recognition of more than $150 million in total revenue +from this customer at the time of shipment. +Improper Recognition of Revenue While Holding Customers’ Bills of Lading +32. Hideshima instituted a practice where Super Micro improperly recognized revenue +while holding certain customers’ bills of lading. When Super Micro shipped goods to certain +countries—primarily Russia and other Eastern European countries—Super Micro requested that +the freight forwarders return the bills of lading to it. Super Micro then held the bills of lading until +it received payment (either partial or in full) from its customers. +33. A bill of lading is a shipping document that allows a customer to clear products +through customs. Absent a bill of lading, a customer ordinarily cannot take possession of the +goods. Super Micro’s practice was meant to ensure that Super Micro was paid by customers that +had not paid in advance. +34. In instances where Super Micro prevented customers from taking possession of +goods until payment was received, revenue was not realized or realizable at the time of shipment +under GAAP. Accordingly, Hideshima should have known that revenue should not have been +recognized. +Failure to Properly Account for Extended Warranties +35. Super Micro offered its customers the ability to purchase extended warranties on its +products. At times, these warranties were purchased separately from the cost of Super Micro +products and listed separately on invoices. With respect to certain types of products sold by Super +Micro, however, customers received an extended warranty covering periods ranging from one to +five years beyond the standard warranty, the cost for which was built into the price of the hardware + 8 +products purchased. These warranties were not explicitly listed in the invoice, purchase order or +any other documents provided to accounting. +36. Hideshima should have known that in order to properly account for extended +warranties, there needed to be a system facilitating accounting personnel’s receipt of information +about any extended warranties sold by Super Micro. Yet, until 2015, Hideshima did not put into +place any internal accounting control or process to identify products that included embedded +warranties. Hideshima also failed to train, or have others train, salespeople and members of the +operations team on how to identify embedded warranties. +37. Under GAAP, companies must account for revenue as earned, which for extended +warranties is ratably over the duration of the warranty term. Super Micro, instead, recognized all +of the extended warranty revenue upfront as a result of Hideshima’s failure to put in place a +sufficient internal accounting control. Accordingly, Super Micro prematurely recognized all +revenue from embedded extended warranties at the time of sale. +B. Super Micro Understated Certain Expenses +Misuse of Cooperative Marketing Funds to Pay Unrelated Expenses +38. Under a policy implemented by Hideshima and his accounting team, Super Micro’s +customers often were entitled to cooperative, or “co-op”, marketing funds based on their purchases +of product from Super Micro. As Super Micro stated in its SEC filings, which were signed by +Hideshima, as well as in internal written policies for which Hideshima was responsible, these funds +were to be used for co-op marketing activities undertaken by Super Micro’s customers. The +customers were entitled to receive reimbursement for a portion of the cost of these activities. +39. At the time of each sale to customers who were entitled to receive co-op marketing +funds, Super Micro accrued a liability and recorded an offsetting debit to contra revenue and +marketing expense. These liabilities were to pay for future marketing activities that customers +would perform. In reality, however, Super Micro improperly reduced the liabilities to avoid +recognizing a variety of expenses unrelated to marketing. +40. Super Micro used co-op marketing funds, without customer approval, for a variety +of purposes that were unrelated to marketing. For instance, Super Micro misused these funds to (a) +pay shipping costs that were the responsibility of Super Micro; (b) pay to store goods at third-party +facilities when customers were not prepared or willing to accept the goods before quarter end; (c) +recoup Super Micro losses in connection with goods that had been returned by customers (e.g., in +instances where the replacement products were more expensive); (d) pay for product repair costs +requested by customers that had extended warranties; (e) pay for Christmas gifts given to +customers; (f) cover customer short-pays (i.e., instances where invoices were not paid in full); and +(g) pay for installation services that Super Micro performed for its customers. Hideshima knew co- +op funds were used for non-marketing purposes and, in certain instances, he proposed that co-op +funds be used for non-marketing purposes. +41. In using co-op marketing funds for purposes unrelated to marketing, Super Micro +understated its expenses and liabilities. Specifically, Hideshima should have recorded or caused + 9 +others to record expenses when Super Micro incurred costs unrelated to marketing. Instead, +Hideshima knowingly circumvented the company’s internal accounting controls by approving a +practice where Super Micro reduced its co-op marketing liability account and did not record any +expense. +Overvaluation of Inventory +42. Super Micro engaged in two additional practices over the course of several years, +which Hideshima implemented, which systemically overstated inventory and understated expenses +in Super Micro’s books and records and publicly reported financial statements. First, Super Micro +failed to reduce inventory and record a research and development expense when its engineers used +inventory for internal purposes, as was required by GAAP. Second, Super Micro improperly +continued to keep inventory on its books that had been provided to customers for testing purposes +even when those products were never returned, as well as instances where it shipped items as +replacement products to its customers. These practices resulted in an understatement of cost of +sales and overstatement of gross profit. +C. Super Micro was Required to Restate Years’ Worth of Financial Statements Included +in Commission Filings +43. On August 3, 2017, Super Micro filed a Form 8-K with the Commission, which +Hideshima reviewed, announcing its operating and financial results for the fourth quarter of FY +2017. Several weeks later, Super Micro announced, in a filing signed by Hideshima, that it would +be unable to file its FY 2017 Form 10-K on time. On September 15, 2017, Super Micro disclosed +that it was performing an audit committee review to permit its auditor to complete its audit of the +financial statements. In November 2018, Super Micro determined that its previously filed financial +statements from 2015 through 2017 could not be relied upon. Super Micro did not file any annual +or quarterly reports from the time it filed its Form 10-Q for the third quarter of FY 2017 until May +2019, when Super Micro filed its FY 2017 Form 10-K. +44. In May 2019, Super Micro filed its Form 10-K for the year ended June 30, 2017 +and amended its Form 10-Q filings to restate its financial statements for the first three quarters of +FY 2017. The FY 2017 Form 10-K also restated the financial statements for FYs 2015 and 2016. +The restatements substantially impacted the company’s revenue/net sales, gross profits, operating +income and net income previously recorded in its books and records and previously reported in its +filings with the Commission. +45. Hideshima approved and signed all of the annual and quarterly reports containing +misstated financial statements that were ultimately restated. He also reviewed and approved +current reports that included misstated financial statements. +46. During the periods in which Hideshima signed annual and quarterly reports +containing misstated financial statements, he sold Super Micro stock at a profit. + 10 +Violations + +47. As a result of the conduct described above, Respondent violated Section 13(b)(5) of +the Exchange Act, which provides that no person shall knowingly circumvent or knowingly fail to +implement a system of internal accounting controls or knowingly falsify any book, record, or +account. +48. As a result of the conduct described above, Respondent violated Rule 13b2-1 of the +Exchange Act, which 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. +49. Super Micro violated the reporting provisions of Section 13(a) of the Exchange Act +by filing periodic and current reports on Forms 10-K, 10-Q, and 8-K that contained materially +misstated financial statements. As a result of the conduct described above, Respondent caused +Super Micro’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 +and 13a-13 thereunder, which require issuers to file accurate annual, current and quarterly reports, +which include such further information as may be necessary to make the required statements not +misleading.3 +50. Super Micro violated Section 13(b)(2)(A) of the Exchange Act, which requires an +issuer to make and keep books, records, and accounts which, in reasonable detail, accurately and +fairly reflect the issuer’s transactions and disposition of assets. As a result of the conduct described +above, Respondent caused Super Micro’s violations of Section 13(b)(2)(A) of the Exchange Act. +51. Super Micro violated Section 13(b)(2)(B) of the Exchange Act, which requires an +issuer to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that: transactions are executed in accordance with management’s general +and specific authorization; transactions are recorded as necessary to permit preparation of financial +statements in conformity with GAAP or any other criteria applicable to such statements, and to +maintain accountability for assets; access to assets is permitted only in accordance with +management’s general or specific authorization; and the recorded accountability for assets is +compared with the existing assets at reasonable intervals and appropriate action is taken with +respect to any differences. As a result of the conduct described above, Respondent caused Super +Micro’s violations of Section 13(b)(2)(B) of the Exchange Act. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Hideshima’s Offer. + + Accordingly, it is hereby ORDERED that: + +3 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 15 U.S.C. § 78u-3(a); Robert M. +Fuller, 56 SEC 976, 984 (2003), pet. denied, 95 F. App’x 361 (D.C. Cir. 2004). + 11 + + A. Pursuant to Section 21C of the Exchange Act, Respondent Howard Hideshima 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 and 13b2-1 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $50,000.00, disgorgement of $260,844.00 and prejudgment interest of +$40,212.00 to the Securities and Exchange Commission. If timely payment of the penalty is not +made, additional interest shall accrue pursuant to 31 U.S.C. §3717. If timely payment of the +disgorgement and prejudgment interest 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 +Howard Hideshima 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 Lisa Deitch, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5010. + +C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the disgorgement, prejudgment interest and penalties referenced in paragraph IV.B above (the +“Hideshema Fair Fund”) and the Hideshema Fair Fund shall be added to the Fair Fund established +in the Commission’s related proceeding, In the Matter of Super Micro Computer, Inc., Admin. +Proc. No. 3-19927 (instituted August 25, 2020) (“Super Micro Fair Fund”). The Super Micro Fair +Fund will be distributed to affected investors in accordance with a Commission-approved plan of +distribution in that proceeding. Amounts ordered to be paid as civil money penalties pursuant to +this Order shall be treated as penalties paid to the government for all purposes, including all tax + 12 +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that in any +Related Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or +reduction of any award of compensatory damages by the amount of any part of Respondent’s +payment of a civil penalty in this action ("Penalty Offset"). If the court in any Related Investor +Action grants such a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of +a final order granting the Penalty Offset, notify the Commission's counsel in this action and pay the +amount of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall +not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4163.txt b/raw/aaer/2020/AAER-4163.txt new file mode 100644 index 0000000000000000000000000000000000000000..c533e7008c56b7bd24fb64513c9564a16762ff0c --- /dev/null +++ b/raw/aaer/2020/AAER-4163.txt @@ -0,0 +1,253 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89658 / August 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4163 / August 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19929 + + +In the Matter of + +CHARLES LIANG, + + + +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 Charles Liang (“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. Super Micro Computer, Inc., a producer of computer servers headquartered in +California, engaged in improper accounting—prematurely recognizing revenue and understating +expenses from at least fiscal year (“FY”) 2015 through FY 2017. As a result, Super Micro filed +with the Commission materially misstated financial statements in its annual, quarterly and current +reports during the period. + +2. Super Micro’s executives pushed employees to maximize end-of-quarter revenue +and minimize expenses, without devising and maintaining sufficient internal accounting controls to +record revenue and expenses in conformity with U.S. Generally Accepted Accounting Principles +(“GAAP”). Super Micro improperly accelerated revenue recognition and reporting through a +number of improper practices. Super Micro also improperly under-reported certain expenses by +misusing its cooperative marketing program and by improperly accounting for certain inventory. + +3. On May 17, 2019, Super Micro filed with the Commission restated financial +statements for previously-filed quarterly and annual reports for fiscal years 2015, 2016 and 2017. + +4. Charles Liang, Super Micro’s Chief Executive Officer, received profits from stock +sales during the 12-month periods following the filings containing financial results that Super +Micro restated as a result of misconduct. Liang has not, however, reimbursed Super Micro for +those stock sales profits as required under Section 304(a) of the Sarbanes-Oxley Act. + +Respondent + +5. Charles Liang, age 62, is the President, Chief Executive Officer, and Chairman of +the Board of Directors of Super Micro. He has held those positions since founding the company in +1993. + +Related Entity + +6. Super Micro is a global producer of computer servers and equipment, incorporated +in Delaware, with its principal place of business in San Jose, California. Super Micro’s securities +are registered under Section 12(b) of the Exchange Act. The company’s fiscal year ends on June +30. Super Micro’s shares currently trade on the NASDAQ Global Select Market. Because of +Super Micro’s pervasive accounting, reporting and internal accounting control issues, Super Micro +was unable to file periodic reports for nearly two years and, as a result, trading in the company’s + +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 +stock was suspended in August 2018 and the stock was then delisted from March 2019 through +January 2020. + +Facts + +Super Micro’s Premature Recognition of Revenue + +7. Super Micro executives pressed employees to maximize revenue at the end of +quarters but failed to devise and maintain sufficient internal accounting controls with respect to +proper revenue recognition. For instance, Super Micro delegated responsibility for identifying +sales terms that may affect revenue recognition to salespeople without training them on revenue +recognition. During the period from at least FY 2015 through the end of FY 2017, Super Micro +systemically recognized, recorded in its books and records, and reported revenue prematurely by +engaging in the following improper practices. + +8. Super Micro engaged in a number of transactions where it recognized revenue prior +to customer delivery, in order to improperly accelerate revenue recognition at the end of quarters. +In certain instances, Super Micro employees sent goods to warehouses or other storage facilities +controlled by third parties at quarter-end and paid for the storage fees until the goods were +delivered to its customer. In other instances, Super Micro asked its freight forwarders to hold the +goods until the date that the customer was prepared to accept the goods, rather than ship and +deliver them on the date agreed to with the customer. There also were instances where Super +Micro recorded revenue although goods remained at its own warehouse. In all of these +transactions and other similar transactions, Super Micro improperly recorded revenue upon +shipment from its own facility but prior to customer delivery or, in a few instances, before the +goods even left its facility. Recognizing the revenue was not in conformity with GAAP. + +9. Super Micro—at the end of quarters—shipped goods on multiple occasions prior to +the delivery dates agreed with, or specified by, its customers in order to record and recognize the +revenue prior to quarter-end. Super Micro’s recognition of revenue when it shipped goods in +contravention of customer instructions did not conform with GAAP. + +10. From at least 2014 through 2017, purchase orders submitted by a large customer +specified “FOB Destination” as the shipping terms. Sales with FOB Destination shipping terms +are not realized or earned until delivery has occurred at the customer-designated location and title +to the goods has passed to the customer. Super Micro, however, improperly recorded revenue +upon shipment to the customer. From FY 2015 through FY 2017, Super Micro prematurely +recognized more than $45 million in revenue in connection with sales to this customer. + +11. Super Micro prematurely recognized revenue in connection with sales transactions +that included customer acceptance clauses. Where an agreement contains a substantive customer +acceptance clause, permitting customers to return the goods if they did not meet the customer’s +specifications, revenue generally should not be recognized until Super Micro received +confirmation of customer acceptance, the customer acceptance provisions lapsed, or, alternatively, +Super Micro received payment from the customer. Super Micro’s internal accounting control for + 4 +tracking customers with acceptance clauses, and for determining whether those clauses had been +satisfied, was lacking. As a result, Super Micro recognized revenue in connection with numerous +sales before it received customer acceptance. + +12. Super Micro improperly recognized revenue for products that it sold where +employees knew the goods were incomplete or mis-assembled at the time of shipment. The goods +were shipped to customers at the end of quarters so that Super Micro would recognize the revenue +before quarter-end. + +13. Super Micro had a distributor customer to which it sold hundreds of millions of +dollars in products from FY 2015 to FY 2017. The distributor, however, was consistently unable +to pay within its payment terms—its payables were often multiple months past due. Super Micro +received information on multiple occasions that the distributor’s ability to pay was tied to its +receipt of funds from its own customers (i.e., end-customers). In light of these facts, under GAAP, +Super Micro was required to recognize revenue when it received payments from its distributor +customer. Super Micro, however, prematurely recognized more than $150 million in total revenue +at the time of shipment from FY 2015 through FY 2017. + +14. Super Micro improperly recognized revenue while holding certain customers’ bills +of lading. Absent a bill of lading, a customer ordinarily cannot take possession of the goods. In +instances where Super Micro prevented customers from taking possession of goods until payment +was received, revenue was not realized or realizable at the time of shipment under GAAP. +Accordingly, revenue should not have been recognized. + +15. Super Micro prematurely recognized revenue on certain extended warranties it sold +to customers by recognizing the revenue at the time of sale, rather than ratably over the duration of +the warranty term. +Super Micro’s Understatement of Expenses +16. Super Micro also improperly under-reported expenses by misusing its cooperative +marketing funds, without customer approval, for a variety of purposes unrelated to marketing, such +as warehousing costs for goods at quarter-end, shipping costs, and product repair costs. +Cooperative marketing funds were supposed to be used for cooperative marketing activities +undertaken by Super Micro’s customers. At the time of each sale to customers who were entitled +to receive co-op marketing funds, Super Micro accrued a liability and recorded an offsetting debit +to contra revenue and marketing expense. These liabilities were to pay for future marketing +activities that customers would perform. In reality, however, Super Micro improperly reduced the +liabilities to avoid recognizing a variety of expenses unrelated to marketing. In using cooperative +marketing funds for purposes unrelated to marketing, Super Micro understated its expenses and +liabilities. In addition, Super Micro over-valued inventory and under-stated expenses by failing to +reduce inventory and record an associated expense in instances where Super Micro no longer held +the inventory for sale. + 5 +Super Micro’s Restatement + +17. On August 3, 2017, Super Micro filed a Form 8-K with the Commission, +announcing its operating and financial results for the fourth quarter of FY 2017. Several weeks +later, Super Micro announced that it would be unable to file its FY 2017 Form 10-K on time and, +on September 15, 2017, it disclosed that it was performing an audit committee review to permit its +auditor to complete its audit of the financial statements. In November 2018, Super Micro +determined that its previously filed financial statements from FYs 2015 through 2017 could not be +relied upon. Super Micro did not file any annual or quarterly reports from the time it filed its Form +10-Q for the third quarter of FY 2017 until May 2019, when Super Micro filed its FY 2017 Form +10-K. +18. As a result of Super Micro’s inability to file any financial statements for nearly two +years, the company’s stock was suspended from trading on the NASDAQ Stock Market and then +de-listed. +19. In May 2019, Super Micro filed its Form 10-K for the year ended June 30, 2017 +and amended its Form 10-Q filings to restate its financial statements for the first three quarters of +FY 2017. The FY 2017 Form 10-K also restated the financial statements for FYs 2015 and 2016. +The restatements substantially impacted the company’s revenue/net sales, gross profits, operating +income and net income previously recorded in its books and records and previously reported in its +filings with the Commission. +Compensation and Stock Sales of CEO Liang + +20. During the 12-month periods that followed the filing of financial statements in +Super Micro’s quarterly and annual reports requiring restatement, Liang realized profits from his +sales of Super Micro stock. +21. Liang has not reimbursed those amounts to Super Micro. +Violation + +22. 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, among other things, any profits realized from the sale of securities of the issuer during that 12- +month periods following the public issuance or filing containing the financial results that were +required to be restated. Section 304 does not require that a chief executive officer or chief +financial officer engage in misconduct to trigger the reimbursement requirement. Liang received +profits from his sales of securities during 12-month periods following filings containing financial +results that Super Micro was required to restate. He has not, to date, reimbursed Super Micro for +those amounts. Liang has, therefore, violated Sarbanes-Oxley Section 304. + 6 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Liang’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Liang cease and desist +from committing or causing any violations and any future violations of Section 304 of the Sarbanes- +Oxley Act of 2002. + +B. Respondent Liang shall, within 10 days of the entry of this Order, reimburse Super +Micro for a total of $2,122,000 pursuant to Section 304(a) of Sarbanes-Oxley Act of 2002. +Respondent shall simultaneously deliver proof of satisfying this reimbursement obligation to Lisa +Deitch, Division of Enforcement, Securities and Exchange Commission, 100 F Street Northeast, +Washington, DC 20549. + +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 of +the federal securities laws or any regulation or order issued under such laws, as set forth in Section +523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4164.txt b/raw/aaer/2020/AAER-4164.txt new file mode 100644 index 0000000000000000000000000000000000000000..2e58d4685c1d523ba851e0876404dbbfe1174f70 --- /dev/null +++ b/raw/aaer/2020/AAER-4164.txt @@ -0,0 +1,277 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89677 / August 26, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4164 / August 26, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19932 + + +In the Matter of + +BorgWarner 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 BorgWarner Inc. (“BorgWarner,” “Respondent,” +or “the Company”). + +II. + + In anticipation of the institution of these proceedings, 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 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, Making Findings, and Imposing a Cease- +and-Desist Order (“Order”), as set forth below. + + + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. From 2012 until the fourth quarter of 2016, BorgWarner failed to estimate its +“incurred but not reported” or “IBNR” liability for future asbestos claims. As a result, +BorgWarner’s financial statements were materially misstated. Although the Company recorded +liabilities for filed asbestos-related claims and noted that future claims were probable, prior to +2016, BorgWarner concluded that it could not reasonably estimate its IBNR liability for future +asbestos claims. BorgWarner came to this conclusion without conducting sufficient analysis, +including any substantive quantitative inquiry, despite possessing nearly 40 years of historical raw +claims data. Rather, the Company’s assessment was based on untested qualitative assumptions not +relevant to calculating an estimate. As reported in its 2017 Form 10-K/A, filed in 2018, +BorgWarner could have estimated its IBNR asbestos liability as early as 2012. +2. In the fourth quarter of 2016, BorgWarner recorded a pre-tax $703.6 million charge +for the IBNR liability and identified the charge as being the result of a change in estimate. +Thereafter, the Company concluded that the charge was the result of an error and filed a +restatement in 2018 to reflect its IBNR liabilities in appropriate prior periods dating back to 2012. +The restated numbers were material to the Company’s financial statements and impacted, among +other items, the amounts accrued for asbestos-related liabilities and pre-tax earnings. BorgWarner +reported that its failure to record the IBNR estimate was due to a material weakness in the +Company’s internal controls over financial reporting. +3. As a result of the conduct described in this Order, BorgWarner violated Sections +13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 +thereunder. + +Respondent + +4. BorgWarner Inc. is a Delaware corporation incorporated in 1987 that provides +technology solutions for combustion, hybrid and electric vehicles. The Company manufactures and +sells its products globally. The Company’s stock currently trades on the New York Stock Exchange +under the ticker symbol “BWA.” + +Facts +5. BorgWarner and its subsidiaries have been frequently named as defendants in +personal injury lawsuits alleging exposure to asbestos-containing automotive parts – mainly clutch +assemblies for use with manual transmissions – that the Company manufactured from 1928 + +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 +through approximately 1986. In 2004, the Company’s primary insurance policies were exhausted, +and BorgWarner became responsible for managing its asbestos-related claims rather than relying +on its insurance companies as it had done in the past. As part of that process, the Company built a +database using the insurers’ claims data to record and manage its claims. + +6. Applicable accounting standards require companies to book a loss contingency +charge whenever the estimated loss from a loss contingency is both probable and reasonably +estimable. From 2004 through 2015, BorgWarner consistently disclosed that losses from future +asbestos claims were probable, but asserted that the amount of those losses was not reasonably +estimable. On that basis, BorgWarner did not book any IBNR charge during those years. + +7. From at least 2011 until 2014, BorgWarner’s conclusion that it could not +reasonably estimate IBNR claims was memorialized in a two page memo-to-file (the “Memos”) +authored and updated by a Company employee. + +8. The Memos consistently stated that BorgWarner could not reasonably estimate the +amount of its IBNR asbestos liability due to a number of qualitative factors that created +insurmountable uncertainty. Specifically, the Company concluded that there was no way to +accurately estimate how many people had been exposed to BorgWarner products, the incidence of +illness, or the life expectancies of exposed individuals. BorgWarner also concluded that because +its asbestos-containing clutch pads were normally sealed inside a clutch housing, BorgWarner’s +position was unique among asbestos defendants, rendering industry benchmarks inapplicable for +estimating BorgWarner’s IBNR asbestos liability. These conclusions were based on high-level +assumptions that were not subject to substantive quantitative analysis, actuarial assessment, or +other testing. + +9. In late 2014 and 2015, BorgWarner implemented a number of changes regarding its +approach to asbestos litigation in an effort to reduce litigation costs. As part of that process, the +Company hired a new employee who had asbestos litigation experience, as well as prior experience +with evaluating IBNR asbestos liability. In the years leading up to 2014, no one at the Company +reviewed the Memos memorializing the Company’s analysis, which were updated on an annual +basis. The process of creating and updating the Memos represented the Company’s only internal +control around whether it could estimate its asbestos-related IBNR. + +10. Beginning in 2015, the Company discussed whether to retain an actuary to evaluate +BorgWarner’s data for IBNR purposes. Repeating the untested assumptions set forth in the +Memos, BorgWarner determined that an actuary was not necessary, citing, among other factors, +gaps in its claims data, the uniqueness of the Company’s product (which the company asserted +rendered industry benchmarks inapplicable), and volatility in claims patterns. + +11. Thereafter, BorgWarner began to populate missing data fields, evaluate claims +patterns, and assess volatility using information from the Company’s database, which included +over 100,000 claims at the time and dated back to the 1980s; and also began evaluating other +companies’ public filings. + + + + +4 +12. In conjunction with this work, in September 2016, the Company hired an actuarial +firm with asbestos claims expertise (the “Actuary”) to perform an actuarial analysis for the purpose +of determining whether the Company’s IBNR asbestos liability was reasonably estimable. + +13. While BorgWarner had previously concluded that its data set was incomplete, the +Actuary was generally able to obtain sufficient information from litigation files accessible to the +Company. In addition, the Actuary determined that industry benchmarks could be applied to +BorgWarner and that it did not need to adjust the benchmarks because BorgWarner’s claims data +was volatile or inherently unique – a finding in contrast to the Company’s prior position that +industry benchmarks were inapplicable. Moreover, the Actuary found that the multiple inhibiting +factors listed in the Company’s Memos (such as product uniqueness and unknown exposure rates) +were not barriers to its estimation of future liabilities. + +14. In its 2016 Form 10-K, BorgWarner reported a change in estimate for the +accounting of its asbestos-related IBNR liabilities and recorded a corresponding pre-tax, non-cash +charge of $703.6 million.2 + +15. Subsequently, on June 15, 2018, BorgWarner announced it would restate its +consolidated financial statements due to a material weakness in its internal controls over financial +reporting related to the Company’s historical assertion that IBNR asbestos liabilities could not be +estimated. BorgWarner stated that it had determined that it could have estimated an IBNR prior to +Q4 2016, and that it would therefore need to reflect the one-time $703.6 million charge in +appropriate prior periods. + +16. BorgWarner’s material weakness in its internal controls over financial reporting +around asbestos-related IBNR stemmed from its use of untested assumptions that, among other +things, lacked substantive quantitative analysis and did not consider industry benchmarks to +conclude that it could not reasonably estimate its IBNR liability. BorgWarner filed an amended +2017 Form 10-K on September 28, 2018 reflecting corrected financial statements dating back to +year-end 2012. + +17. The impact of the Company’s misstatement was material to several financial +statement items, including a 6% reduction in pre-tax earnings in both 2014 and 2015 and a more +than 200% increase in asbestos-related liabilities for each year. + +Violations + +18. As a result of the conduct described above, BorgWarner violated the reporting +provisions of Sections 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder. +Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 thereunder require issuers +like BorgWarner to file annual, current, and quarterly reports with the Commission containing such + +2 In 2015, BorgWarner reported pre-tax earnings of $926.8 million. In 2016, the Company reported pre-tax earnings +of $190.5 million. + + + + +5 +information as the Commission’s rules prescribe. As described above, BorgWarner’s financial +statements contained in annual, current, and quarterly reports were materially mistatted. + +19. BorgWarner also violated Sections 13(b)(2)(A) and (B) of the Exchange Act. +Section 13(b)(2)(A) requires an issuer like BorgWarner to make and keep books, records, and +accounts, which, in reasonable detail, accurately and fairly reflect the company’s transactions and +dispositions of assets. Section 13(b)(2)(B) requires issuers like BorgWarner to devise and maintain +a system of sufficient internal accounting controls. As detailed above, BorgWarner failed to make +and keep books, records, and accounts which accurately and fairly reflected transactions related to +its IBNR for asbestos liabilities. BorgWarner also failed to establish sufficient internal accounting +controls relating to its IBNR for asbestos liabilities. + +V. + + 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(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules +13a-1, 13a-11 and 13a-13, thereunder. + +B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $950,000 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 + + + + +6 +Payments by check or money order must be accompanied by a cover letter identifying +BorgWarner as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Carolyn Welshhans, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5010A. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4165.txt b/raw/aaer/2020/AAER-4165.txt new file mode 100644 index 0000000000000000000000000000000000000000..91676f26381a17749076230979f6671d6951f4cd --- /dev/null +++ b/raw/aaer/2020/AAER-4165.txt @@ -0,0 +1,571 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89704 / August 28, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4165 / August 28, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19948 + + +In the Matter of + +HERBALIFE NUTRITION +LTD., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Herbalife Nutrition, Ltd. (“Herbalife” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + +2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Herbalife, a direct selling +company incorporated in the Cayman Islands with headquarters in the United States. + +2. From 2006 to 2016, Herbalife’s Chinese subsidiaries (“Herbalife China”) engaged +in a scheme to offer corrupt payments and other improper benefits to Chinese government officials. +Between 2012 and 2016, Herbalife China employees, including Herbalife China’s then-Managing +Director (“Managing Director”) and Herbalife China’s then-Director of External Affairs (“EA +Director”), provided improper benefits of cash, gifts, travel, alcohol, meals, and entertainment to +Chinese government officials. Certain Herbalife executives received reports of high travel and +entertainment spending in China and violations of Herbalife’s internal FCPA policies, but failed to +detect and prevent improper payments and benefits and falsifications of expense reports. By 2016, +Herbalife China was responsible for approximately twenty percent of Herbalife’s worldwide net +sales. The improper benefits provided by Herbalife China were not accurately reflected in +Herbalife’s books and records, and Herbalife failed to devise and maintain a sufficient system of +internal accounting controls. + +3. As a result, Herbalife violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act. + +Respondent + +4. Herbalife is a direct selling company incorporated in the Cayman Islands with +headquarters in the United States. Herbalife’s common stock is registered with the Commission +pursuant to Section 12(b) of the Exchange Act. At all relevant times, its stock has been listed on +the New York Stock Exchange (Ticker: HLF), and it has been an “issuer” within the meaning of +the FCPA. + +Relevant Entity and Persons + +5. Herbalife China is a group of wholly-owned, China-based subsidiaries of +Herbalife. Throughout the relevant period, Herbalife China’s financial statements were +consolidated with those of Herbalife. + + +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. Managing Director is a Chinese national residing in China and was Herbalife +China’s Managing Director from December 2007 to May 2017. Prior to becoming Managing +Director, he was the Director of Sales for Herbalife China in 2006 and 2007. + +7. EA Director is a Chinese national who resides in China. From 2006 to May 2017, +she served as the head of the External Affairs department (“External Affairs”) for Herbalife China. + +Facts + +Herbalife China Provided Improper Benefits to Chinese Government Officials in +Connection with Licenses + +8. From at least 2006, External Affairs, headed by EA Director, was responsible for +obtaining direct selling licenses from the Chinese government – a prerequisite for Herbalife China +to conduct its direct selling business in China. External Affairs was also responsible for promoting +Herbalife China’s interests to the Chinese government, responding to inquiries and investigative +requests from the Chinese government, and marketing Herbalife China through the Chinese media. + +9. In late 2006, Herbalife China submitted an application to the Chinese government +for its first direct selling license, which was ultimately granted for two cities in one province (the +“Province”). To facilitate approval of its license application, Herbalife China provided improper +benefits, including payments, to government officials including those employed by Chinese +Government Agency 1, the agency responsible for awarding direct selling licenses in China. For +example, in a January 10, 2007 telephone call, Managing Director (serving then as the Director of +Sales for Herbalife China) asked EA Director whether Herbalife China had “taken care of” an +official at Chinese Government Agency 1 (“Official 1”). Managing Director then asked, “We have +given the money to [Official 1], haven’t we?” to which EA Director replied, “Of course we have.” +Managing Director then stated, “The money works well on him.”2 + +10. In March 2007, Chinese government officials informed Herbalife China that it +would receive its first direct selling license for the two cities in the Province. During a March 22, +2007 telephone call, Herbalife China’s Managing Director at the time (“Former MD”) +congratulated EA Director on acquiring the license. EA Director told Former MD, “I will take +care of those people. I will still have to invite them out for dinner next time I come anyway.” +Former MD responded, “Right, good idea. We will talk later about how you are going to take care +of them.” Later that day, during a call, EA Director spoke with a senior manager of External +Affairs (“Senior Manager”). EA Director told Senior Manager to “grab a pen and write down the +gift list.” After listing the names of 17 individuals, including Chinese Government Agency 1 +officials who were involved in application process for Herbalife China’s pending direct selling +license application, EA Director told Senior Manager to “go and get 260,000 yuan (approximately +$33,700) and then divide the money among them, with a total of approximately 60,000 yuan +(approximately $7,800) distributed to 16 Chinese Government Agency 1 officials” + +2 The telephone discussions between Herbalife China employees described in this Order +were in Chinese, and the quoted excerpts are English translations of those discussions. +4 + +11. During a telephone call later that same day, Former MD told Managing Director +(serving then as the Director of Sales for Herbalife China) that Former MD wanted to talk “about +what I spent to take care of things for our license.” Managing Director told Former MD that +Managing Director had withdrawn over 200,000 yuan, and Former MD responded that EA +Director “is pressing me about that. I already took [100,000 yuan] out of the bank and gave it to +[EA Director].” + +12. The following day, on March 23, 2007, Former MD spoke with a (now former) +senior Herbalife executive in the U.S. (“Senior Executive”). During that call, Former MD +complained about Herbalife’s internal policy of limiting dinners with any Chinese government +official to six dinners per year. Former MD said that he was concerned about this limitation +“because the people that does [sic] your license are those people, okay. You have far more than +just six dinners.” Former MD told Senior Executive that this policy will put the onus on U.S. +executives to approve any dinners in excess of six times per year, “I can always write back to you +folks and ask for approvals but then it’s like putting the onus back on you folks to answer future +questions.” Former MD stated that he “disagree[d] that having dinners with officials, that you will +influence them but it’s just part of the way of doing business.” Senior Executive told Former MD +that “I am sure there are a lot of government officials, you can put different names down…but I +didn’t tell you that.” After Former MD explained that “with the license process, you know, it is +tough for me to use all the names,” Senior Executive responded, “How would anybody ever +know?” Former MD said he understood, and Senior Executive told Former MD, “All an auditor is +going to do is pick up your receipts, your expense report, oh he did Mr. X, Mr. A, Mr. B, Mr. C, +Mr. D., and if he did a few of these guys a couple times but that was it.” + +13. Thereafter, Herbalife China provided improper benefits to a Chinese government +official in connection with a license. On September 8, 2009, Managing Director spoke with an +official from a government agency responsible, at least in part, for enforcing compliance with +Chinese laws applicable to direct selling licenses (“Official 2”). Managing Director thanked +Official 2 for helping Herbalife China in connection with a license: “You have certainly helped us +to get this done.” Official 2 asked to be a “consultant” for Herbalife to help pay for his “son’s +house purchasing fund,” but Official 2 also said that he did not “want to discuss too much [ ] over +the phone.” + +14. Herbalife China employees continued to influence government officials through +lavish meals and gifts. Consistent with the lack of commitment to compliance and accurate record +keeping demonstrated by Senior Executive, Herbalife China employees funded those meals and +gifts through falsified expense reimbursements until 2016. + +Herbalife China Provided Chinese Government Officials with Improper Benefits +including Cash, Gifts, Meals, and Entertainment + +15. Herbalife China provided improper benefits of cash, gifts, meals, and entertainment +to Chinese government officials. For example, during a call on March 15, 2007, Managing +Director (serving then as the Director of Sales for Herbalife China) and EA Director discussed +paying certain provincial officials. Managing Director told EA Director that he had been told to +pay 35,000 yuan (approximately $4,500) to the officials. Managing Director then asked, “Do you +5 + +think we should give more?” EA Director responded that, “Okay. But he has to guarantee this…to +be effective.” Managing Director explained that “we need to build the connection…I was thinking +it is better to spend money beforehand than spending money afterwards. This money is a small +sum after all, and if we were to be penalized, the figure will be much greater.” + +16. Herbalife China continued to influence Chinese government officials with improper +gifts of meals and entertainment. An Herbalife China External Affairs manager (“EA Manager”) +developed a relationship with a municipal government official (“Official 3”). During telephone +conversations, EA Manager and Official 3 discussed treating Chinese government officials to +expensive meals, alcohol, karaoke, and luxury gifts. For example, on January 11, 2012, EA +Manager told Official 3 that EA Manager had entertained several government officials with +dinners, karaoke, and alcohol. EA Manager said that one government official who coordinated a +dinner had been direct about his expectations: “He was straight forward to me, because I’m not +going to go invite people for dinner empty-handed…He said, ‘you be prepared.’ I said I +understood. I can’t leave him empty-handed.” EA Manager also said that he had “taken care” of +other Chinese government officials. + +17. On March 31, 2012, EA Manager told Official 3 that EA Manager treated Chinese +government officials to expensive meals with alcohol. EA Manager said that one evening was “so +expensive, my hands were shaky.” Later, EA Manager asked Official 3 for names of government +officials that EA Manager could write on his expense reports because he spent so much money that +he needed to add names to get under the company’s per head spending limitation. + +18. Other Herbalife China External Affairs employees also falsified expense reports to +collect reimbursement for purported gifts and meals to Chinese government officials. For +example, on January 11, 2012, an External Affairs employee spoke with the External Affairs +assistant manager responsible for processing expense reimbursement requests (“EA Assistant +Manager”). EA Assistant Manager asked the employee to submit falsified reimbursement requests +supported by false meal and gift invoices totaling 577,000 yuan (approximately $91,000). + +19. Herbalife China also provided improper benefits, including payments, to Chinese +government officials, to curtail government investigations of Herbalife China and to prevent or +reduce fines issued to Herbalife China by the Chinese government. For example, on August 8, +2012, Managing Director and EA Director discussed an investigation in Nanjing. EA Director told +Managing Director that a Chinese government official had helped stop an investigation involving +Herbalife China, and that EA Director was going to obtain the interview records and police report +for the investigation. Managing Director told EA Director to thank the government official, and +she responded that she had already done so when he came to Beijing. Managing Director told EA +Director to give the government official the money that the company otherwise would have paid as +a penalty, “Let’s give the fine to him.” EA Director responded that they should not discuss this +over the phone. + +20. The above-described conduct by External Affairs employees continued until 2016. +According to internal audit reports, Herbalife China employees continued excessive spending on +gifts, meals, and entertainment for Chinese government officials. + +6 + +Herbalife China Provided Improper Benefits to Chinese State-Owned Media to +Remove Negative Media Coverage of Herbalife China + +21. Herbalife China also provided improper benefits to government officials at state- +owned media outlets in China to delete negative media coverage of Herbalife China. For example, +in January 2013, a state-owned media outlet (“Media Outlet 1”) published a negative article about +Herbalife China. In an April 22, 2013 telephone call, EA Director told Managing Director that she +had met with an official of Media Outlet 1 (“Media Official 1”) and asked him to remove the +negative article. EA Director told Managing Director: “He already took what he should take, ate +what he should eat, drank what he should drink, and used what he should use. It’s up to him.” +Managing Director responded: “It is time for him to get to work, right?” EA Director told +Managing Director that she told Media Official 1 that “if you destroyed us, where could you get +money?” to which Media Official 1 laughed and agreed to remove the negative articles. Managing +Director praised EA Director: “You have done a great job!” + +22. In 2013, another state-owned media outlet (“Media Outlet 2”) published several +negative articles about Herbalife China. In an August 28, 2013 telephone call, EA Manager told +Managing Director that he had met with a senior editor of Media Outlet 2 (“Media Outlet 2 +Editor”), who “had agreed that they would stop after publishing two articles and we would start to +negotiate collaboration.” EA Manager told Managing Director that when Media Outlet 2 Editor +escorted him out, EA Manager “put our ‘goodwill’ on the desk. He pretended he did not see it. +This should not be a problem.” + +Herbalife China Employees Submitted and Approved False Expenses + +23. External Affairs employees submitted fake invoices and false expense reports to get +reimbursed for improper benefits they provided to government officials. For example, on January +31, 2012, EA Manager asked Official 3 for names of government officials that EA Manager could +list on a falsified expense report. EA manager told Official 3 that a local government official had +called EA Manager to ask EA Manager to pay for a meal for the official and his family during a +family road trip. EA Manager explained that the official “knows that [EA Manager] can arrange +for any place all over the country.” EA Manager said that the official “has helped [EA Manager] a +lot before.” EA Manager asked for names of officials that he could list on the expense report +because “it’s not appropriate for [EA Manager] to write down [the official’s] name too many +times.” + +24. During a telephone call on April 6, 2012, EA Manager told Official 3 that he went +to buy fake receipts “to cover the gifts” for government officials, bags that were “very expensive +by Prada.” During a call on August 1, 2013, EA Manager and EA Director discussed whether to +purchase fake meal invoices or fake gift invoices to best avoid internal audit oversight. They also +discussed how EA Manager’s usual fake invoice supplier was no longer available and his other +sources could not provide enough fake invoices. + +25. During a telephone call on March 21, 2014, two External Affairs employees +discussed how to submit falsified expense reports for 20,000 yuan for claimed expenses regarding +gifts to government officials. The two employees discussed splitting the gift expenses into two +7 + +applications and revising the list of purported participants because the original list of 20 supposed +deputy directors was not realistic. + +26. In 2015 and 2016, Managing Director approved several expense applications +submitted by an External Affairs employee for a reimbursement of approximately $150,000 +claimed to have been paid to a farm, purportedly for shipping fruit and vegetable gifts to Chinese +government officials and media, including state-owned media officials. The amount of produce +purportedly purchased at the farm would have weighed approximately 34.5 metric tons, or 135 +pounds per purported gift recipient, and, thus, could not have been the actual purpose of the +$150,000 reimbursed. The expense applications and attached invoices were false, and the +expenditures was improperly recorded in Herbalife’s financial records. + +27. Between 2012 and 2016, Herbalife China failed to accurately record gifts, meals, +entertainment, and other expenditures provided for government officials on its books, records and +accounts. + +28. Herbalife China’s financial statements were consolidated into Herbalife’s reported +financial statements, which were filed in the United States. Therefore, these falsified and/or fake +expenses recorded by Herbalife China were incorporated into Herbalife’s financial statements. + +Herbalife Executives Received Internal Audit Reports Showing High Spending in +China and Violations of Internal Policies + +29. At all relevant times, Herbalife’s Internal Audit department (“IA”) was headed by +Herbalife’s Senior Vice President, Internal Audit (“IA Director”), who reported directly to +Herbalife’s Audit Committee. The IA in China (“China IA”), which reported directly to IA +Director, audited External Affairs’ expenses approximately twice a year. At the conclusion of each +audit, China IA reported its results to IA, which then circulated a revised version of this report to +Managing Director and Herbalife’s management (“EA Audit Report”). The EA Audit Reports +showed large expenses and identified violations of Herbalife China’s internal policies regarding +compliance with FCPA, including fake receipts and verbal approval of expenses when prior, +written approval had been required. + +30. For example, in 2014, an EA Audit Report covering expenses for the last six +months of 2012 found that, during this six-month period, EA Director had been reimbursed over $1 +million on claimed meals and gifts for Chinese government officials and media, including state- +owned media officials. According to the report, EA Director submitted expenses claiming to have +attended 239 such meals, with a total of 4,312 participants, averaging $3,232 per meal. These +numbers were extraordinarily high, as there were only 184 days (including weekends) during those +six months. According to the EA Audit Report, during those six months, External Affairs, as a +whole, submitted expenses claiming to have treated 30,076 Chinese government officials and +media members to meals, and was reimbursed, as a whole, a total of approximately $3.7 million +for claimed meals, gifts, and entertainment of government officials and media, including state- +owned media officials. + +8 + +31. In March 2016, another EA Audit Report covering expenses for the first six months +of 2015 stated that EA Director submitted expenses claiming to have attended 115 restaurant meals +with Chinese government officials and media, including state-owned media officials, during that +six-month period. The average cost per meal was $1,472. During that same period, according to +the EA Audit Report, EA Director submitted expenses claiming to have provided gifts to 828 +government officials and media, including state-owned media officials, totaling $146,485. The +report stated that “vendor receipts were replaced when problems were found,” highlighting +Herbalife China’s practice of allowing External Affairs to replace problematic receipts, and failing +to highlight those problems on the final reports. Despite this practice of replacing problematic +receipts, the report still found violations, such as restaurant receipts submitted by different +employees with very close transaction times in the same restaurant. The report also found that +External Affairs had expended a total of $811,465 without the corporate approvals required for +those particular expenses, and that seven External Affairs employees (including EA Director) had +relied solely upon verbal approvals for more than 50% of their expense applications, despite +Herbalife China’s internal policy that such verbal approval could be used only for emergency +expenditures. + +32. After receiving the March 2016 IA report, a member of Herbalife’s Board of +Directors emailed the Audit Committee and IA Director asking whether the high spending by +China EA was reasonable. Another Board member responded: “Please note I have questioned this +every year I have been on the board, and the company has defended its position that these are +reasonable within FCPA guidelines.” IA Director responded that “the findings are the typical +issues in these audits” and are within “tolerance.” + +33. Between 2012 and 2016, Herbalife reimbursed External Affairs employees for over +$7.2 million in questionable External Affairs meal and gift expenditures in connection with +Chinese officials and media, including state-owned media officials. Herbalife obtained +approximately $58.7 million in benefit based on the conduct described above. + +Legal Standards and Violations + +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, 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. As a result of the conduct described above, Herbalife violated Section 13(b)(2)(A) +of the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and disposition of their assets. [15 U.S.C. § +78m(b)(2)(A)]. + +36. As a result of the conduct described above, Herbalife violated Section 13(b)(2)(B) +of the Exchange Act, which requires issuers that have a class of securities registered pursuant to +9 + +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. [15 U.S.C. § +78m(b)(2)(B)]. + +Herbalife’s Cooperation and Remedial Efforts + +37. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. Herbalife’s +remediation included terminating employees involved in the violative conduct, hiring a dedicated +Chief Compliance Officer, enhancing internal accounting controls and compliance functions, and +adopting a new compliance structure. Herbalife’s cooperation included timely sharing of facts +developed during the course of an internal investigation and voluntarily producing documents. + +Undertakings + +38. Respondent has undertaken to: + +(1) Report to the Commission staff periodically during a three-year term, the +status of its remediation and implementation of compliance measures, particularly as to the +areas of due diligence on prospective and existing third-party consultants and vendors, +FCPA training, and the testing of relevant controls including the collection and analysis of +compliance data. + +(2) During this period, should Herbalife 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 +Herbalife, or any entity or person acting on behalf of Herbalife, or that related false books +and records have been maintained, Herbalife shall promptly report such conduct to the +Commission staff. + +(3) During this three-year period, Herbalife shall: (1) conduct an initial review +and submit an initial report and (2) conduct and prepare two follow-up reviews and reports, +as described below: + +a. Herbalife shall submit to the Commission staff a written report +within 365 calendar days of the entry of this Order setting forth a complete +description of its FCPA and anti-corruption related remediation efforts to date, its +proposals reasonably designed to improve Herbalife’s policies and procedures for +the purpose of compliance with FCPA and other applicable anticorruption laws, and +10 + +the parameters of the subsequent review (the “Initial Report”). The Initial Report +shall be transmitted to Gerald A. Gross, Assistant Regional Director, United States +Securities and Exchange Commission, New York Regional Office, 200 Vesey +Street, Suite 400, New York, New York 10128. Herbalife may extend the time +period for issuance of the Initial Report with prior written approval of the +Commission staff. + +b. Herbalife shall undertake two follow-up reviews, incorporating any +comments provided by the Commission staff on the previous report, to further +monitor and assess whether Herbalife’s policies and procedures 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 365 +days after the Initial Report. The second Follow-up Report shall be completed by +no later than 700 days after the completion of the Initial Report. Herbalife 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 Herbalife will likely +include confidential financial, proprietary, competitive business or commercial +information. Public disclosure of the reports could discourage cooperation, +impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non- +public, except (1) pursuant to court order, (2) as agreed to by the parties in writing, +(3) to the extent that the Commission determines in its sole discretion that +disclosure would be in furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) is otherwise required by law. + +e. During this three-year period of review, Herbalife shall provide its +external auditors with its annual internal audit plan and reports of the results of +internal audit procedures and, subject to attorney-client privilege and attorney +work product protections, its assessment of its FCPA compliance policies and +procedures. + +f. During the three-year period of review, Herbalife shall provide +Commission staff with any written reports or recommendations provided by +Herbalife’s external auditors in response to Herbalife’s annual internal audit plan, +reports of the results of internal audit procedures, and its assessments of its FCPA +compliance policies and procedures. + +(4) 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, +11 + +and Respondent agrees to provide such evidence. The certification and supporting material +shall be submitted to Gerald A. Gross, Assistant Regional Director, United States Securities +and Exchange Commission, New York Regional Office, 200 Vesey Street, Suite 400, New +York, New York 10128, 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. + +39. Respondent undertakes to do the following: in connection with this action and any +related judicial or administrative proceeding or investigation commenced by the Commission or to +which the Commission is a party, Respondent (i) agrees to appear and be interviewed by +Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will +accept service by mail or facsimile transmission of notices or subpoenas issued by the Commission +for documents or testimony at depositions, hearings, or trials, or in connection with any related +investigation by Commission staff; (iii) appoints Respondent's undersigned attorney as agent to +receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, +waives the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure +and any applicable local rules, provided that the party requesting the testimony reimburses +Respondent's travel, lodging, and subsistence expenses at the then-prevailing U.S. Government per +diem rates; and (v) consents to personal jurisdiction over Respondent in any United States District +Court for purposes of enforcing any such subpoena. + +In determining whether to accept the Offer, the Commission has considered the +undertakings set forth in Paragraph 39. + +Deferred Prosecution Agreement + +40. Herbalife has entered into a three-year deferred prosecution agreement with the +United States Department of Justice that acknowledges responsibility for criminal conduct relating +to certain findings in the Order. + +Non-Imposition of a Civil Penalty + +41. Herbalife acknowledges that the Commission is not imposing a civil penalty based +upon the imposition of a $55,743,093 criminal fine as part of its resolution with the Department of +Justice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Herbalife’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Herbalife 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. + +12 + + B. Respondent shall comply with the undertakings enumerated in Paragraph 38 above. + +C. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$58,669,993.00 and prejudgment interest of $8,643,504.50 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to SEC +Rule of Practice 600. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + +13 + +Payments by check or money order must be accompanied by a cover letter identifying +Herbalife 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, New York Regional Office, Securities and Exchange Commission, 200 Vesey Street, +Suite 400, New York, NY 10281-1022. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4166.txt b/raw/aaer/2020/AAER-4166.txt new file mode 100644 index 0000000000000000000000000000000000000000..701095c5e0f77b9b88ffd7c2a5189a6a68c5130c --- /dev/null +++ b/raw/aaer/2020/AAER-4166.txt @@ -0,0 +1,246 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5573 / September 4, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4166 / September 4, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-19964 + + +In the Matter of + +SQN CAPITAL MANAGEMENT, +LLC, + +Respondent. +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 203(e) AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF 1940, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) against SQN Capital Management, LLC (“SQN Capital” or the “Respondent”). + +II. + + In anticipation of the institution of these proceedings, the Respondent has submitted an +Offer of Settlement (“Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, the Respondent consents to the entry of this Order Instituting +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the +Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. + +2 +III. + + On the basis of this Order and the Respondent’s Offer, the Commission finds that: + +Summary + +1. SQN Capital, a registered investment adviser, failed to timely distribute annual +audited financial statements prepared in accordance with Generally Accepted Accounting +Principles (“GAAP”) to the investors in one private fund that it advised for each fiscal year from +2012 through 2019, and another private fund that it advised for each fiscal year from 2014 +through 2019, resulting in violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 +thereunder, commonly referred to as the “custody rule.” + + 2. SQN Capital also failed to adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder, a violation +of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder. + +Respondent + +3. SQN Capital is a Delaware limited liability company with its principal office and +place of business in New York, New York. SQN Capital has been registered with the Commission +as an investment adviser since February 2012. During the relevant period, SQN Capital was the +managing member of and served as investment adviser to the two private funds at issue here, and +provided investment advisory services to several other pooled investment vehicles. +Facts + +4. SQN Capital’s two private funds at issue – SQN Special Opportunity Fund, LLC +(“SO Fund”) and SQN Portfolio Acquisition Company, LLC (“PA Fund”) – accounted for +approximately $21.2 million of the approximately $918 million in regulatory assets under +management that SQN Capital reported in its Form ADV filed on May 16, 2020. The stated +investment strategy for both the SO Fund and the PA Fund focuses on industrial equipment leases +and other asset finance investment opportunities worldwide. +5. The custody rule is designed to protect investment advisory clients from the misuse +or misappropriation of their funds and securities. It requires that registered advisers who have +custody of client funds or securities implement an enumerated set of requirements to prevent loss, +misuse, or misappropriation of those assets. + + 6. An investment adviser has custody of client assets if it holds, directly or indirectly, +client funds or securities, or if it has the ability to obtain possession of those assets. See Rule +206(4)-2(d)(2). + + 7. SQN Capital had custody of the assets of the SO Fund and the PA Fund as +defined in Rule 206(4)-2. An investment adviser who has custody of client assets must, among + +3 +other things: (i) ensure that a qualified custodian maintains the client assets; (ii) notify the client in +writing of accounts opened by the adviser at a qualified custodian on the client’s behalf; (iii) have a +reasonable basis for believing that the qualified custodian sends account statements at least +quarterly to clients, except if the client is a limited liability company for which the adviser or a +related person is a managing member, the account statements must be sent to each member; and +(iv) ensure that client funds and securities are verified by actual examination each year by an +independent public accountant at a time chosen by the accountant without prior notice or +announcement to the adviser. See Rule 206(4)-2(a)(1) - (5). + + 8. The custody rule provides an alternative to complying with the requirements of +Rule 206(4)-2(a)(2), (3) and (4) for investment advisers to limited liability companies or other +types of pooled investment vehicles, such as the SO Fund and the PA Fund. The custody rule +provides that an investment adviser “shall be deemed to have complied with” the independent +verification requirement and is not required to satisfy the notification and accounts statements +delivery requirements with respect to a fund if the fund is subject to audit at least annually and +“distributes [the fund’s] audited financial statements prepared in accordance with generally +accepted accounting principles to all . . . members. . . within 120 days of the end of [the fund’s] +fiscal year” (“Audited Financials Alternative”). See Rule 206(4)-2(b)(4). The accountant +performing the audit must be an independent public accountant that is registered with, and subject +to regular inspection by, the Public Company Accounting Oversight Board (“PCAOB”). See Rule +206(4)-2(b)(4)(ii). An investment adviser to a limited liability company that fails to meet the +requirements of the Audited Financials Alternative to timely distribute audited financial statements +prepared in accordance with GAAP would need to satisfy all of the requirements of Rule 206(4)- +2(a)(2-4) in order to avoid violating the custody rule. + +9. With respect to both the SO Fund and the PA Fund, SQN Capital relied on the +Audited Financials Alternative to attempt to comply with the custody rule during the relevant +period but failed to do so. Although SQN Capital engaged a PCAOB-registered firm to conduct +annual audits of the financial statements of both funds, the audit firm did not complete the audits +and issue audit reports until well after 120 days following the end of each relevant fiscal year or, +in some cases, the audits have not been completed. + +10. SQN Capital failed to distribute audited annual financial statements to the members +of the two funds within the required timeframes for those years that audits were completed as +follows: + +Fund Fiscal Year Number of Days Late +SO Fund 2012 881 +SO Fund 2013 516 +SO Fund / PA Fund 2014 151 / 224 +SO Fund / PA Fund 2015 397 / 397 +SO Fund / PA Fund 2016 578 / 386 +SO Fund / PA Fund 2017 214 / 151 + +4 +PA Fund 2018 178 + +The audits for the SO Fund’s 2018 and 2019 fiscal years and for the PA Fund’s 2019 fiscal year +have not been completed at all, and audited annual financial statements for those fiscal years +therefore were not distributed to investors by SQN Capital within 120 days of the fiscal year’s +end. Accordingly, SQN Capital did not satisfy the requirements of the Audited Financials +Alternative in Rule 206(4)-2(b)(4) for the SO Fund for fiscal years 2012 through 2019, and for +the PA Fund for fiscal years 2014 through 2019. SQN Capital was therefore obligated to comply +with Rule 206(4)-2(a)(2), (3) and (4), which it also failed to do. + + 11. SQN Capital also failed to comply with the requirement that every investment +adviser registered with the Commission adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder. See Rule +206(4)-7(a). While SQN Capital’s written policies and procedures referenced the custody rule, +they were not reasonably designed and implemented to prevent violations of the rule. + +Violations + + 12. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging +in acts, practices or courses of business that are fraudulent, deceptive, or manipulative, as defined +by the Commission in rules and regulations promulgated under the statute. Proof of scienter is not +required to establish a violation of Section 206(4) of the Advisers Act and the rules thereunder. +See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). Among other things, Rule 206(4)-2 +requires registered investment advisers with custody of client funds or securities to have +independent public accountants conduct surprise examinations of those client funds or securities, or +to have private fund clients timely distribute to their investors annual audited financial statements +prepared in accordance with GAAP. Rule 206(4)-7 requires, among other things, that an +investment adviser registered with the Commission adopt and implement written policies and +procedures reasonably designed to prevent violation of the Advisers Act and rules thereunder. + + 13. As a result of the conduct described above, SQN Capital willfully violated Section +206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent’s Offer. + + Accordingly, pursuant Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Section 206(4) of the Advisers Act and Rules 206(4)-2 and 206(4)-7 thereunder. + + +5 +B. SQN Capital is censured. + + C. Orders that Respondent shall, pay a civil monetary penalty in the amount of +$75,000 to the Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3), in the following installments: $25,000 to be paid within 21 +days of the entry of the Order; $25,000 to be paid within 45 days of the entry of the Order; and +$25,000 to be paid within 60 days of the entry of the Order. Payments shall be applied first to +post-Order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the final payment +set forth above, Respondent shall contact the staff of the Commission for the amount due. If +Respondent fails to make any payment by the date agreed and/or in the amount agreed according to +the schedule set forth above, all outstanding payments under this Order, including post-Order +interest, minus any payments made, shall become due and payable immediately at the discretion of +the staff of the Commission without further application to the Commission. + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +SQN Capital Management, LLC, as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to Sanjay +Wadhwa, Senior Associate Director, Securities and Exchange Commission, New York Regional +Office, 200 Vesey Street, Suite 400, New York, NY 10281. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, Respondent shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment of a civil + +6 +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4167.txt b/raw/aaer/2020/AAER-4167.txt new file mode 100644 index 0000000000000000000000000000000000000000..a837cb9e5cf9dd65791528f34c550f25a791c690 --- /dev/null +++ b/raw/aaer/2020/AAER-4167.txt @@ -0,0 +1,78 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89861 / September 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4167 / September 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20000 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +HENRY SETH BROCK, CPA : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Henry Seth Brock (“Brock”) 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. Brock, age 67, was a certified public accountant (“CPA”) licensed to practice in +the State of Utah. His CPA license lapsed in 2016. Brock was the founder and president of the +Mutual Benefit International Group, LTD (“MBIG”), a financial services company located in St. +George, Utah. Beginning in 2009 and continuing to 2017, Brock solicited over 70 investors to +invest over $10 million in various securities offerings in MBIG, including a scheme called the +“IRA Exit Strategy.” + + +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 +2. On October 30, 2017, a judgment of conviction was entered against Brock in +United States v. Henry Seth Brock, case number 2:17-cr-00613-TS, in the United States District +Court for the District of Utah, Central Division, finding him guilty of violations of 26 U.S.C. § +7201 (Tax Evasion), 15 U.S.C. § 77j(b) & 78ff (Securities Fraud) and 18 U.S.C. § 1343 (Wire +Fraud). + +3. As a result of this conviction, Brock was sentenced to 72 months imprisonment in +a federal penitentiary, ordered to serve three years of supervised release, and ordered to pay +restitution in the amount of $12,000,000. + +III. + +In view of the foregoing, the Commission finds that Brock 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 Henry Seth Brock is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4168.txt b/raw/aaer/2020/AAER-4168.txt new file mode 100644 index 0000000000000000000000000000000000000000..53005fe9136bdcfbc1983cf8cad5de6ccbc299ec --- /dev/null +++ b/raw/aaer/2020/AAER-4168.txt @@ -0,0 +1,299 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89936 / September 21, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4168 + +ADMINISTRATIVE PROCEEDING +File No. 3-20036 + + + +In the Matter of + +STEVEN L. JENKINS, +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 Steven L. +Jenkins, CPA (“Respondent” or “Jenkins”), pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (3) to have willfully violated, or willfully +aided and abetted the violation of, any provision of the securities laws or the rules +and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +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: + +1. These proceedings arise from Jenkins’s failure to disclose his personal bankruptcy +history to RCI Hospitality Holdings, Inc. (“RCI”), which, in turn, did not disclose them in its 2015 +through 2018 Schedule 14A filings. + +2. Jenkins, age 63, is a resident of Friendswood, Texas. He is a certified public +accountant licensed in Texas since 1982. He is also a member of the Texas Society of Certified +Public Accountants. From 2001 until his August 2019 resignation, Jenkins was an independent +member of RCI’s board of directors and the audit committee’s financial expert. He also served on +RCI’s compensation and nominating committees. + +FACTS + +3. Pursuant to Regulation S-K, Item 401(f)(1), registrants must disclose in Schedule +14A an officer’s or a director’s filing of “[a] petition under the Federal bankruptcy laws” that +occurred within the past 10 years. Jenkins filed two personal federal bankruptcy petitions while he +was a member of RCI’s board of directors, served on its audit committee, and was listed as a +nominee for RCI’s board directors in the company’s annual proxy statements. However, he + + + 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 +willfully failed to disclose them to the company, which, in turn, failed to disclose Jenkins’ +bankruptcy history in its Schedule 14A filings, as required. + +4. In August 2010, Jenkins filed a bankruptcy petition pursuant to Chapter 13 of the +Federal Bankruptcy Code. In September 2015, his 2010 petition was dismissed when he was +unable to pay the balloon payment due as required by his approved bankruptcy plan. Within weeks +of this dismissal, Jenkins filed another Chapter 13 bankruptcy petition in October 2015. + +5. Jenkins should have identified his bankruptcy filings during RCI’s annual process +of obtaining officer and director certifications. Every year, “in anticipation of the filing of the +proxy statement” for RCI’s upcoming annual meeting, Jenkins was asked to confirm by email if +the certification was correct, i.e., that he had not been involved in certain legal proceedings, +including the filing of a petition under the federal bankruptcy laws. Jenkins responded, “Correct,” +in his email returning the certification, indicating that he had not filed any such petition. He +understood that RCI required him to accurately complete the director and officer certification in +connection with the company’s annual proxy statement filing. + +6. Jenkins did not disclose his bankruptcy filings because he was embarrassed by them +and did not want to embarrass RCI. Jenkins was listed in RCI’s annual definitive proxy statements +as an RCI board member and director nominee. Thus, as an RCI director and director nominee, +Jenkins permitted his name to be used in connection with RCI’s annual proxy solicitations. + +7. When RCI first learned of Jenkins’ bankruptcy history in July 2019, the company +asked him to step down from the board. If RCI management had known of Jenkins’s bankruptcy +history, he probably would not have been invited to join the company’s board. + +VIOLATIONS + +8. Section 14(a) of the Exchange Act prohibits any person from acting in +contravention of the Commission’s rules and regulations “to solicit or to permit the use of his name +to solicit any proxy . . . in respect of any security . . . registered pursuant to Section 12” of the +Exchange Act (emphasis added). 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 bankruptcy filing history +disclosure pursuant to Item 401(f)(1). Rule 14a-9 prohibits the use of proxy statements containing +materially false or misleading statements or materially misleading omissions. + +9. Based on the foregoing, the Commission finds that Jenkins willfully4 violated +Sections 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 promulgated thereunder. + +4 “Willfully,” for purposes of imposing relief under Exchange Act Section 4C(a)(3) and Rule +102(e)(1)(iii) “means no more than that the person charged with the duty knows what he is + + +4 + +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. Jenkins shall cease and desist from committing or causing any violations and any +future violations of Sections 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 promulgated +thereunder. + + B. Jenkins is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After three (3) years from the date of this order, Jenkins 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 Jenkins’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. + +doing.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 +F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “also be aware that he is +violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). + + +5 + + Such an application must satisfy the Commission that: + + (a) Jenkins, 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) Jenkins, 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 Jenkins will not receive appropriate supervision; + (c) Jenkins 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) Jenkins acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Jenkins 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 Jenkins’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + E. Respondent 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 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/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 +Steven L. Jenkins as the Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Anita Bandy, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +N.E., Washington, DC 20549-6561. + + 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, 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 + + + +7 +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4169.txt b/raw/aaer/2020/AAER-4169.txt new file mode 100644 index 0000000000000000000000000000000000000000..8486f7042caeeb1fdfe9092cabef1318a328475c --- /dev/null +++ b/raw/aaer/2020/AAER-4169.txt @@ -0,0 +1,1320 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 89984 / September 24, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4169 / September 24, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20062 + +In the Matter of + +POWER SOLUTIONS +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” or “SEC”) 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 Power Solutions International, Inc. +(“PSI” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, Respondent admits the Commission’s jurisdiction over it and the +subject matter of these proceedings, and consents to the entry of this Order Instituting Cease-and- +Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + 2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +SUMMARY +1. This case concerns accounting fraud by former executives of PSI, a publicly traded +company that manufactures and sells engines. Gary Winemaster (“Winemaster”), PSI’s former +Chief Executive Officer, Craig Davis (“Davis”), PSI’s former Vice President of Sales, and James +Needham (“Needham”), PSI’s former General Manager for Industrial, Heavy Duty Products, +fraudulently inflated PSI’s revenue in order to try to meet PSI’s prior revenue guidance and +analysts’ revenue expectations. As a result of their fraud, PSI issued materially misstated financial +statements in its public filings for every period from the fourth quarter of 2014 through the fourth +quarter of 2015. Taken together, the fraud caused PSI to overstate its revenues by almost $25 +million. +2. Winemaster, Davis and Needham caused PSI to fraudulently recognize revenue for +purported sales of products that the customer had not yet agreed to accept; that had not yet been +completed to customer specifications; and for which Winemaster, Davis and Needham had +negotiated improper “bill and hold” arrangements. They also caused PSI to improperly recognize +revenue for transactions for which they had created undisclosed side agreements that included +contingencies such as product return rights and special financing and payment terms. They also +caused PSI to improperly recognize revenue in amounts that exceeded the actual sale price. +3. Winemaster, Davis, and Needham orchestrated the transactions that resulted in the +accounting misstatements. They engineered transactions designed to create the appearance of +revenue in certain periods when, in fact, PSI was not entitled to report revenue from those +transactions at that time. +4. Winemaster, Davis, and Needham also misled certain members of PSI’s accounting +department, or hid information from them, to ensure that PSI recognized revenue from the +transactions in question. They misled accounting department personnel in an effort to meet PSI’s +revenue targets. They also engaged in fraudulent conduct to conceal the true nature of several +transactions from PSI’s auditor (“Auditor A”). +5. Beginning in August 2016, PSI disclosed information concerning its misstated +financial statements in various Forms 8-K filed over time. When PSI disclosed this information +about its financials, PSI’s stock price fell significantly. + +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. On May 16, 2019, PSI issued restated financial statements when it filed its 2017 +Form 10-K. The restated financial statements included significant reductions in revenue as a result +of PSI’s fraud. The reductions in revenue as a result of the fraud totaled $846,000 for the fourth +quarter of 2014, and more than $24 million for fiscal year 2015. In addition to the fraud-related +adjustments, PSI also made other revenue-related adjustments to its previously issued financial +statements. +7. The following chart summarizes the quantitative impact on PSI’s financial +statements from its accounting fraud: + + +RESPONDENT +8. Power Solutions International, Inc., a Delaware corporation headquartered in +Wood Dale, Illinois, manufactures and sells power systems to industrial equipment manufacturers +and transportation companies. PSI became a publicly traded company on April 29, 2011. PSI’s +common stock was registered with the SEC pursuant to Section 12(b) of the Exchange Act and +traded on the NASDAQ as “PSIX.” NASDAQ delisted PSI’s common stock on April 17, 2017 for +its failure to timely file required periodic reports with the SEC. Following the delisting, PSI’s +common stock has traded on the OTC Pink market as “PSIX.” +Impact of Fraudulent Transactions on Net Revenue +(dollar amounts in thousands) Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 +Originally Reported Net Revenue 103,910 86,139 94,629 112,008 96,670 389,446 +Fraudulent Transactions (846) (6,951) (10,020) (1,286) (5,823) (24,080) +Other Adjustments (1,863) 4,132 746 4,229 (12,087) (2,981) +Net Revenue Adjustments (2,709) (2,819) (9,274) 2,943 (17,910) (27,060) +Restated Net Revenue 101,202 83,320 85,355 114,951 78,760 362,386 +Impact of Fraudulent Transactions, as Percentage of +Restated Net Revenue 0.8% 8.3% 11.7% 1.1% 7.4% 6.6% +Impact of Fraudulent Transactions on Income (Loss) Before Taxes +(dollar amounts in thousands) +Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 +Originally Reported Income (Loss) Before Taxes 13,630 (72) 6,206 8,643 (887) 13,890 +Restated Income (Loss) Before Taxes 10,585 (2,585) 1,246 6,908 (18,162) (12,593) +Fraudulent Transactions (320) (2,424) (3,007) (1,286) (1,054) (7,771) +Other Adjustments (2,438) 384 (482) 26 (3,751) (3,823) +Gross Profit Adjustment (2,758) (2,040) (3,489) (1,260) (4,805) (11,594) +Gross Profit Impact of Fraudulent Transactions, as +Percentage of Restated Income Before Taxes 3.0% 93.8% 241.3% 18.6% 5.8% 61.7% +Increase (Decrease) +Increase (Decrease) + + + 4 +OTHER RELEVANT INDIVIDUALS +9. Gary Winemaster, 62 years old, is a resident of Mundelein, Illinois. Winemaster +was a co-founder of PSI and was employed by PSI as its CEO, President and Chairman of the +Board from at least 2011 until April 2017. While serving as PSI’s CEO, Winemaster was +responsible for (a) reviewing and approving PSI’s consolidated financial statements and (b) +reviewing, approving, signing, and certifying PSI’s periodic public reports (including its Forms 10- +K and 10-Q). From 2014 through 2016, Winemaster, along with his brother who was also +employed by PSI, owned a majority of the common stock of PSI. Winemaster resigned as PSI’s +CEO, President and Chairman of the Board in April 2017 and became its chief strategy officer. +Winemaster served in that position until he retired from PSI in May 2019. +10. Craig Davis, 46 years old, is a resident of Batavia, Illinois. From at least 2014 until +around October 2018, Davis was employed by PSI as its VP of Sales. Davis reported to +Winemaster while Winemaster was CEO of PSI. Davis was terminated by PSI in or around +October 2018. +11. James Needham, 58 years old, is a resident of Leavenworth, Kansas. From at least +2014 until around April 2019, Needham was employed by PSI as its General Manager for +Industrial, Heavy Duty Products. Needham reported to Winemaster while Winemaster was CEO of +PSI. Needham was terminated by PSI in or around April 2019. +FACTS +Background +12. PSI, a publicly traded company, is a global producer of a broad range of engines +that it sells to manufacturers of industrial equipment, trucks, and busses. Many of PSI’s largest +customers purchased engines to be used in the oil and gas industry, primarily in support of +operating wells. As such, demand for a significant segment of PSI’s products was tied to the price +of oil (i.e., as the price of oil decreased, demand for PSI’s products used in the oil and gas industry +also decreased). For many of its customers, PSI was the sole source provider of engines. +13. PSI registered its common stock and started trading on the NASDAQ on April 29, +2011. After taking that step, PSI was required by the federal securities laws to file various periodic +reports with the SEC, including annual reports (Forms 10-K), quarterly reports (Forms 10-Q) and +current reports (Forms 8-K). PSI was required, among other things, to include financial statements +in its quarterly and annual reports that accurately and fairly reflected PSI’s financial condition. +These filings stated that the included financial statements were prepared in accordance with +Generally Accepted Accounting Principles (“GAAP”).2 The annual financial statements were also + +2 GAAP is codified in the Financial Accounting Standards Board Accounting Standards Codification (“ASC”). + + + 5 +required to be audited by an independent public accountant. Once filed, PSI’s periodic reports and +accompanying financial statements became available to the investing public. +14. ASC 605 is the governing accounting standard for revenue recognition, and was +issued by the Financial Accounting Standards Board. ASC 605-10-25-1 provides that revenue may +be recognized when it is realized, or realizable, and earned. +15. Consistent with PSI’s obligation to recognize revenue only when it was realized, or +realizable, and earned under ASC 605-10-25-1, PSI’s revenue recognition policy, as represented in +its SEC periodic filings, provided that “[w]e recognize revenue upon transfer of title and risk of +loss to the customer, which is typically when products are shipped, provided there is persuasive +evidence of an arrangement, the sales price is fixed or determinable and management believes +collectability is reasonably assured.” PSI further represented in its SEC periodic filings that: +In certain circumstances, [PSI] recog nizes revenue before delivery +has occurred. In such circumstances, among other things, risk of +ownership has passed to the buyer, the buyer has made a written fixed +commitment to purchase the finished goods, the buyer has requested +the finished goods be he ld for future delivery as scheduled and +designated by them, and no additional performance obligations exist +by [PSI]. +16. At all times relevant to this Order, PSI did not have any other stated revenue +recognition policies other than what was disclosed in its SEC filings. +17. Winemaster, Davis and Needham knew that PSI filed financial statements in its +quarterly and annual reports. They knew about PSI’s revenue recognition standards and policies. +They also knew that PSI’s financial statements needed to be truthful and accurate. +18. As PSI’s CEO, Winemaster was responsible for reviewing and approving PSI’s +financial statements and its quarterly and annual reports. He was also responsible for establishing +and maintaining PSI’s internal control over financial reporting. At all times relevant to this Order, +Winemaster signed each of PSI’s annual and quarterly reports before they were publicly filed. He +certified, among other things, that each report (a) did not include any material misstatements or +omissions, and (b) fairly presented, in all material respects, the financial condition of PSI for that +period. +19. Davis was in charge of PSI’s sales department, which was primarily responsible for +selling product to PSI’s customers. Davis oversaw its sales personnel (with the exception of +Needham), and approved all sales incentives offered to PSI customers. Davis also was responsible +for communicating those incentives to others in sales and the accounting group to ensure the sales +incentives were appropriately documented and recorded. Davis reported to Winemaster, who +exercised close oversight of the sales department and maintained close contact with a number of +PSI customers. + + + 6 +20. Needham was PSI’s General Manager for Industrial, Heavy Duty Products. In that +role, Needham was responsible for selling PSI product to customers serving the oil and gas +industry. Needham reported directly to Winemaster. +21. PSI’s revenue was recorded through PSI’s enterprise resource planning system, +EPICOR. The accounting department relied upon “word of mouth” from PSI’s sales department to +ensure any non-standard terms granted to customers for orders matched what was input into +EPICOR. PSI’s sales department personnel, including Needham, were told by accounting +department personnel on multiple occasions to inform accounting of any side arrangements or +atypical terms entered into with PSI customers that were different from PSI’s standard terms +because PSI was a public company and therefore needed to report transactions appropriately. +Winemaster, Davis and Needham all knew that they needed to inform PSI’s accounting department +about any sales transaction terms that deviated from PSI’s standard terms so that the accounting +department could properly record the revenue associated with those transactions. +22. The accounting department did not review customer purchase orders or shipping +documents for customer orders before recording revenue. If a customer was given terms different +from those entered by sales department personnel into EPICOR, those terms would not be reflected +on the invoice generated by the accounting department. +23. As is very common with public companies, stock analysts reviewed PSI’s periodic +reports and other public disclosures, including forward-looking guidance, so they could develop +recommendations. Specifically, stock analysts offered projections for a number of PSI’s financial +metrics, including anticipated net revenue. Various financial firms and media outlets combined +analysts’ projections for PSI’s quarterly net revenue into a “consensus estimate” for that period. +That consensus net revenue estimate was available to the public through various financial news +websites. The consensus net revenue estimate is an important metric for public companies and for +investors. When a company falls short of its consensus net revenue projection, it is not unusual for +that company to experience a negative reaction from investors with a corresponding decrease in the +stock price. +24. Winemaster determined what revenue guidance PSI provided to the public and +consistently set revenue targets for PSI. In 2014 and 2015, PSI management, including Winemaster +and Davis, used quarterly analyst guidance as a benchmark for its internal quarterly revenue +targets. On August 5, 2015, PSI provided the investing public with quarterly revenue guidance for +the third and fourth quarters of 2015 along with reduced full year guidance for 2015. Subsequently, +on November 9, 2015, PSI provided the investing public with revised, lower quarterly revenue +guidance for the fourth quarter of 2015. During this period, PSI management, including +Winemaster and Davis, also continued to look at quarterly analyst guidance as a benchmark for its +internal quarterly revenue targets. +25. At all times relevant to this Order, Winemaster, Davis and Needham each +understood that it was important for PSI to meet or exceed the analyst consensus net revenue + + + 7 +guidance. Each of them also understood that it was important for PSI to meet or exceed PSI’s own +public net revenue guidance. +PSI’s Fraudulent Revenue Recognition Practices +26. PSI’s revenue targets became increasingly difficult to meet in 2015 when the price +of oil was depressed. In order to achieve these targets, Winemaster and Davis pressured PSI’s +salesmen to provide incentives to their customers to take additional product before the end of +quarters, including by incenting customers to place additional orders for product they did not +currently need and pushing customers to take delivery of already ordered product earlier than +desired. Doing so resulted in a significant amount of sales being “pulled ahead” from future +periods to a current quarter. For example, approximately 24 percent of PSI’s sales for the first +quarter of 2015 were pulled ahead from the second quarter to the first quarter. +27. These end-of-quarter drives to hit revenue targets led to PSI’s customers +accumulating inventory that they did not need and ultimately led to PSI’s customers having little +appetite to purchase additional product from PSI in 2016. This practice also was detrimental to +PSI’s gross profit margins in 2014 and 2015 because cost of goods sold increased due to inefficient +production rushes, labor overtime, and expedited freight charges related to those sales. +28. Winemaster, Davis and Needham did not simply encourage customers to buy more, +or buy early. They also orchestrated transactions to cause PSI to fraudulently recognize revenue so +that they could meet PSI’s previously issued revenue guidance and analysts’ revenue expectations. +29. To achieve PSI’s revenue targets, Winemaster, Needham and Davis caused PSI to +fraudulently recognize revenue for purported sales of products that the customer had not yet agreed +to accept; that had not yet been completed to customer specifications; and for which Winemaster, +Needham and Davis had negotiated improper “bill and hold” arrangements. They also caused PSI +to improperly recognize revenue for transactions for which they had created undisclosed side +agreements that included contingencies such as product return rights and special financing and +payment terms. In addition, they caused PSI to improperly recognize revenue in amounts that +exceeded the actual sale price. This misconduct began in the fourth quarter of 2014 and increased +in scope as the demand for PSI’s product slowed throughout 2015. +30. A summary of the fraudulent accounting is set forth below: +a. Fourth Quarter 2014: PSI fraudulently recorded revenue totaling +approximately $846,000 for a purported “bill and hold” sale of engines that +was not requested by the customer and was not delivered to the customer +until 2015. +b. First Quarter 2015: PSI fraudulently recorded revenue totaling +approximately $7.8 million for the purported sale of engines to a customer + + + 8 +that was given an indefinite, open-ended right to return the engines if it did +not need them. +c. Second Quarter 2015: PSI fraudulently recorded revenue totaling +approximately $10 million for the purported sale of engines to a customer +when the customer (i) did not have to pay for the engines until 30 days after +it used them in a generator and (ii) could exchange the engines for different +engines for an unlimited period of time. +d. Third Quarter 2015: PSI fraudulently recorded $1.3 million when it +recognized revenue of $4.3 million for engines that were sold to a customer +for only $3 million under a side agreement. +e. Fourth Quarter 2015: PSI fraudulently recorded $3 million in revenue on +the purported sale of 3 generator-sets to a customer, when in fact that +customer’s receipt of the generator-sets was conditioned upon the return of +other previously sold engines that would have offset all of the revenue +recognized from the generator-sets. PSI also fraudulently recorded revenue +totaling approximately $600,000 for the purported sale of 48 engines to a +customer, although PSI did not finish manufacturing the engines to the +customer’s specifications and did not ship them to the customer before the +end of 2015. In addition, PSI fraudulently recorded revenue totaling +approximately $300,000 for the purported sale of 147 engines that were +shipped to a warehouse that PSI controlled without the customer’s +knowledge and acceptance. Finally, PSI fraudulently recorded revenue +totaling approximately $1.9 million for the purported sale of 775 “base +engines” to a customer, although the engines did not include all of the +components required by the customer, and the risk of loss did not shift to +the customer until 2016. +Fourth Quarter 2014 +31. In the fourth quarter of 2014, PSI appeared to meet the consensus analyst +expectation for net revenue of $103.4 million when it reported net revenue of $103.9 million. In +that quarter, PSI recognized approximately $846,000 of revenue for a fraudulent bill and hold +transaction with Customer A as described below. If PSI had accounted for that transaction in +accordance with GAAP, PSI would have missed the consensus analyst net revenue expectation for +that quarter by approximately $400,000. Davis approved this fraudulent “bill and hold” transaction. +32. Sellers can recognize revenue on the sale of goods before delivery has occurred if +the standards for “bill and hold” transactions are satisfied. In essence, a “bill and hold” sale of +goods requires that: (i) the risks of ownership pass to the buyer at the time of the bill and hold +transaction; (ii) the buyer makes a fixed commitment to purchase the goods; (iii) the buyer, not the +seller, requests that the transaction be on a bill and hold basis; (iv) the buyer has a substantial + + + 9 +business purpose for ordering the goods on a bill and hold basis; (v) there is a fixed schedule for +delivery of the goods that is both reasonable and consistent with the buyer’s substantial business +purpose for the bill and hold transaction; (vi) the seller does not retain any specific performance +obligations related to the sale; and (vii) the goods are complete and ready for shipment at the time +of the bill and hold transaction. PSI incorporated the requirements for “bill and hold” transactions +in its revenue recognition policies as described above in ¶ 15. +33. In late November 2014, at Davis’s direction, the PSI sales representative +responsible for the Customer A account approached Customer A and offered extended payment +terms to incent Customer A to take delivery of 30 engines early in order to enable PSI “to hit some +numbers for 2014.” In addition to the extended payment terms, Customer A asked PSI to cover the +cost of warehousing the engines at an off-site location as well as the shipping costs to get the +engines to the off-site location. Davis approved Customer A’s counteroffer, stating that PSI needed +to do the deal, “as we are still 4 million short” of the quarterly sales target. PSI delivered the +product to the agreed upon off-site location in December 2014 and paid for the storage of the +engines until Customer A accepted the engines in February 2015. +34. An internal email sent by the PSI sales representative for the Customer A account +summarized the true nature of this transaction: “the WHOLE reason behind this entire exercise was +to try and jam as much business in the [sic] 2014 as possible. [Customer A] agreed to take all the +engines they had on order for 2015 in December. That was 30 units. They don’t want any of them, +but agreed to help us out.” +35. PSI recognized approximately $846,000 of revenue associated with this transaction +in the fourth quarter of 2014. PSI recognized revenue on the transaction despite not meeting the +criteria required by ASC 605-10-25-1 and which were included in its own policies as described in +¶ 15. Customer A did not request the bill and hold nor did it have a business purpose for ordering +on a bill and hold basis. In addition, by reimbursing Customer A for the storage of these engines +until Customer A needed the engines in 2015, PSI did not meet the delivery requirements to +recognize revenue in 2014. +36. Davis did not tell PSI’s accounting department that the customer did not request the +bill and hold, had received extended payment terms, or that PSI was covering the costs of storing +the engines. When challenged by a senior operations executive about the appropriateness of +recognizing revenue under these circumstances, Davis lied to that executive by falsely telling him +that PSI’s CFO and others in accounting had been informed about the transaction details and +approved of the accounting for the transaction. +37. Due to the misconduct identified in ¶¶ 31, 33-36 above, PSI’s 2014 Form 10-K +contained materially misstated financial statements that improperly recognized $846,000 in +revenue. A reasonable investor would have viewed this misstatement as important because the +misstatement: (i) involved a fraudulent accounting position with no GAAP support, (ii) arose as an +ongoing effort by senior PSI management to meet revenue targets provided to the market, (iii) +allowed PSI to meet the consensus analyst expectation for net revenue for that quarter, and (iv) + + + 10 +constituted a 0.8 percent overstatement of net revenue and a 3.0 percent overstatement of pre-tax +income. +38. Davis acted with scienter with respect to the fraudulent accounting for this +transaction. For example, he approved the key terms for the transaction, including the agreement to +reimburse Customer A’s storage costs, knowingly withheld important information about the +transaction from PSI’s accounting department, and also lied to a senior PSI operations executive +about consulting with the accounting department concerning the appropriateness of recognizing +revenue from the transaction. He knew that the transaction in question had the purpose and effect +of artificially inflating PSI’s revenue. Davis’ scienter is imputed to PSI. +First Quarter 2015 +39. In the first quarter of 2015, PSI appeared to narrowly miss the consensus analyst +expectation for net revenue of $87 million when it reported net revenue of $86.1 million. It was a +narrow miss only because PSI manipulated its revenue. In that quarter, PSI fraudulently recognized +approximately $7.8 million of revenue related to a contingent sales transaction with Customer B as +described below. If PSI had accounted for that transaction in accordance with GAAP, PSI would +have missed the consensus analyst expectation for net revenue for that period by a wide margin. +Davis and Winemaster orchestrated this fraudulent accounting transaction. +40. In late February 2015, at Davis’s direction, PSI’s sales representative for Customer +B approached Customer B about accelerating the delivery of around $8 million worth of engines +scheduled for delivery in June, July, and August of 2015 to the first quarter in order to meet PSI’s +quarterly revenue target. At the time, PSI’s sales representative for Customer B emailed Davis and +questioned how PSI could continue to pull ahead sales in this manner to meet quarterly revenue +targets. Davis agreed with the salesperson’s concern but noted that without the Customer B pull +ahead the quarterly results would be “tragic.” +41. Customer B rejected PSI’s multiple offers of various incentives to take the engines +early because Customer B did not want the engines in the first quarter of 2015. In a last ditch effort +to recognize the revenue in the first quarter, Winemaster called the president of Customer B and +offered, in addition to the other incentives previously offered, an indefinite right of return on the +engines if Customer B’s intended customer for the engines cancelled its order. Customer B +accepted Winemaster’s offer, and the engines were delivered before the end of the first quarter of +2015. +42. Winemaster did not inform anyone else in the PSI organization of this indefinite +right of return prior to the filing of PSI’s Q1 2015 Form 10-Q. The PSI sales department, including +Davis, learned of the return right offered by Winemaster from representatives of Customer B. +Neither Winemaster nor Davis informed the accounting group of the return right Winemaster +granted Customer B. + + + 11 +43. Ultimately, Customer B did not have demand from its own customers for the +engines, and it requested to return those engines to PSI in 2017. However, as discussed in more +detail at ¶ 130, in order to try to conceal the true nature of the transaction, PSI did not take the +engines back. Instead, representatives of PSI’s sales department, with Winemaster’s and Davis’s +knowledge and approval, arranged to have one of PSI’s other customers (and a competitor of +Customer B) purchase the engines from Customer B. +44. As a result of Winemaster’s and Davis’s conduct, PSI recorded revenue associated +with the transaction even though it had failed to meet the criteria required by ASC 605-15-25-1 +(Sales of Product when Rights of Return Exists) when it recognized revenue for this transaction in +the first quarter of 2015. Under ASC 605-15-25-1e and 605-15-25-1f, PSI could not recognize +revenue unless it could reasonably estimate the amount of future returns, and had no future +performance obligation to help Customer B resell the engines. +45. PSI did not meet the aforementioned criteria. For example, PSI had no way of +reasonably estimating the future returns from Customer B. At the time, PSI had only accepted +returns due to defect or performance issues. PSI had no way of knowing, into the indefinite future, +whether Customer B’s intended customer would someday cancel its order. Consequently, the +earnings process was not complete, and the sale should not have been recognized in the first +quarter of 2015. +46. Due to the misconduct identified in ¶¶ 39-45 above, PSI’s Q1 2015 Form 10-Q +contained materially misstated financial statements that improperly recognized approximately $7.8 +million in revenue. A reasonable investor would have viewed this misstatement as important +because the misstatement: (i) involved a fraudulent accounting position with no GAAP support, (ii) +arose as an ongoing effort by senior PSI management to meet revenue targets provided to the +market, (iii) masked the severity of the downward revenue trend PSI was facing in 2015, and (iv) +contributed to an 8.3 percent overstatement of net revenue and a 93.8 percent overstatement of pre- +tax income. +47. Winemaster and Davis acted with scienter with respect to the fraudulent accounting +for this transaction. For example, Winemaster granted the return right to Customer B; Winemaster +and Davis knowingly withheld the existence of the return right from PSI’s accounting department; +and Winemaster and Davis authorized PSI’s sales staff to facilitate Customer B’s resale of the +engines to another PSI customer in 2017 after Customer B requested to return the engines to PSI. +They knew that the transaction in question had the purpose and effect of artificially inflating PSI’s +revenue. Winemaster’s and Davis’ scienter is imputed to PSI. +48. In addition, Winemaster signed and certified PSI’s Q1 2015 Form 10-Q and +approved the filing on May 7, 2015 of a Form 8-K announcing PSI’s net revenue for the quarter +even though he knew that $7.8 million of net revenue for the quarter had been improperly +recognized. + + + 12 +49. Winemaster also hid the existence of the Customer B return right from Auditor A. +On or around May 8, 2015, Winemaster signed a management representation letter for Auditor A +that stated, among other things, that: (i) the financial information for Q1 2015 is presented in +accordance with GAAP; (ii) “[w]e have no knowledge of any fraud or suspected fraud affecting the +Company;” and (iii) “[t]here are no material transactions that have not been properly recorded in +the accounting records underlying the interim financial information.” He signed this letter despite +knowing that the $7.8 million transaction with Customer B was fraudulently recorded as revenue in +Q1 2015 and without otherwise informing Auditor A of the return right for the transaction. +Second Quarter 2015 +50. In the second quarter of 2015, PSI appeared to meet the consensus analyst +expectation for net revenue of $87 million when it reported net revenue of $94.6 million. In that +quarter, PSI fraudulently recorded approximately $10 million of revenue related to a conditional +sales transaction with Customer C, based on the conduct of Needham, Davis and Winemaster, as +described below. If PSI had accounted for that transaction in accordance with GAAP, PSI would +have missed the consensus analyst expectation for net revenue for that period. Needham, Davis and +Winemaster all participated in this transaction. +51. Customer C was in the business of manufacturing and leasing generators to be used +by its customers in operating oil and gas wells. As such, demand for its product tracked the price of +oil and gas. PSI supplied Customer C all of the engines it used in its generators, as the PSI engine +was the only engine that worked in Customer C’s generators. +52. In late May 2015, in order to meet its quarterly sales target, Needham approached +Customer C to take $10 million of product by the end of June 2015. At the time, Customer C did +not have the demand from its customers to justify such a purchase given the decrease in the price +of oil. +53. Nonetheless, after receiving pressure from Needham to take the $10 million worth +of engines, Customer C agreed to do so, but only after negotiating a side letter agreement with PSI +(“June 2015 Letter Agreement”). That side agreement contained numerous protections should +Customer C not have sufficient demand for the engines from its own customers. The June 2015 +Letter Agreement provided, among other things, that: (i) Customer C would not have to pay for +each engine until 30 days after the engine was placed in a Customer C generator (which Customer +C did not do until it had a customer that desired to lease the generator); and (ii) Customer C could +exchange engines at a later date for others that were more in demand. This engine exchange right +did not contain a time limitation. Customer C referenced the June 2015 Letter Agreement on its +purchase order for the engines, specifically stating the order was “[p]ursuant to letter dated June 8, +2015 from PSI and signed by Jim Needham.” (The purchase order is hereinafter referred to as the +“June 2015 PO.”) The engines purchased pursuant to the June 2015 PO were shipped to Customer +C by the end of June 2015. + + + 13 +54. The agreement was negotiated and signed by Needham. Winemaster and Davis +knew and approved of the June 2015 Letter Agreement. Neither Winemaster, Davis or Needham +informed PSI’s accounting group about the June 2015 Letter Agreement prior to the filing of PSI’s +Q2 2015 Form 10-Q. +55. Under GAAP, if a seller gives the buyer the right to return product, revenue from +the sales transaction shall be recognized at the time of sale only if the conditions in ASC 605-15- +25-1 (Sales of Product when Rights of Return Exists) are met. One of those conditions is that “[t]he +buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not +contingent on resale of the product. If the buyer does not pay at time of sale and the buyer’s +obligation to pay is contractually or implicitly excused until the buyer resells the product, then this +condition is not met.” ASC 605-15-25-1b. +56. Here, the June 2015 Letter Agreement allowed Customer C to not pay for the +engines it purchased until they were consumed, and it also gave Customer C the right in the future +to exchange engines for others that were more in demand. Due to these indefinite extended +payment terms, the sales price was not fixed or determinable, and revenue should not have been +recognized in the second quarter of 2015. +57. Additionally, PSI could not recognize revenue in accordance with ASC 605-15-25- +1f unless it could reasonably estimate the amount of future returns. PSI had no way of estimating +the future returns from Customer C. It had previously only accepted returns due to defect or +performance issues. +58. Due to the misconduct identified in ¶¶ 50-57 above, PSI’s Q2 2015 Form 10-Q +contained materially misstated financial statements that improperly recognized around $10 million +in revenue. A reasonable investor would have viewed this misstatement as important because the +misstatement: (i) involved a fraudulent accounting position with no GAAP support, (ii) arose as an +ongoing effort by senior PSI management to meet revenue targets provided to the market, (iii) +masked the severity of the downward revenue trend PSI was facing in 2015, (iv) allowed PSI to +meet the consensus analyst expectation for net revenue for that quarter, and (v) resulted in an 11.7 +percent overstatement of net revenue and a 241.3 percent overstatement of pre-tax income. +59. Winemaster, Davis and Needham acted with scienter with respect to the fraudulent +accounting for this transaction. For example, Needham, with Winemaster’s and Davis’s knowledge +and approval, negotiated the June 2015 Letter Agreement on behalf of PSI; and Winemaster, Davis +and Needham did not inform PSI’s accounting group about the June 2015 Letter Agreement prior +to the filing of PSI’s Q2 2015 Form 10-Q. They knew that the transaction in question had the +purpose and effect of artificially inflating PSI’s revenue. Winemaster’s, Davis’ and Needham’s +scienter is imputed to PSI. +60. In addition, Winemaster also signed and certified PSI’s Q2 2015 Form 10-Q and +approved the filing on August 5, 2015 of a Form 8-K announcing PSI’s net revenue for the quarter + + + 14 +even though he knew that $10 million of net revenue for the quarter had been improperly +recognized. +61. Winemaster also hid the existence of the June 2015 Letter Agreement from Auditor +A. On or around August 7, 2015, Winemaster signed a management representation letter for +Auditor A that stated, among other things, that: (i) the financial information for Q2 2015 is +presented in accordance with GAAP; (ii) “[w]e have no knowledge of any fraud or suspected fraud +affecting the Company;” and (iii) “[t]here are no material transactions that have not been properly +recorded in the accounting records underlying the interim financial information.” He signed this +letter despite knowing that the $10 million transaction with Customer C was fraudulently recorded +as revenue in Q2 2015 and without otherwise informing Auditor A of the June 2015 Letter +Agreement. +Third Quarter 2015 +62. In the third quarter of 2015, PSI reported net revenue of $112 million. PSI appeared +to narrowly miss the consensus analyst expectation for net revenue of $113.6 million, and appeared +to meet the low end of the quarterly guidance ($110 million) it released to the public in August +2015. In this quarter, PSI fraudulently recognized approximately $1.3 million of revenue related to +an inflated Customer C purchase order as detailed below. Winemaster, Davis and Needham were +all responsible for the fraudulent inflation of revenue created by this purchase order. +63. In an effort to meet its sales goal for the third quarter, PSI’s sales group was +aggressively pursuing customers to take additional product. Davis, in a September 3, 2015 email, +informed Winemaster that: “[w]e are pushing every angle. I have some really unhappy customers . +. . as I am jamming everything to them in the quarter and they are not happy with me.” +64. Against this backdrop, Needham was pushing Customer C to purchase $3 million +of engines directly from PSI instead of another company set up as a PSI joint venture (“PSI JV”), +which Customer C ultimately agreed to do. +65. Needham verbally assured Customer C that it would only have to pay $3 million for +the engines when invoiced. However, Needham also directed Customer C to issue a purchase order +for these engines at a higher price, $4.3 million, in order to make PSI’s revenue numbers look +better for the quarter. The purchase order ($4.3 million) overstated the actual sale price ($3 million) +by $1.3 million. +66. Both Winemaster and Davis were aware and approved of Needham’s direction to +Customer C to issue its purchase order at the overstated $4.3 million price. Neither Winemaster, +Davis or Needham told accounting about the true nature of the deal made with Customer C prior to +the filing of PSI’s Q3 2015 Form 10-Q. As a result, accounting booked the $4.3 million as revenue +when the engines shipped to Customer C in the third quarter of 2015, even though the actual sale +price was only $3 million. + + + 15 +67. Due to the conduct of Winemaster, Davis and Needham, PSI improperly booked +the overstated revenue ($4.3 million) associated with this transaction. Because Needham had +informed Customer C it would only have to pay $3 million for the engines, the incremental $1.3 +million invoiced was not realizable and should not have been recognized as revenue under ASC +605-10-25-1. Customer C only paid the $3 million that it had agreed to pay. The remaining $1.3 +million of revenue was eventually reversed by PSI in connection with its restatement filed on May +16, 2019. +68. Due to the misconduct identified in ¶¶ 62-67 above, PSI’s Q3 2015 Form 10-Q +contained materially misstated financial statements that improperly recognized around $1.3 million +in revenue. A reasonable investor would have viewed this misstatement as important because the +misstatement: (i) involved a fraudulent accounting position with no GAAP support, (ii) arose as an +ongoing effort by senior PSI management to meet revenue targets provided to the market, (iii) +masked the severity of the downward revenue trend PSI was facing in 2015, and (iv) resulted in a +1.1 percent overstatement of net revenue and an 18.6 percent overstatement of pre-tax income. +69. Winemaster, Davis and Needham acted with scienter with respect to the fraudulent +accounting for this transaction. For example, Needham, with Winemaster’s and Davis’s knowledge +and approval, directed Customer C to issue an inaccurate purchase order; and neither Winemaster, +Davis or Needham informed PSI’s accounting group about the real price for the $4.3 million +transaction with Customer C prior to the filing of PSI’s Q3 2015 Form 10-Q. They knew that the +transaction in question had the purpose and effect of artificially inflating PSI’s revenue. +Winemaster’s, Davis’ and Needham’s scienter is imputed to PSI. +70. In addition, Winemaster also signed and certified PSI’s Q3 2015 Form 10-Q and +approved the filing on November 9, 2015 of a Form 8-K announcing PSI’s net revenue for the +quarter even though he knew that the $1.3 million of net revenue for the quarter had been +improperly recognized. +71. Winemaster also hid the true nature of the Customer C purchase order from Auditor +A. On or around November 9, 2015, Winemaster signed a management representation letter for +Auditor A that stated, among other things, that (i) the financial information for Q3 2015 is +presented in accordance with GAAP; (ii) “[t]here are no material transactions that have not been +properly recorded in the accounting records underlying the interim financial information;” (iii) +“[w]e have no knowledge of any fraud or suspected fraud affecting the Company;” and (iv) +“[t]here are no . . . [s]ide agreements or other arrangements (either written or oral) that have not +been disclosed to you.” He signed this letter despite knowing that PSI had entered into an oral side +agreement with Customer C to purchase the engines for $3 million in order to fraudulently inflate +PSI’s revenue number in the third quarter of 2015 and without otherwise informing Auditor A of +the Customer C arrangement. + + + + 16 +Fourth Quarter 2015 +72. As of November 2015, PSI was not on track to meet the analyst revenue +expectations for the fourth quarter of 2015. At that time, Davis reported to Winemaster and others +in senior management that PSI was going to have to pull forward a lot of sales from 2016 because +“[w]e are 30 million short of the number that was given to the market as of right now.” +73. In an effort to meet those revenue projections, PSI fraudulently recognized +approximately $5.8 million of revenue related to a number of transactions that were engineered by +Winemaster, Davis and Needham as described below. Notwithstanding its efforts to pull in sales, +PSI appeared to miss the consensus analyst net revenue expectation for the quarter of $105.7 +million as well as the low end of its own public guidance of $100 million when it reported net +revenue of $96.7 million. Without the fraud, PSI would have missed the target by a wider margin. +Customer D $3 Million Transaction +74. Entering the fourth quarter of 2015, PSI management, including Davis and +Winemaster, began discussing how they might achieve the company’s revenue target. Davis noted +that the sale of several Waukesha generator sets (“Waukesha Gen-Sets”) assembled by its +Professional Power Products (“PPPI”) subsidiary was “essential” to achieving PSI’s fourth quarter +sales goals. Customer D purchased generator sets exclusively from Customer C, and those +generator sets used PSI engines. +75. PSI’s sales department attempted throughout much of 2015 to sell the Waukesha +Gen-Sets directly to Customer D. On December 10, 2015, Needham and Customer D’s CEO +agreed to a deal in which Customer D would receive 3 of the Waukesha Gen-Sets at a per unit +price of $995,000 in exchange for PSI accepting the return of approximately 97 PSI engines +previously purchased by Customer C to fulfill Customer D generator set orders. As designed, the +return of these 97 engines would have created a credit at PSI that Customer D would use to fund +the purchase of the 3 Waukesha Gen-Sets. +76. Over the final week of 2015, Needham worked to create documentation supporting +the transaction. Though Customer D understood that the transaction would be an exchange by +Customer C of the 97 PSI engines for the 3 Waukesha Gen-Sets (that Customer D would +subsequently purchase from Customer C), Needham insisted that Customer D issue a purchase +order for the 3 Waukesha Gen-Sets directly to PPPI. Prior to issuing a PO, Customer D requested +written confirmation that PSI had agreed to accept the return of the engines from Customer C, and +thus create a credit for Customer D. On the morning of December 29, 2015, Needham emailed a +statement to Customer D stating that PSI would accept the return sometime in the first quarter of +2016. Later that same day, Customer D issued a PO for the 3 Waukesha Gen-Sets. The Waukesha +Gen-Sets were not shipped to Customer D before the 2015 year end. +77. Davis and Needham improperly attempted to characterize this Customer D +transaction as a bill and hold sale. Needham provided Customer D with a bill and hold agreement + + + 17 +for execution, stating that it “allows us to recognize revenue.” That agreement provided that: (1) +Customer D requested the bill and hold treatment, (2) the Waukesha Gen-Sets were complete, and +(3) Customer D took title to the Waukesha Gen-Sets. However, Customer D did not have +customers for whom it would lease the Waukesha Gen-Sets as of December 2015 and had no need +or desire for the Waukesha Gen-Sets to be delivered in the foreseeable future. Needham and Davis, +among others, knew that Customer D had not initiated or requested the bill and hold treatment. +Rather, it was proposed by PSI strictly as a means to record revenue in 2015. +78. Neither Needham nor Davis informed anyone in the accounting group about the +true nature of the transaction or that it was conditioned upon the return of the 97 engines from +Customer C prior to the filing of PSI’s 2015 Form 10-K. +79. PSI improperly recognized approximately $3 million of revenue on this Customer +D transaction in 2015 when it failed to meet the criteria required by ASC 605-10-25-1 and which +were included in its own policies as described in ¶ 15. PSI’s accounting for the transaction should +have reflected all substantive terms of the negotiated deal, including PSI’s agreement to accept the +return of previously sold engines in exchange for the purported sale of the Waukesha Gen-Sets. +This would have resulted in no recognized net revenue for the fourth quarter of 2015 related to this +transaction. Instead, PSI recorded only the Waukesha Gen-Set part of the transaction, thus inflating +2015 net revenues by $3 million. +80. Further, PSI failed to meet the criteria disclosed in its own policies as necessary for +a bill and hold transaction to be recognized as revenue. Its revenue recognition policy required, +among other things, that the buyer had requested the finished goods be held for future delivery. +These criteria were not met. PSI requested the transaction to be structured as a bill and hold solely +to recognize revenue in 2015. Buyers must also have a substantial business purpose for requesting +bill and hold treatment, which Customer D did not have for the Waukesha Gen-Sets transaction. +Customer E $600,000 Transaction +81. Customer E issued a purchase order to PSI for 48 engines (totaling around +$600,000) which PSI expected to ship to Customer E by the end of 2015. However, there was a +delay in PSI procuring the custom oil pan required to meet the Customer E specification for the +engine. In an effort to recognize the revenue on the transaction in 2015, PSI’s sales department +determined that the 48 engines would be shipped to the PSI JV facility in China (Dalian facility) on +December 31, 2015 with a standard oil pan until they could be refitted sometime in 2016 with the +correct oil pan before being delivered to Customer E. +82. PSI’s Controller learned about the sales department’s plan for shipping these +engines without the correct oil pan and consulted with PSI’s customer service department, who +informed him that the Customer E engines would not be functional within Customer E’s intended +product without the correct oil pan. PSI’s Controller relayed this issue concerning the oil pan to +PSI’s CFO. + + + 18 +83. PSI’s CFO then emailed the sales department and told them that their plan would +result in no revenue being recognized for the transaction in 2015 because the product was not +complete to customer specification and would not be shipped to Customer E by the end of 2015. In +response to this email, the salesperson responsible for the Customer E account emailed +Winemaster directly and updated him that PSI’s CFO believed revenue could not be recognized for +the transaction. +84. Subsequently, Winemaster told PSI’s CFO that the Customer E engines were fully +functional and that revenue should be recognized for the transaction even though Winemaster +knew that the Customer E engines were not built to specification and were not functional within +Customer E’s intended product. +85. PSI recognized revenue on this Customer E transaction in 2015 despite not meeting +the criteria required by ASC 605-10-25-1 and which were included in its own policies as described +in ¶ 15. Because the engines for Customer E were not complete to the customer’s specification by +the end of 2015 and needed to be re-fitted with the correct oil pan to operate appropriately for the +customer’s needs, PSI had not completed the earnings process to recognize revenue. In addition, +the engines were not shipped to Customer E by the end of year; instead a Customer E-coordinated +transporter simply moved them to a PSI-controlled facility in China to be finished at a later date. +As a result, the risk of loss for the engines had not shifted to Customer E by the end of 2015. +Consequently, revenue should not have been recognized for this transaction. +Customer F $300,000 Transaction +86. In December 2015, PSI’s sales group was attempting to do everything possible to +ship product to meet its sales goals for the quarter. To that end, a PSI sales representative attempted +to convince Customer F to take early delivery – before the end of 2015 – of engines that it had +previously ordered. To incentivize Customer F to take the engines early, the PSI salesperson +offered Customer F extended payment terms. At the time, Customer F did not want to take delivery +of the engines because of the lack of its own customer demand for its product. +87. Still faced with a revenue shortfall on the last day of 2015, Davis called PSI’s +Director of Facilities and told him to ship 147 engines that Customer F had on order but was not +prepared to take delivery of to an off-site warehouse (“Warehouse A”), which was leased and +controlled by PSI, by the end of the day and to not tell anyone about the shipment. On the call, +Davis also relayed that he had already talked to Winemaster about the shipment and that the only 3 +people who would know about the shipment were Winemaster, Davis and the Director of +Facilities. +88. The 147 engines were shipped to Warehouse A by the end of 2015; Customer F +was invoiced for the engines (approximately $300,000 worth of engines); and the revenue for that +transaction was recognized in 2015. At the time, Customer F did not accept delivery of the engines, +and did not know of – let alone authorize – the shipment of the engines to Warehouse A. Further, +PSI’s accounting group was not made aware of the circumstances surrounding the shipment of the + + + 19 +147 engines, namely that they were shipped to Warehouse A without Customer F’s knowledge, +prior to the filing of PSI’s 2015 Form 10-K. +89. PSI recognized revenue on this transaction despite not meeting the criteria required +by ASC 605-10-25-1 and which were included in its own policies as described in ¶ 15. Since +Customer F did not accept the shipment of the 147 engines (and was not even aware they had been +shipped to a warehouse), PSI had neither realized nor earned revenue in accordance with ASC 605- +10-25-1. As a result, revenue should not have been recognized for this transaction. +90. In March 2016, PSI’s accounting department was working with PSI’s sales +department to collect the balance owed by Customer F related to the 147 engines shipped on +December 31, 2015. In connection with these efforts, PSI’s sales representative for Customer F +informed PSI’s accounting department for the first time that Customer F was not “even aware that +we shipped the last (147) engines.” Upon learning this, PSI’s accounting department reversed the +sales revenue (around $300,000) for the transaction in the first quarter of 2016 but did not restate +PSI’s previously issued fourth quarter financial statements. +Customer G $1.9 Million Transaction +91. In November 2015, Customer G agreed to purchase a certain type of engine that +was being discontinued. The agreement provided that Customer G would purchase 775 “base +engines,” which included the base engine block, fuel system, and catalyst, by the end of 2015. +These “base engines” would be stored at Warehouse A. The “base engines” would then be brought +back to PSI from the off-site location during 2016 and re-fitted with additional parts to enable the +engines to function in Customer G’s equipment, before being shipped to Customer G. Davis knew +that the purpose behind the proposed transaction structure was to increase 2015 revenue for PSI. +92. PSI manufactured and shipped the “base engines” to the PSI-leased warehouse +before the end of 2015. However, those engines did not include the catalysts, a required component +under the agreement between PSI and Customer G, because PSI had difficulty procuring them. The +salesperson responsible for the Customer G account informed Winemaster, Davis, and certain +operations personnel that: “I spoke with [Winemaster] last night and . . . we should NOT ship the +catalysts with this order. Let’s add those when we trim the engines next year.” Winemaster and +Davis did not tell PSI’s accounting group that the “base engines” shipped offsite did not contain +the catalysts prior to the filing of PSI’s 2015 Form 10-K. +93. Customer G also did not take on the risk of loss of the purported “base engines” +until 2016 because it did not lease Warehouse A until that time. The accounting department and +Davis knew that Customer G had not leased Warehouse A before the end of 2015. +94. As a result of the misconduct set forth above in ¶¶ 91-93, PSI improperly +recognized approximately $1.9 million of revenue on this transaction in 2015 despite not meeting +the criteria required by ASC 605-10-25-1 and which were included in its own policies as described +in ¶ 15. Because the “base engines” shipped to Warehouse A were missing the catalyst, PSI had + + + 20 +not completed the earning process required to recognize revenue. Further, the risk of loss +associated with those engines did not transfer to Customer G in 2015 because the engines were +shipped to a PSI-leased warehouse. +Fourth Quarter/Year End Summary +95. Due to the misconduct identified in ¶¶ 39-94 above, PSI’s Q4 and full-year 2015 +financial statements – included in its 2015 Form 10-K – were materially misstated because they +improperly recognized around $5.8 million in revenue for Q4 2015 and around $24.1 million in +revenue for full-year 2015. A reasonable investor would have viewed these misstatements as +important because they: (i) involved fraudulent accounting positions with no GAAP support, (ii) +arose as an ongoing effort by senior PSI management to meet revenue targets provided to the +market, (iii) masked the severity of the downward revenue trend PSI was facing in 2015, and (iv) +constituted a 7.4 percent overstatement of net revenue and a 5.8 percent overstatement of pre-tax +income for Q4 2015 and contributed to a 6.6 percent overstatement of net revenue and a 61.7 +percent overstatement of pre-tax income for full-year 2015. +96. Winemaster, Davis and Needham acted with scienter with respect to the fraudulent +accounting for these transactions. For example, Davis and Needham knew of and did not inform +PSI’s accounting group about the contemplated return of Customer C engines as part of Customer +D’s purchase of the Waukesha Gen-Sets; Winemaster approved recognizing $600,000 of revenue +despite knowing that the Customer E engines were not built to customer specification and were not +functional within Customer E’s intended product; Winemaster and Davis authorized the shipment +of $300,000 worth of engines on the last day of 2015 to Warehouse A without Customer F’s +consent and concealed such shipment from PSI’s accounting department; and Winemaster and +Davis knew the engines for Customer G were not complete to customer specification and failed to +inform PSI’s accounting department of that fact. They knew that the transactions in question had +the purpose and effect of artificially inflating PSI’s revenue. Winemaster’s, Davis’ and Needham’s +scienter is imputed to PSI. +97. In addition, Winemaster signed and certified PSI’s 2015 Form 10-K and also +approved the filing on February 22, 2016 of a Form 8-K announcing PSI’s net revenue for the +fourth quarter of 2015 even though he knew that at least $2.8 million of revenue for Q4 2015 and +at least $21.1 million of revenue for full-year 2015 had been improperly recognized. +98. Despite knowing relevant details of the transactions described above (¶¶ 39-94) and +without otherwise informing Auditor A of them, Winemaster on or around February 26, 2016 +signed a management representation letter for Auditor A that stated, among other things, that: (i) +the financial statements for 2015 are presented in accordance with GAAP; (ii) “[t]here are no . . . +[m]aterial transactions that have not been properly recorded in the accounting records underlying +the consolidated financial statements;” (iii) “[w]e have no knowledge of fraud or suspected fraud +affecting the entity;” (iv) “[t]here are no . . . [s]ide agreements or other arrangements (either written +or oral) undisclosed to you;” and (v) “[w]e have informed you of all uncorrected misstatements.” +This management representation letter was false. + + + 21 +Concealment of Fraudulent Accounting +99. Winemaster, Davis and Needham attempted to conceal the important terms of a +number of the transactions described above in order to avoid reversing or restating the recognized +revenue associated with those transactions. They attempted to renegotiate terms of some of the +transactions in later periods, and misled Auditor A about certain of the transactions. +Concealing the June 2015 Letter Agreement and the Truth +about the $4.3 Million Customer C Transaction +100. In October 2015, while trying to collect Customer C’s outstanding $10 million +receivable for the engines it had purportedly purchased in the second quarter of 2015, PSI’s +accounting department received a copy of the June 2015 Letter Agreement from Needham. The +June 2015 Letter Agreement provided, among other things, that Customer C would not have to pay +for an engine until it was placed in a generator and that Customer C could exchange the engines at +a later date for those that were more in demand. Customer C had refused to pay the $10 million +based on that letter agreement. +101. PSI’s Controller gave a copy of the agreement to PSI’s CFO and told him that, +given its conditional terms, he believed the transaction constituted a consignment sale, that PSI +should have deferred the related revenue as of June 30, 2015, and that the amount of the +transaction likely required PSI to restate its second quarter 2015 financial reports. PSI’s CFO and +inside counsel for PSI then drafted a proposed amendment to the June 2015 Letter Agreement that +removed the conditional terms and shared it with Winemaster. Winemaster subsequently sent the +proposed draft amendment to Davis and Needham. The proposed draft amendment was never sent +to Customer C. +102. Notwithstanding Winemaster’s, Davis’ and Needham’s knowledge of the existence +of the June 2015 Letter Agreement and the proposed draft amendment to the agreement, they did +not tell Auditor A about the side agreement. Further, Winemaster falsely represented in a +management representation letter to Auditor A on November 9, 2015, that there were no “[s]ide +agreements or other arrangements (either written or oral) that have not been disclosed to you.” +103. Winemaster, Davis and Needham also concealed the truth about the $4.3 million +Customer C transaction booked in the third quarter of 2015 from Auditor A. In late January 2016, +Customer C’s COO emailed Needham regarding the $4.3 million Customer C transaction, asking +for the “real amount we need to pay” for the engines purchased at the end of the third quarter, +noting “[i]f you remember when we did the $3M deal . . . PSI upped the price so it made your +numbers look better.” +104. Needham conferred with Davis who told him to have Customer C “pay the lower +amount and not reference anything at this point in time.” Accordingly, Needham responded to +Customer C that it should only pay the $3 million and PSI would adjust the $1.3 million balance at +a later time. When Davis updated Winemaster on the transaction, he noted: + + + 22 +It was agreed upon that we would sell these engines to [Customer C] +at the JV price but sell them at the normal price and now as we +negotiate with [Customer C] to pay these invoices they are going to +short pay these invoices by . . . 1.2 million dollars. This is the deal +that was agreed to. Before accounting gets short paid 1.2 million +dollars I wanted you to be aware. This is obviously a problem.3 +105. Also, Needham told Davis he was concerned that PSI’s accounts receivable +department would contact Customer C and ask for an explanation as to why Customer C had paid +only $3 million of the $4.3 million purportedly owed. In an attempt to address that concern and +collect Customer C’s $10 million balance from the June 2015 PO (which was then still +outstanding), Needham attempted to trade a write-off of the $1.3 million balance (which he +previously had already promised Customer C) and price incentives for future purchases in +exchange for Customer C’s payment of the $10 million balance over the next six months. In +response, Customer C’s COO stated: +The $1.2M was added in order to boost PSI’s sales revenue . . . . I see +you’re washing it away but why wasn’t it “discounted” on the +payment we just made . . . ? That was the dea l you and I made. We +shouldn’t have that $1.2M anywhere involved with the $10M deal. In +fact, if that $1.2M shows up as owed on our bill it’s going to raise all +sorts of red flags around here . . . . +106. In February 2016, Winemaster, Davis and Needham continued to have +conversations with Customer C representatives regarding the $10 million balance from the June +2015 PO. In connection with these conversations, they offered, among other things, to subsidize +Customer C’s cost of capital to allow it to make a $5 million payment on the balance. Customer C +did not accept PSI’s offer at that time. +107. In late March 2016, PSI’s accounting department received the January 2016 email +correspondence between Customer C and Needham described above. Upon receiving this email +correspondence, PSI’s Controller communicated his concerns to PSI’s CFO that there was no +justification for booking the $1.3 million and that PSI had thereby committed fraud. PSI’s +Controller also provided a hard copy of this email correspondence to PSI’s CFO. A couple weeks +later, PSI’s CFO reported to PSI’s Controller that he had spoken to Winemaster, who had told him +that PSI “doesn’t do business like that” and that Winemaster was going to meet with Customer C +on this transaction. +108. In early April 2016, Needham and Winemaster attempted to create after-the-fact +documentation, which would be sent by Customer C, to justify the inflated price for the originally +recorded $4.3 million transaction. + +3 The difference between the price Customer C agreed to pay and the amount PSI recorded was $1,286,000. Some at +PSI referred to the amount as $1.2 million while others refer to the rounded-up amount of $1.3 million. + + + 23 +109. Needham’s and Winemaster’s plan was to claim that PSI shipped domestic EPA- +certified engines priced at $4.3 million as opposed to international non-certified engines priced at +$3 million because PSI did not have the international non-certified engines available in September +2015. In order to avoid detection of the communications regarding this issue, Winemaster drafted +one proposed email, printed it out, and texted a picture of the print-out to PSI’s CFO. That draft +email stated: +We are now clear that PSI did not have the [PSI JV] price reduced +engine blocks in stock and therefore sold us standard engines to meet +the distribution requirement. Therefore we will purchase engines in +2016 at the JV pricing to balance the agreement between our +companies. +110. This draft proposed email was false. PSI did not sell its standard, domestic engines +in connection with this transaction. Instead, it shipped Customer C the same non-EPA certified +international engines that Customer C would have purchased from the PSI JV for $3 million but +invoiced Customer C for the standard, domestic engine (EPA-certified) $4.3 million price. +111. PSI’s CFO then provided Winemaster comments on the draft email via text. For +example, PSI’s CFO texted Winemaster on April 13, 2016: +Gary - keep this in mind while U are with [Customer C]. Our auditors +will be in next week and the [Customer C] discount and cash +collections will be front of mind. [Customer C] needs to return the +discount for now and restate their January email without mention of +future discounts - anything less is a major problem. +Winemaster’s proposed email apparently was never sent to Customer C. +112. On April 14, 2016, Winemaster and Needham met with Customer C. Davis kept +himself informed of what was occurring at the meeting. At that meeting, Winemaster pressured +Customer C to make additional payments on the engines purchased pursuant to the June 2015 +Letter Agreement even though the engines had not yet been placed in generators, including by +threatening to stop selling Customer C additional engines or engine parts if it did not pay off the +debt. PSI engines and parts were important for Customer C’s operations, as PSI was the only +supplier who could provide Customer C the engines for its generators to operate. +113. Ultimately, Customer C agreed to pay PSI $5 million even though it was not +required to do so under the June 2015 Letter Agreement. Prior to agreeing to make this $5 million +payment, Customer C had made payments totaling around $1.6 million on the debt from the June +2015 PO. Consistent with the June 2015 Letter Agreement, Customer C paid these amounts only +after placing engines into generator sets. In connection with its agreement to pay the $5 million +amount, Winemaster agreed to subsidize Customer C’s cost of capital on the $5 million payment + + + 24 +for six months and to allow Customer C to return around $4 million worth of product. The cost of +the subsidy was granted in the form of a monthly parts credit. +114. After this meeting, Winemaster told PSI’s CFO that Customer C was going to pay +PSI $5 million in the near future and would pay the remaining balance owed by the end of June +2016. Soon thereafter, PSI’s CFO informed the accounting department of Customer C’s +contemplated payments. Neither Winemaster, Davis or Needham told the accounting department +about the cost of capital subsidy and return right that Winemaster had given to Customer C at the +meeting to induce the $5 million payment. On April 20, 2016, Customer C sent PSI the promised +$5 million payment. +115. Notwithstanding his knowledge of these transactions and agreements, on May 10, +2016, Winemaster signed a management representation letter for Auditor A that, in relevant part, +provided that he had no knowledge of any fraud or suspected fraud affecting PSI and that “[t]here +are no . . . [s]ide agreements or other arrangements, either written or oral, that have not been +disclosed to you.” +Concealing the Truth Concerning the Customer D Transaction +116. In April 2016, a dispute began to surface between PSI and Customer D related to +the 2015 year-end purported sale of the Waukesha Gen-Sets. PSI refused to accept the return of the +Customer C engines that was an element of the Customer D transaction. This prompted Customer +D’s COO to email Needham on April 15, 2016: +As you know, the PO [Customer D] issued was requested by PSI in +order for PSI to book the sale of the three Waukesha’s by the end of +2015. We were going to utilize the deal you and I made . . . to return +[Customer C’s] excess 8T and 11L engines to use as a credit towards +the three Waukesha’s. As you know the PO wasn’t for a direct deal +between [Customer D] and PSI instead it notionally represented that +[Customer D] would end up with the Waukesha’s when PSI received +the returned 8T and 11T [sic] inventory. The PO used for PSI to book +the sale is not a valid PO and was built at your request. +117. This resulted in a months-long series of correspondence between Winemaster and +Customer D executives asserting their respective positions and threatening legal action. In +connection with this correspondence, Winemaster was made aware of the engine exchange element +of the Customer D transaction no later than June 3, 2016. +118. In the midst of Winemaster’s ongoing correspondence with Customer D, PSI’s +CFO wrote an email to Winemaster on July 25, 2016 inquiring, “Gary – when can we discuss the +[Customer D] units? Auditors will want to remove these sales and force a change to history – not +an outcome we want.” Winemaster replied the same day, “[t]hese will get cleared. Try and push for +end of August (15th min if you can). We are shutting off the telematics 7/31 to force them to pay + + + 25 +thier [sic] outstanding.” PSI controlled access to the “telematics” referenced in Winemaster’s +email. The telematics were used by Customer D to manage and monitor its operating units and +were important to its operations. +119. In late August 2016, PSI and Customer D reached a settlement agreement in which +Customer D agreed to take delivery of and pay for the 3 Waukesha Gen-Sets originally “sold” to +them by PSI in December 2015. Winemaster and PSI’s Chief Legal Officer insisted during the +settlement negotiations that Customer D not issue a new PO for the Waukesha Gen-Sets. Rather, +they explained that PSI needed the transaction to supplement the previously issued December 2015 +PO “for accounting purposes.” The Waukesha Gen-Sets were shipped to Customer D in or around +August 2016. +Misrepresentations to Auditor A During Internal Investigation +120. In May 2016, PSI’s COO left the company in the midst of an employment dispute. +Upon departing, he communicated allegations of unethical and unlawful activities to the PSI Board +in the form of a letter and draft complaint against PSI (“COO Complaint”). PSI’s COO asserted +that top management at PSI directed sales staff to “channel stuff” and “pull-up” sales from 2016 to +falsely inflate PSI’s 2015 revenues to avoid missing PSI’s revenue guidance. The COO Complaint +included allegations regarding the second and third quarter Customer C transactions, the fourth +quarter Customer D transaction, and the fourth quarter Customer F transaction as examples of PSI +recognizing revenue improperly. +121. Soon after this complaint was received, PSI’s Audit Committee and Board of +Directors had discussions regarding the COO Complaint with Winemaster and PSI’s Chief Legal +Officer. During these discussions Winemaster told members of the Audit Committee and Board +that he did not believe there was any merit to the former COO’s allegations but that management +would investigate the COO’s allegations. This internal investigation was going to be performed by +PSI’s Chief Legal Officer and CFO and would ultimately be documented in writing. Winemaster’s +statement to the members of the Audit Committee and Board was a lie; he knew that there was +merit to the claims the COO had made. +122. Also soon after the COO’s Complaint was received, PSI’s Board of Directors +decided to retain independent counsel to investigate the former COO’s allegations. The process of +selecting and engaging independent counsel was completed by mid-July 2016 with the independent +counsel beginning the independent investigation in August 2016. +123. On July 31, 2016, PSI’s CFO for the first time also sent the former COO’s letter +and the COO Complaint to Auditor A. After receiving this information, Auditor A requested the +results of PSI’s internal investigation before deciding whether it could sign off on PSI’s second +quarter Form 10-Q. +124. On August 2, PSI’s Chief Legal Officer and Deputy Chief Legal Officer began the +internal investigation into the COO Complaint. Over the course of the next couple of weeks, PSI’s + + + 26 +CFO, Chief Legal Officer and Deputy Chief Legal Officer provided Auditor A with information +and documents in response to Auditor A’s requests regarding the COO Complaint. In connection +with these efforts, Winemaster told PSI’s Chief Legal Officer that Customer C’s $1.3 million short +pay related to the third quarter of 2015 transaction was a misunderstanding and that the shipment +of Customer F engines to Warehouse A was done at his direction to more easily allow PSI to +reclaim the engines should Customer F fail to pay for them. These statements by Winemaster were +false. Winemaster’s lies regarding these transactions were shared with Auditor A. +125. As the deadline to file PSI’s Form 10-Q for the second quarter of 2016 approached, +Winemaster, PSI’s CFO, and PSI’s Chief Legal Officer continued to work towards addressing +Auditor A’s requests. These efforts included a late night conference call on August 8, 2016, during +which Winemaster attempted to convince Auditor A that the transactions identified by the former +COO were all legitimate business deals that were fully collectable. On the same call, Winemaster +also mentioned, with respect to Auditor A, “don’t these guys know who they work for.” +Ultimately, Auditor A did not sign off on PSI’s second quarter 2016 Form 10-Q. +Continued Efforts to Conceal after SEC Investigation Commences +126. Winemaster’s efforts to conceal the fraudulent accounting for the transactions with +Customer B and Customer C continued even after the SEC had issued a document preservation +notice and document subpoena to PSI in August 2016. +127. In or around September 2016, Winemaster told his VP of Advanced Product +Development that PSI needed to clean up its outstanding receivables from Customer C before the +end of 2016 to mitigate its exposure during the investigation by the SEC. To that end, Winemaster +directed his VP of Advanced Product Development to help find a buyer for Customer C’s excess +engine inventory so that Customer C would then pay down its outstanding balance from the second +quarter and third quarter transactions described above. Initially, PSI explored an opportunity to +connect a prospective UK-based power generation customer with Customer C for a direct sale +transaction that would “keep [PSI’s] hands clean.” When that opportunity did not appear viable +before the end of the year, Winemaster directed his VP of Advanced Product Development and +Needham to directly purchase 60 generator sets from Customer C that contained previously sold +PSI engines. PSI had not identified customers to purchase these generators, and entered into the +purchase as a way to induce Customer C to pay for the engines consumed to cover up PSI’s prior +accounting misstatements. +128. In addition, Winemaster and Davis attempted to disguise the return right +Winemaster granted to Customer B in connection with its $7.8 million purchase in the first quarter +of 2015. Specifically, Winemaster and Davis authorized PSI’s sales staff to facilitate Customer B’s +resale of the engines to another PSI customer in 2017 after Customer B requested to return the +engines to PSI. + + + + 27 +PSI’s Fraud Unravels and PSI Restates its Financial Statements +129. The accounting misstatements came to light in various Forms 8-K filed over the +period August 4, 2016 through April 7, 2017. These disclosures resulted in a significant decline in +PSI’s stock price. +130. After learning additional details of the conduct described herein from PSI’s +independent investigation, Auditor A resigned as PSI’s auditor on January 27, 2017. +131. PSI originally filed annual reports for its fiscal years ending 2014 and 2015, +quarterly reports for the first, second and third quarters of 2015 and current reports disclosing +financial results for each quarter from the fourth quarter of 2014 through the fourth quarter of 2015 +that contained material misstatements of PSI’s net revenue. These misstatements principally +derived from the improper recognition of revenue for a number of transactions, including those +detailed in ¶¶ 26-98 above. +132. On May 16, 2019, PSI issued restated financial statements when it filed its 2017 +Form 10-K. Those restated financial statements included a cumulative $29.8 million reduction of +revenue for PSI’s financial statements from the fourth quarter of 2014 through the fourth quarter of +2015, as well as adjustments to other income statement and balance sheet line items for its +previously issued financial statements. +133. The following chart summarizes PSI’s revenues and income, as originally reported +and as restated. + +Impact of All Adjustments on Net Revenue +(dollar amounts in thousands) +Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 +Originally Reported Net Revenue 103,910 86,139 94,629 112,008 96,670 389,446 +Fraudulent Transactions (846) (6,951) (10,020) (1,286) (5,823) (24,080) +Other Adjustments (1,863) 4,132 746 4,229 (12,087) (2,981) +Net Revenue Adjustments (2,709) (2,819) (9,274) 2,943 (17,910) (27,060) +Restated Net Revenue 101,202 83,320 85,355 114,951 78,760 362,386 +Net Revenue Adjustment, as Percentage of +Restated Net Revenue 2.7% 3.4% 10.9% 2.6% 22.7% 7.5% +Increase (Decrease) + + + 28 + +134. A reasonable investor would have viewed the misstatements detailed in ¶¶ 131-133 +as important. The financial impact of these misstatements was significant. In addition, the +accounting for many of the transactions comprising these misstatements was fraudulent as +described above in ¶¶ 26-98. +135. PSI failed to devise and maintain a sufficient system of internal accounting +controls. Among other things, PSI’s reliance on “word of mouth” to ensure atypical transaction +terms were disclosed to the accounting department was insufficient to provide reasonable +assurance that transactions were recorded in accordance with GAAP. PSI’s 2017 Form 10-K +disclosed that the company’s internal control over financial reporting was not effective, disclosing +a number of material weaknesses. These material weaknesses contributed to revenue being +recognized not in accordance with GAAP. For example, the lack of adequate accounting controls +allowed Winemaster, Davis and Needham to conceal the inflated revenue from the third quarter of +2015 Customer C transaction from the accounting department and permitted such revenue to be +recognized when it was not realizable under ASC 605-10-25-1. +VIOLATIONS +136. As a result of the conduct described above, Respondent violated Section 10(b) of +the Exchange Act and Rule 10b-5 promulgated thereunder, which prohibit fraudulent conduct in +connection with the purchase or sale of securities. +137. As a result of the conduct described above, Respondent violated Section 13(a) of +the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 promulgated thereunder, which +require issuers of securities registered pursuant to Section 12 of the Exchange Act to file periodic +and other reports with the Commission, including annual, quarterly and current reports, on the +appropriate forms and within the period specified on the form that must contain any material +information necessary to make the required statements made in the report not misleading. +138. As a result of the conduct described above, Respondent violated Exchange Act +Section 13(b)(2)(A) which requires issuers of securities registered pursuant to Section 12 of the +Exchange Act to make and keep books, records and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and dispositions of assets. +Impact of All Revenue Related Adjustments on Income Before Taxes +(dollar amounts in thousands) +Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 FY 2015 +Originally Reported Income (Loss) Before Taxes 13,630 (72) 6,206 8,643 (887) 13,890 +Restated Income (Loss) Before Taxes 10,585 (2,585) 1,246 6,908 (18,162) (12,593) +Fraudulent Transactions (320) (2,424) (3,007) (1,286) (1,054) (7,771) +Other Adjustments (2,438) 384 (482) 26 (3,751) (3,823) +Gross Profit Adjustment (2,758) (2,040) (3,489) (1,260) (4,805) (11,594) +Gross Profit Adjustment, as Percentage of +Restated Income Before Taxes 26.1% 78.9% 280.0% 18.2% 26.5% 92.1% +Increase (Decrease) + + + 29 +139. As a result of the conduct described above, Respondent violated Exchange Act +Section 13(b)(2)(B) 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, among other things, permit +preparation of financial statements in accordance with GAAP. +PSI’S REMEDIAL EFFORTS AND COOPERATION +140. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. +141. PSI shared facts developed in its internal investigation, including by providing +regular updates and analyses and identifying key documents, and it facilitated interviews with +witnesses. +142. PSI has taken certain remedial measures, including dismissing or disciplining +employees involved in the conduct set forth above, and continuing to modify and improve +certain internal controls and procedures. PSI has made a number of organizational changes, such +as replacing and hiring a new CEO, CFO and Corporate Controller, as well as hiring several +additional staff in finance, accounting and sales positions. PSI also revamped its internal audit +function, including establishment of a VP of Internal Audit position that reports directly to the +Audit Committee. PSI also implemented additional compliance training for employees and +specialized training for sales and accounting personnel. +143. PSI also implemented changes to its revenue recognition practices, including (1) +revisions to its revenue recognition policies and procedures; (2) enhanced sales controls, policies +and procedures; (3) revisions to its review process and monitoring controls over contracts with +customers, customer payments, and incentives; (4) training regarding relevant revenue +recognition principles for the Accounting, Financing and Sales Teams; and (5) creation of an +Internal Control Steering Committee to oversee the enterprise-wide remediation plan. +UNDERTAKINGS +144. Respondent undertakes to: +a. Cooperate fully with the Commission in any and all investigations, +litigations or other proceedings relating to or arising from the matters +described in the Order. +b. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information reasonably requested by the Commission’s +staff, with a custodian declaration as to their authenticity, if requested. + + + 30 +c. Use its best efforts to cause PSI’s current and former employees, officers, +directors and consultants to be interviewed by the Commission’s staff as +such times and places as the staff reasonably may direct. +d. Use its best efforts to cause PSI’s current and former employees, officers, +directors and consultants to appear and testify truthfully and completely +without service of a notice or subpoena in such investigations, depositions, +hearings or trials as may be reasonably requested by the Commission’s staff. +e. In connection with any interviews of PSI’s current and former employees, +officers, directors and consultants to be conducted pursuant to this +undertaking, requests for such interviews may be provided by the +Commission’s staff by regular electronic mail to: Junaid Zubairi, Vedder +Price P.C., 222 N. LaSalle Street, Chicago, IL 60601, (312) 609-7720, +jzubairi@vedderprice.com. +f. Fully remediate the deficiencies in its internal control over financial +reporting that constituted material weaknesses identified in PSI’s Form 10-K +filed with the Commission on May 16, 2019 (“MWs”) by April 30, 2021, +unless an extension has been provided by the Commission’s staff pursuant to +Paragraph 145 herein. +g. In the event that the MWs are not fully remediated by April 30, 2021 and no +extension has been provided pursuant to Paragraph 145 , engage an +independent consultant (the “IC”), not unacceptable to the Commission’s +staff, by June 30, 2021 to conduct a comprehensive review of the then +outstanding MWs and of PSI’s policies, procedures, controls, and training +relating to financial reporting, and to recommend, if and where appropriate, +policies, procedures, controls and training designed to provide reasonable +assurance that PSI’s internal control over financial reporting is effective. +h. Cooperate fully with the IC by providing access to its own files, books, +records, and personnel as reasonably requested for its review. PSI’s +engagement of the IC will require the IC to complete its review and make its +recommendations, if any, within six months of being retained. PSI will +promptly adopt all recommendations of the IC; provided however, that +within sixty (60) days after receiving the IC’s recommendations, PSI may, in +writing, advise the IC and the Commission (addressed to the Assistant +Director identified below) of any recommendation that it considers to be +unnecessary, unduly burdensome, impractical, or costly. As to any such +recommendations, PSI shall within thirty (30) days thereafter propose in +writing an alternative policy, procedure, or control designed to achieve the +same objective or purpose. As to any recommendation on which PSI and the + + + 31 +IC do not agree within forty-five (45) days, after attempting in good faith to +reach an agreement, PSI will abide by the determination of the IC. +i. Require the IC 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 IC shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with PSI, or any +of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity. The agreement will also provide that the IC 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 IC in performance of his/her +duties under this Order shall not, without prior written consent of the +Commission, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with PSI, 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. +j. Require that these undertakings shall be binding upon any acquirer or +successor in interest to PSI. +k. Certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits +sufficient to demonstrate compliance. The Commission staff may make +reasonable requests for further evidence of compliance, and PSI agrees to +provide such evidence. The certification and supporting material shall be +submitted to Steven Klawans, Assistant Director, with a copy to the Office +of Chief Counsel of the Enforcement Division, no later than sixty (60) +days from the date of the completion of the undertakings. +145. For good cause shown, the Commission’s staff may extend any of the procedural +dates set forth above in Paragraph 144. In the event PSI decides to request an extension of any +such dates, it shall provide the Commission’s staff a written extension request that explains the +circumstances and rationale for such request. The written extension request shall be submitted to +Steven Klawans, Assistant Director, no later than thirty (30) days before the applicable deadline. +146. Any reports by the IC will likely include confidential financial, proprietary, +competitive business or commercial information. Public disclosure of the reports could +discourage cooperation, impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, the reports and the +contents thereof are intended to remain and shall remain non-public, except (1) pursuant to court +order, (2) as agreed to by the parties in writing, (3) to the extent that the Commission determines + + + 32 +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. +147. Any reports submitted by PSI will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of the reports +could discourage cooperation, impede pending or potential government investigations or +undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non-public, except (1) +pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law. +148. In determining whether to accept the Offer, the Commission has considered the +undertakings set forth in paragraphs 144a-e. +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 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 +promulgated thereunder. +B. Respondent shall comply with the undertakings enumerated in paragraphs 144f-k +and 145-147 above. +C. Respondents shall, within thirty (30) days of the entry of this Order, pay a civil +money penalty in the amount of $1,700,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to this +paragraph in an account at the United States Treasury pending a decision whether the Commission, +in its discretion, will seek to distribute funds or, 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. +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; + + + 33 +(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 +Power Solutions International, 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 Steven +Klawans, Assistant Director, Securities and Exchange Commission, Chicago Regional Office, 175 +West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. +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 one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4170.txt b/raw/aaer/2020/AAER-4170.txt new file mode 100644 index 0000000000000000000000000000000000000000..411f27a8e27c56a4ae9b960ad68dd73660e05ae3 --- /dev/null +++ b/raw/aaer/2020/AAER-4170.txt @@ -0,0 +1,1401 @@ + + + + + + + + + + + + + + + + SEC.gov | Revolution Lighting Technologies, 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\/525071","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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Revolution Lighting Technologies, Inc., et al. , No. 3:20-cv-01440-CSH (D. Conn. filed September 24, 2020) + + + + + + + + + The Securities and Exchange Commission today charged Connecticut-based Revolution Lighting Technologies, Inc., for an accounting fraud that falsely inflated its reported revenues over a four-year period. Four Revolution Lighting executives-CEO Robert LaPenta, former CFO James DePalma, and two former CFOs of the firm's largest division, Allen Garner and Daniel O'Neal- were also charged for their roles in causing Revolution Lighting to misreport its revenue. All have agreed to settlements to resolve the claims against them. + + According to the SEC's complaint, from late 2014 to mid-2018, Revolution Lighting improperly recognized revenue for sales much earlier than permitted by accounting rules or the firm's own written revenue-recognition policies. The complaint alleges that as Revolution Lighting approached the end of each fiscal quarter, LaPenta and DePalma pressured Garner, O'Neal and sales personnel to improperly record anticipated future sales as current "bill and hold" sales to make up for revenue shortfalls. The company then allegedly recognized revenue from the uncompleted sales. On multiple occasions, Garner allegedly concealed this practice by providing backdated documents related to "bill and hold" sales to the company's auditor. As alleged, DePalma kept careful track of Revolution Lighting's reporting of bill and hold transactions through a "bill and hold schedule" that Garner, and later O'Neal, prepared. The complaint alleges that the defendants failed to disclose that "bill and hold" sales represented a significant portion of Revolution Lighting's revenue or that the company was materially deviating from its stated revenue-recognition policies. + + The SEC's complaint, filed in federal court in Connecticut, alleges that the defendants violated antifraud, books and records, internal controls, and reporting provisions of the securities laws. In addition, the complaint alleges that LaPenta and DePalma made false certifications in Revolution Lighting's filings, that DePalma, Garner, and O'Neal circumvented accounting controls or falsified records, and that Garner misled Revolution Lighting's auditor. Revolution Lighting and Garner were charged with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 17(a) of the Securities Act of 1933, and LaPenta, DePalma, and O'Neal were charged with violating Securities Act Sections 17(a)(2) and (3). In addition, Revolution Lighting was charged with violating, and all other defendants were charged with aiding and abetting, 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; LaPenta was charged with violating Exchange Act Rules 13a-14 and 13b2-1; DePalma, Exchange Act Section 13(b)(5) and Rules 13a-14 and 13b2-1; Garner, Exchange Act Section 13(b)(5) and Rules 13b2-1 and 13b2-2; and O'Neal, Exchange Act Section 13(b)(5) and Rule 13b2-1. + + Without admitting or denying the SEC's allegations, Revolution Lighting, LaPenta, DePalma, Garner, and O'Neal consented to judgments permanently enjoining them from future violations of the charged provisions and requiring them to pay penalties of $1.25 million, $192,768, $100,000, $25,000, and $25,000, respectively. Garner also agreed to be prohibited from acting as a public company officer or director for five years. The settlements are subject to court approval. + + The SEC's case is being handled by Peter Moores, Ryan Murphy, Trevor Donelan, Marc Jones, and Michele T. Perillo of the Boston Regional Office. The SEC's investigation is ongoing. + + + + + + + + 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/2020/AAER-4171.txt b/raw/aaer/2020/AAER-4171.txt new file mode 100644 index 0000000000000000000000000000000000000000..05558cecbffebd64670d3c69319181b96431b4b5 --- /dev/null +++ b/raw/aaer/2020/AAER-4171.txt @@ -0,0 +1,224 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90003 / September 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4171 / September 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20073 + + +In the Matter of + +AEON GLOBAL HEALTH +CORP., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Aeon Global Health Corp. (formerly known as +Authentidate Holding Corp.) (“Respondent” or “Aeon”). +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 + This proceeding involves violations of the federal securities laws in connection with the +Respondent’s reporting, books and records, and internal accounting control failures, as well as its +failure to maintain Internal Control over Financial Reporting (“ICFR”). Respondent failed to +maintain, and did not remediate material weaknesses in, ICFR for fourteen consecutive reporting +periods from the period ended March 31, 2016 through the period ended June 30, 2019. In addition, +Respondent announced three financial statement restatements during the period from 2016 to 2019. +Respondent + +1. Aeon is a Delaware corporation headquartered in Gainesville, Georgia. It provides +services to healthcare professionals including medical testing, web-based revenue cycle +management applications, and telehealth products and services. Aeon’s common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act and is quoted on +OTC Link (previously “Pink Sheets”) operated by OTC Markets Group Inc., under the ticker +“AGHC.” Until January 31, 2018, Respondent was known as Authentidate Holding Corp. +(“AHC”). AHC had completed, in 2016, a reverse acquisition of Peachstate Health Management, +LLC d/b/a AEON Clinical Laboratories. At all relevant times, Respondent filed periodic reports +with the Commission, including Forms 10-K and 10-Q, pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. +Background +2. Respondent disclosed material weaknesses in each of its Forms 10-K and 10-Q over +a period of approximately four years, from 2016 through 2019. +3. In its Form 10-Q for the period ended March 31, 2016, Respondent disclosed that it +had insufficient resources in its accounting function, which “restricts the Company’s ability to +gather, analyze and properly review information related to financial reporting in a timely manner.” +Respondent also disclosed that it had “inadequate controls to ensure that information necessary to +properly record transactions is adequately communicated on a timely basis from non-financial +personnel to those responsible for financial reporting.” These two material weakness disclosures +were subsequently repeated in each of the next thirteen reporting periods, up to and including +Respondent’s most recent Form 10-K for the period ended June 30, 2019. +4. During the period from 2016 through 2019, Respondent filed three financial +restatements. In its April 5, 2017 filing of an amended Form 10-Q for the period ended March 31, +2016, Respondent disclosed that its previously reported financial statements for the three- and +nine-month periods ending March 31, 2016, contained material errors related to its revenue + +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 +estimates. In connection with the restatement, Respondent disclosed a material weakness resulting +from “delays in identifying reduced revenue collections due to modification of payor claims +adjudication processes and lack of communication between financial personnel and non-financial +personnel.” The same material weakness was subsequently described in each of the next twelve +reporting periods up to and including Respondent’s Form 10-Q for the period ended March 31, +2019. +5. In its Form 10-K for the period ended June 30, 2017 filed on October 13, 2017, +Respondent disclosed that its previously reported financial statements for the three-month periods +ending September 30, 2016, December 31, 2016, and March 31, 2017 included material errors +“resulting in the understatement of inventory and the understatement of certain accruals.” +6. In its January 25, 2019 filing of an amended Form 10-Q for the period ended +September 30, 2018, Respondent disclosed that its previously reported financial statements for the +three months ended September 30, 2018 “contains material errors related to the classification and +valuation of the embedded derivative related to an aggregate principal amount of . . . convertible +notes.” +7. Beginning with its Form 10-Q for the period ended March 31, 2016, Respondent +stated that it would perform certain remedial actions. Planned remedial actions were repeated in +subsequent periodic filings. Respondent’s disclosed remedial actions have included reviewing the +design of the procedures for the preparation of financial statements; improving documentation; +hiring additional personnel in the accounting department; and providing training to individuals in +its accounting and reporting functions. Despite these efforts, Respondent continues to report +material weaknesses. +Violations +8. As a result of the conduct described above, Respondent violated Section 13(a) of +the Exchange Act and Rules 13a-13 and 13a-15(a) thereunder, which require issuers with classes +of securities registered pursuant to Section 12 of the Exchange Act to file periodic and other +reports with the Commission and to maintain ICFR. +9. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions +and dispositions of their assets. +10. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a +system of sufficient internal accounting controls. +Undertakings + Respondent has undertaken to: +4 +11. Retain, within thirty (30) days of the date of entry of the Order, at its own expense, +a qualified independent consultant (the “Consultant”) not unacceptable to the Commission staff, to +review and evaluate the Respondent’s ICFR. +12. Provide, within forty-five (45) days of the issuance of this Order, a copy of the +engagement letter detailing the Consultant’s responsibilities to Steven G. Rawlings, Assistant +Regional Director, Division of Enforcement, Securities and Exchange Commission, Brookfield +Place, 200 Vesey Street, Suite 400, New York, NY 10281. +13. Require the Consultant, at the conclusion of the review, which in no event shall be +more than 120 days after the entry of the Order, to submit a report of the Consultant to the +Respondent and the Commission staff. The report shall address the Respondent’s ICFR and shall +include a description of the review performed, the conclusions reached, and the Consultant’s +recommendations for changes or improvements to the Respondent’s ICFR. +14. Adopt, implement, and maintain all policies, procedures and practices +recommended in the report of the Consultant. As to any of the Consultant’s recommendations +about which the Respondent and the Consultant do not agree, such parties shall attempt in good +faith to reach agreement within 180 days of the date of the entry of the Order. In the event that the +Respondent and the Consultant are unable to agree on an alternative proposal, the Respondent will +abide by the determination of the Consultant and adopt those recommendations deemed +appropriate by the Consultant. +15. No later than twelve (12) months after the date of the entry of the Order, direct the +Consultant to conduct a follow-up review of the Respondent’s efforts to implement each of the +recommendations made by the Consultant and the Respondent shall direct the Consultant to submit +a follow-up report to the Commission staff no later than fifteen (15) months after the date of the +entry of the Order. The Respondent shall direct the Consultant to include in the follow-up report +the details of the Respondent’s efforts to implement each of the Consultant’s recommendations and +shall separately state whether the Respondent has fully complied with each of the Consultant’s +recommendations. +16. Cooperate fully with the Consultant in its review, including making such +information and documents available as the Consultant may reasonably request, and by permitting +and requiring the Respondent’s employees and agents to supply such information and documents +as the Consultant may reasonably request. +17. Ensure the independence of the Consultant, the Respondent (i) shall not have +received legal, auditing, or other services from, or have had any affiliations with, the Consultant +during the two years prior to the issuance of this Order; (ii) shall not have the authority to terminate +the Consultant without prior written approval of the Commission staff; and (iii) shall compensate +the Consultant for services rendered pursuant to the Order at their reasonable and customary rates. +18. 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 +5 +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 Consultant +will require that any firm with which he/she is affiliated or of which he/she is a member, and any +person engaged to assist the Consultant in performance of his/her duties under this Order shall not, +without prior written consent of the Commission staff, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Respondent, 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. +19. The reports by the Consultant will likely include confidential financial, proprietary, +competitive business or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations or undermine the objectives of +the reporting requirement. For these reasons, among others, the reports and the contents thereof +are intended to remain and shall remain non-public, except (1) pursuant to court order, (2) as +agreed to by the parties in writing, (3) to the extent that the Commission determines in its sole +discretion that disclosure would be in furtherance of the Commission’s discharge of its duties and +responsibilities, or (4) is otherwise required by law. +20. Require the Consultant to report to the Commission staff on its activities as the staff +may request. +21. Respondent agrees that the Commission staff may extend any of the dates set forth +above at its discretion. +22. Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of compliance in the form +of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable request for further evidence of compliance, and the +Respondent agrees to provide such evidence. The certification and reporting material shall be +submitted to Steven G. Rawlings, Assistant Regional Director, with a copy to the Office of the +Chief Counsel of the Division of Enforcement, no later than sixty (60) days from the date of the +completion of the undertakings. +Civil Penalties + +23. Respondent has submitted a sworn Statement of Financial Condition dated July 7, +2020 and other evidence and has asserted its inability to pay a civil penalty. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Aeon’s Offer. + Accordingly, it is hereby ORDERED that: +6 + A. Pursuant to Section 21C of the Exchange Act, Respondent Aeon 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-13 and 13a-15(a) thereunder. +B. Respondent shall comply with the undertakings enumerated in Paragraphs 11-22. + +C. Based upon Respondent’s sworn representations in its Statement of Financial +Condition dated July 7, 2020 and other documents submitted to the Commission, the Commission +is not imposing a penalty against Respondent. +D. 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. + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4172.txt b/raw/aaer/2020/AAER-4172.txt new file mode 100644 index 0000000000000000000000000000000000000000..db5d040f28ed46854b0e99ebce5c7bdaf52aa104 --- /dev/null +++ b/raw/aaer/2020/AAER-4172.txt @@ -0,0 +1,449 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90008 / September 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4172 / September 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20075 + + +In the Matter of + +JAMES L. THOMPSON, 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 James L. Thompson, CPA +(“Thompson” 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 ... (2) … to +have engaged in unethical or improper professional conduct …. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purposes of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, 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. These proceedings arise out of Thompson’s failure to exercise due professional +care, maintain professional skepticism, obtain sufficient appropriate audit evidence, and prepare +audit documentation of sufficient detail regarding the work performed on the audit of the 2017 +fiscal year financial statements of Santa Fe Gold Corporation (“Santa Fe” or “the company”) (the +“2017 audit”). Thompson – who served as the engagement partner – had overall responsibility for +the 2017 audit, including supervision of the engagement team members and compliance with +Public Company Accounting Oversight Board (“PCAOB”) standards. Thompson caused the +issuance of the audit report, signed by Thompson on behalf of the audit firm, containing an +unqualified opinion that Santa Fe’s financial statements were presented fairly in all material +respects in conformity with accounting principles generally accepted in the United States of +America (“GAAP”) and that the audit was conducted in accordance with PCAOB standards. The +audit report, dated July 3, 2018, was included in Santa Fe’s annual report on Form 10-K filed on +July 5, 2018.4 + +2. During Santa Fe’s 2017 fiscal year, its former chief executive officer (“CEO”), +Thomas H. Laws (“Laws”), misappropriated nearly $1 million from the company.5 Thompson + +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 Santa Fe’s 2017 fiscal year ended on June 30, 2017. Santa Fe was delinquent with respect to the filing +of its 2017 Form 10-K. + +5 On November 15, 2018, the Commission filed a civil action against Laws alleging violations of, among +other provisions, the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) +of the Exchange Act and Rule 10b-5 thereunder, and obtained a permanent injunction and other relief +against him. SEC v. Thomas H. Laws, et al., C.A. No. 18-cv-01063-JB-SCY (D.N.M.) + +3 +encountered numerous red flags during the 2017 audit concerning Laws’ misconduct indicating +that additional audit steps were required, including transfers of material amounts of Santa Fe funds +to Laws’ personal bank account. Yet Thompson failed to, among other things, obtain sufficient +appropriate audit evidence to adequately assess the evidence and these transactions. + +RESPONDENT + +3. James L. Thompson, CPA, is a resident of Houston, Texas and a former partner of a +PCAOB registered audit firm that specializes in auditing small public companies (“the firm”). +Thompson has been licensed as a CPA in Texas since 2012. Thompson served as the engagement +partner for the 2017 audit. + +OTHER RELEVANT PARTY + +4. Santa Fe Gold Corporation, a Delaware corporation with its principal place of +business in Albuquerque, New Mexico, is a small mining company. It currently has a class of +securities registered under Section 12(g) of the Exchange Act. At the time of the audit, its +common stock was traded on the OTC Marketplace operated by OTC Markets Group, Inc. or +“OTC Pink Sheets,” under the ticker symbol “SFEG,” and was required to file periodic reports +with the Commission pursuant to Section 13 of the Exchange Act and related rules +thereunder. The company filed Chapter 11 Bankruptcy in August 2015 and exited bankruptcy in +June 2016. + + +FACTS + + The Underlying Fraud at Santa Fe and Resulting Financial Misstatements + +5. From approximately August 2016 to February 2018, Santa Fe’s Chief Financial +Officer (“CFO”) transferred approximately $1.1 million of Santa Fe funds to a personal bank +account of Santa Fe’s CEO Laws. In April 2017, Santa Fe transferred $500,000 to Laws based +upon the understanding that he would place the funds in an attorney’s escrow account as a down +payment for the company’s $3 million purchase of a silver mine. Santa Fe transferred additional +funds to Laws purportedly for other corporate purposes, including the purchase of mining +equipment and for services such as drilling. Instead of placing the funds in escrow or using the +funds for corporate purposes, Laws misappropriated approximately $1 million. + +6. Due to Laws’ misappropriation, the financial statements included in Santa Fe’s +Form 10-K for the year ended June 30, 2017, filed on July 5, 2018, were materially false. The +engagement team audited those financial statements, represented that the audit was conducted in +accordance with PCAOB standards, and concluded in an audit report authorized by Thompson and +issued on July 3, 2018, that the 2017 financial statements “present fairly, in all material respects, + +4 +the financial position of the Company … and the results of their operations” in accordance with +GAAP.6 + +Thompson Knew the 2017 Audit of Santa Fe Involved Substantial Control Risks + +7. Thompson participated in the planning stage of the 2017 audit. At that time, the +engagement team determined there were material weaknesses in internal control over financial +reporting at Santa Fe due to a lack of process and procedures and inadequate segregation of duties. +The firm also documented a “significant deficiency” in internal control over financial reporting due +to the absence of any policy regarding related party transactions. As a result, the firm determined +at the outset of the 2017 audit that it could “not rely on the internal control of the company during +the audit” and set the control risk as “high.” Thompson, as the engagement partner, knew of this +risk control designation. + +Audit Failures Concerning the Purported $500,000 Down Payment for the Purchase of the +Alhambra Silver Mine +8. Santa Fe’s June 30, 2017 balance sheet provided to the engagement team included a +$500,000 asset classified as an “escrow deposit.” That amount was material to Santa Fe, +constituting almost half of its assets as of June 30, 2017. The amount exceeded the $300,000 +materiality threshold for the financial statements as a whole, as determined by the engagement +team for the 2017 audit, which warranted heightened scrutiny for the transaction. + +9. Santa Fe told the engagement team that this balance sheet item related to the $3 +million purchase of a silver mine located near Silver City, New Mexico (the “Alhambra mine”). +Specifically, Santa Fe told the engagement team that the company wired $500,000 to Laws’ +personal bank account in April 2017 (a related party transaction that required heightened scrutiny), +and that Laws subsequently wired that amount to an attorney in Silver City representing the seller +of the Alhambra mine. Further, Santa Fe told the engagement team that the funds represented a +down payment to be applied to the total purchase price of the mine, and were being held in escrow +by the seller’s attorney. Thompson, as engagement partner, was aware of Santa Fe’s description of +the transaction. In reality, although the agreement to purchase the Alhambra mine was real, there +was no escrow associated with the transaction. Laws simply misappropriated $500,000 from Santa +Fe. + +10. Thompson knew of red flags with respect to the $500,000 asset classified as an +“escrow deposit” on Santa Fe’s June 30, 2017 balance sheet, including that Santa Fe represented +that the funds had been transferred to Laws’ personal bank account prior to being placed in escrow, +and that the contract to purchase the Alhambra mine, which was provided to the engagement team, +did not contain any reference to a $500,000 down payment to be placed in escrow. + + +6 On October 1, 2018, Santa Fe filed a Form 8-K stating that the company’s previously filed financial +statements could no longer be relied upon. + +5 +11. Thompson instructed the engagement team to confirm that the funds were in fact +held in escrow by the Alhambra mine seller’s attorney. But when the engagement team asked +Santa Fe for contact information for the attorney holding the escrowed funds, Laws claimed the +attorney (“Attorney A”) had died after the escrow was established, and that the funds were now +held by another attorney in Silver City (“Attorney B”) who was serving as a court-appointed +“special master” for Attorney A’s escrow account. The engagement team emailed Attorney B +seeking verification, but Attorney B responded by email stating, “I am not involved in the matter.” + +12. Despite these unusual circumstances and the significant red flag raised by Attorney +B’s response, the engagement team did not obtain sufficient appropriate audit evidence to +determine whether the related party transaction had been properly accounted for and disclosed. +There were several simple steps that Thompson could have caused the engagement team to take to +obtain evidence supporting these transactions, but did not. For example, had the engagement team +followed-up with Attorney B, they would have learned that: (1) Attorney B, consistent with his +email to the engagement team, had no knowledge of the purported escrow account, and was not +acting as a “special master” with respect to Attorney A’s affairs; and (2) Attorney A had died in +2015 (Attorney B knew this), before the purported existence of the escrow account. In addition, a +simple Internet search would have shown that Attorney A died in 2015, before Laws purportedly +wired the funds to Attorney A. Moreover, Thompson never sought a third-party bank +confirmation, which would have demonstrated that the funds were never wired to Attorney A or +held by Attorney B. And Thompson never sought to contact the seller of the Alhambra mine, who +would have told Thompson or the engagement team that the purported escrow account did not +exist. + +13. On or around June 19, 2018, Santa Fe claimed that Attorney B had returned the +$500,000 down payment, and provided a copy of a statement from Laws’ personal bank account to +the engagement team. The bank statement, which was heavily redacted and incomplete, +purportedly showed a “pending” deposit into Laws’ personal bank account as of June 14, 2018. + +14. The bank statement, a forgery created by Laws, contained unusual discrepancies +and inconsistencies. For example, the deposit was listed as “pending” in one portion of the bank +statement, but as a “posted” transaction (i.e., available for immediate withdrawal) in another +portion. A junior member of the engagement team reviewed the bank statement, but Thompson +never saw those facial inconsistencies because he never reviewed it, even though it was a material, +related party transaction accompanied by significant red flags. Thompson also never sought a +third-party confirmation from Laws’ bank. + +15. On July 3, 2018, over two weeks after the $500,000 was supposedly deposited in +Laws’ account, Thompson asked the engagement team if the deposit was still “pending,” or +whether it had been transferred from Laws’ personal account to Santa Fe or to the seller of the +Alhambra mine. In response, the engagement team told Thompson that Santa Fe’s CFO +represented that Laws’ bank had placed “some sort of hold” on the funds. + + +6 +16. Shortly before Thompson authorized the firm to issue an unqualified audit report +for the period ended June 30, 2017, the engagement team told Thompson that it had addressed the +issue regarding the escrow of Santa Fe’s funds. Despite the significant red flags of which +Thompson was aware surrounding the $500,000 that was allegedly in escrow, Thompson failed to +inquire of the engagement team as to how the issue purportedly had been resolved. Moreover, the +audit workpaper concerning the $500,000 escrow deposit, which Thompson reviewed and signed, +neither included any reference as to how the engagement team resolved the issue, nor documented +whether the engagement team had communicated with the Alhambra mine seller’s attorney(s). +Audit Failures Concerning Additional Advances to Laws +17. During the course of the audit, Thompson discovered that Laws was purportedly +conducting additional company business, including purchases of equipment and procurement of +various services, through his personal bank account. Santa Fe did not affirmatively disclose these +related party transactions; the engagement team identified the transactions when auditing Santa +Fe’s general ledger. For the fiscal year ended June 30, 2017, Santa Fe advanced approximately +$400,000 to Laws for this purpose. These funds advanced to Laws exceeded the $300,000 +materiality threshold for the fiscal year 2017 financial statements as determined by the engagement +team, which again warranted heightened scrutiny. + +18. The engagement team requested from Santa Fe Laws’ bank statements and the +underlying invoices supporting the transactions. The engagement team also requested copies of +the checks Laws had written to the vendors. In response to these requests, Laws provided various +invoices and incomplete, heavily redacted bank statements. These invoices and bank statements +included obvious discrepancies and inconsistencies. For example, one bank statement showed +individual debits that vastly exceeded the total debits for the month. Further, several of the +invoices provided were handwritten and missing common items such as sales tax. Thompson, +however, never reviewed these documents, even though these were material, related-party +transactions that were not previously disclosed to the firm. Moreover, although initially requested, +Laws never provided the engagement team with cancelled checks. As such, the engagement team +never verified who was ultimately paid from the Santa Fe funds advanced to Laws’ personal +account. + +19. There were several other simple steps that Thompson could have caused the +engagement team to take to obtain evidence supporting these transactions, but did not. For +example, the engagement team did not conduct any physical or remote inspection of the equipment +supposedly purchased by Laws for Santa Fe, and did not obtain any written confirmations from +third parties, such as from vendors or Laws’ bank. +Thompson Failed to Comply with PCAOB Auditing Standards During the Audit of Santa +Fe’s 2017 Fiscal Year Financial Statements +20. PCAOB standards require an auditor to exercise due care with professional +skepticism. (AS 1015.07.) “Professional skepticism is an attitude that includes a questioning +mind and a critical assessment of audit evidence.” (Id.) + +7 +21. PCAOB standards also require that an auditor obtain “sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion.” (AS 1105.04.) “As the risk [of +material misstatement] increases, the amount of evidence that the auditor should obtain also +increases.” (AS 1105.05.) Moreover, “[t]o be appropriate, audit evidence must be both relevant +and reliable ….” (AS 1105.06.) + +22. PCAOB standards require the auditor to design and perform audit procedures “in a +manner that addresses the risks of material misstatement associated with related parties and +relationships and transactions with related parties.” (AS 2410.11.) The auditor should also “look +to the requirements in paragraphs .66-.67A of AS 2401, Consideration of Fraud in a Financial +Statement Audit, for related party transactions that are also significant unusual transactions.” (Id.) + +23. PCAOB standards provide that the auditor should design and perform procedures +“to obtain an understanding of the business purpose (or the lack thereof) of each significant +unusual transaction that the auditor has identified.” (AS 2401.66A.) The auditor’s procedures +should include evaluating “whether the business purpose (or the lack thereof) indicates that the +significant unusual transaction may have been entered into to engage in fraudulent financial +reporting or conceal misappropriation of assets.” (AS 2401.67.) + +24. PCAOB standards provide that in identifying and assessing risks of material +misstatement, the auditor should emphasize to all engagement team members that if “information +or other conditions indicate that a material misstatement due to fraud might have occurred, the +need to probe the issues, acquire additional evidence as necessary, and consult with other team +members and, if appropriate, others in the firm including specialists.” (AS 2110.53.) + +25. PCAOB standards do not permit an auditor to rely on less than persuasive evidence +because he or she believes management is honest. (AS 1015.09.) “Inquiry of company personnel, +by itself, does not provide sufficient audit evidence to reduce audit risk to an appropriately low +level for a relevant assertion ….” (AS 1105.17.) Moreover, management representations “are not +a substitute for the application of those auditing procedures necessary to afford a reasonable +basis for an opinion regarding the financial statements under audit.” (AS 2805.02.) + +26. PCAOB standards provide that engagement team members performing supervisory +activities, like Thompson, should review the work of “engagement 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 1201.05(c).) +The “extent of supervision” should take into account “[t]he risks of material misstatement” and +“[t]he knowledge, skill and ability of each engagement team member.” (AS 1201.06(c)-(d).) + +27. Thompson failed to comply with these standards. First, Thompson failed to +exercise due professional care, maintain professional skepticism, and obtain sufficient appropriate +audit evidence to evaluate management’s explanations or representations concerning the purported +$500,000 held in escrow for the purchase of the Alhambra mine. Numerous red flags existed such +that the related party transaction should have been assessed as a significant unusual transaction, + +8 +including transfers to the personal bank account of the CEO and the contract to purchase the mine +that did not contain any reference to a $500,000 down payment to be placed in escrow. Moreover, +Thompson did not perform or direct the engagement team to perform any number of simple steps +that would likely have exposed the fact that the funds were not in escrow. For example, despite its +importance, Thompson also did not review Laws’ personal bank record purporting to show that the +company’s funds had been returned to Laws, relying instead on the representations of a junior +member of the engagement team. Finally, instead of adequately evaluating the work of the +engagement team, Thompson accepted that the escrow issue had been “resolved” without seeking +an explanation or support as to how it was resolved. + +28. Second, Thompson failed to exercise due professional care, maintain professional +skepticism, and to obtain sufficient appropriate audit evidence to evaluate management’s +explanations or representations with respect to the additional funds advanced to Laws. Thompson +knew that Laws was conducting a material amount of purported Santa Fe business through his +personal bank account. Instead of appropriately verifying Santa Fe management’s representations +about how Laws used these funds by, for example, collecting additional evidence such as check +copies or written confirmations, or conducting a physical or remote inspection of the items +purportedly purchased, Thompson relied upon the engagement team’s review of Laws’ incomplete, +heavily redacted bank statements and invoices with obvious discrepancies. + +29. Further, Thompson failed to prepare audit documentation of sufficient detail +regarding the 2017 audit. PCAOB standards provide that “[a]udit documentation should be +prepared in sufficient detail to provide a clear understanding of its purpose, source, and the +conclusions reached. Also, the documentation should be appropriately organized to provide a +clear link to the significant findings or issues.” (AS 1215.04.) Moreover, an auditor must identify +all significant issues in an engagement completion document (“ECD”), and be specific enough in +the ECD for an Engagement Quality Review (“EQR”) partner to understand the issues. (AS +1215.13.) The ECD is specifically intended, in part, to aid the EQR partner in fulfilling his or her +responsibilities. + +30. The funds transferred by Santa Fe to Laws accounted for over half of Santa Fe’s +total assets and involved related-party transactions, some of which were not disclosed by Santa Fe +to the engagement team. As discussed above, numerous red flags existed in connection with these +transfers. Nonetheless, Thompson failed to include documentation in the firm’s workpapers, +including in the ECD, regarding the significant issues outlined above surrounding the purported +escrow of $500,000 and the other Santa Fe funds advanced to Laws. + +31. PCAOB standards also require that an auditor communicate certain information to +the audit committee, including any “significant unusual transactions” (i.e., transactions that “appear +to be unusual due to their timing, size, or nature”). (AS 1301.12.) An auditor must also +communicate to the audit committee “transactions with related parties that were previously +undisclosed to the auditor.” (AS 2410.19.) The firm’s communications to Santa Fe’s audit +committee, as reviewed and approved by Thompson, including the “AS 1301” Letter to the audit + +9 +committee (named after the relevant PCAOB standard), contained no reference to the issues +surrounding the purported $500,000 escrow or to the other funds advanced to Laws. +FINDINGS +32. Based on the foregoing, the Commission finds that Thompson 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.7 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Thompson’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Thompson is denied the privilege of appearing or practicing before the Commission +as accountant. + + B. After two years from the date of this order, Thompson 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 Thompson’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 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. + +7 Pursuant to Section 4C(b) and Rule 102(e)(1)(iv), “improper professional conduct” includes two types +of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation of +professional standards in circumstances where heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in violations of professional standards, that indicate a lack of +competence. + +10 + Such an application must satisfy the Commission that: + + (a) Thompson, 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) Thompson, 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 Thompson’s or the firm’s quality control system that would +indicate that Thompson will not receive appropriate supervision; + (c) Thompson 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) Thompson 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. + +C. The Commission will consider an application by Thompson 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 Thompson’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4173.txt b/raw/aaer/2020/AAER-4173.txt new file mode 100644 index 0000000000000000000000000000000000000000..f7b243d0f1839c8dc8d688b88b477b88c4ef6c66 --- /dev/null +++ b/raw/aaer/2020/AAER-4173.txt @@ -0,0 +1,460 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90010 / September 25, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4173 / September 25, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20076 + + +In the Matter of + +LAM D. HA, 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 Lam D. Ha, CPA (“Ha” 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 ... (2) … to +have engaged in unethical or improper professional conduct …. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purposes of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, 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. These proceedings arise out of Ha’s failure to exercise due professional care, +maintain professional skepticism, obtain sufficient appropriate audit evidence, and prepare audit +documentation of sufficient detail regarding the work performed on the audit of the 2017 fiscal +year financial statements of Santa Fe Gold Corporation (“Santa Fe” or “the company”) (the “2017 +audit”). Ha – who served as the senior manager on the engagement – had supervisory +responsibility for the 2017 audit, including supervision of junior engagement team members and +compliance with Public Company Accounting Oversight Board (“PCAOB”) standards. Ha +participated in the planning and performance of the audit, which resulted in the issuance of the +audit report containing an unqualified opinion that Santa Fe’s financial statements were presented +fairly in all material respects in conformity with accounting principles generally accepted in the +United States of America (“GAAP”) and that the audit was conducted in accordance with PCAOB +standards. The audit report, dated July 3, 2018, was included in Santa Fe’s annual report on Form +10-K filed on July 5, 2018.4 + +2. During Santa Fe’s 2017 fiscal year, its former chief executive officer (“CEO”), +Thomas H. Laws (“Laws”), misappropriated nearly $1 million from the company.5 Ha + +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 Santa Fe’s 2017 fiscal year ended on June 30, 2017. Santa Fe was delinquent with respect to the filing +of its 2017 Form 10-K. + +5 On November 15, 2018, the Commission filed a civil action against Laws alleging violations of, among +other provisions, the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) +of the Exchange Act and Rule 10b-5 thereunder, and obtained a permanent injunction and other relief +against him. SEC v. Thomas H. Laws, et al., C.A. No. 18-cv-01063-JB-SCY (D.N.M.) + +3 +encountered numerous red flags during the 2017 audit concerning Laws’ misconduct indicating +that additional audit steps were required, including being aware of evidence directly contradicting +management representations and transfers of material amounts of Santa Fe funds to Laws’ personal +bank account. Yet Ha failed to, among other things, obtain sufficient appropriate audit evidence to +adequately assess the evidence and these transactions. + +RESPONDENT + +3. Lam D. Ha, CPA, is a resident of Houston, Texas and a senior manager at a +PCAOB registered audit firm that specializes in auditing small public companies (“the firm”). Ha +has been licensed as a CPA in Texas since 2010. Ha served as the senior manager for the 2017 +audit. + +OTHER RELEVANT PARTY + +4. Santa Fe Gold Corporation, a Delaware corporation with its principal place of +business in Albuquerque, New Mexico, is a small mining company. It currently has a class of +securities registered under Section 12(g) of the Exchange Act. At the time of the audit, its +common stock was traded on the OTC Marketplace operated by OTC Markets Group, Inc. or +“OTC Pink Sheets,” under the ticker symbol “SFEG,” and was required to file periodic reports +with the Commission pursuant to Section 13 of the Exchange Act and related rules +thereunder. The company filed Chapter 11 Bankruptcy in August 2015 and exited bankruptcy in +June 2016. + +FACTS + + The Underlying Fraud at Santa Fe and Resulting Financial Misstatements + +5. From approximately August 2016 to February 2018, Santa Fe’s Chief Financial +Officer (“CFO”) transferred approximately $1.1 million of Santa Fe funds to a personal bank +account of Santa Fe’s CEO Laws. In April 2017, Santa Fe transferred $500,000 to Laws based +upon the understanding that he would place the funds in an attorney’s escrow account as a down +payment for the company’s $3 million purchase of a silver mine. Santa Fe transferred additional +funds to Laws purportedly for other corporate purposes, including the purchase of mining +equipment and for services such as drilling. Instead of placing the funds in escrow or using the +funds for corporate purposes, Laws misappropriated approximately $1 million. + +6. Due to Laws’ misappropriation, the financial statements included in Santa Fe’s +Form 10-K for the year ended June 30, 2017, filed on July 5, 2018, were materially false. The +engagement team audited those financial statements, represented that the audit was conducted in +accordance with PCAOB standards, and concluded in an audit report issued by the firm on July 3, + +4 +2018, that the 2017 financial statements “present fairly, in all material respects, the financial +position of the Company … and the results of their operations” in accordance with GAAP.6 + +Ha Knew the 2017 Audit of Santa Fe Involved Substantial Control Risks + +7. Ha participated in the planning stage of the 2017 audit. At that time, the +engagement team determined there were material weaknesses in internal control over financial +reporting at Santa Fe due to a lack of process and procedures and inadequate segregation of duties. +The firm also documented a “significant deficiency” in internal control over financial reporting due +to the absence of any policy regarding related party transactions. As a result, the firm determined +at the outset of the 2017 audit that it could “not rely on the internal control of the company during +the audit” and set the control risk as “high.” Ha, as the senior manager, knew of this risk control +designation. + +Audit Failures Concerning the Purported $500,000 Down Payment for the Purchase of the +Alhambra Silver Mine +8. Santa Fe’s June 30, 2017 balance sheet provided to the engagement team included a +$500,000 asset classified as an “escrow deposit.” That amount was material to Santa Fe, +constituting almost half of its assets as of June 30, 2017. The amount exceeded the $300,000 +materiality threshold for the financial statements as a whole, as determined by the engagement +team for the 2017 audit, which warranted heightened scrutiny for the transaction. + +9. Santa Fe told the engagement team that this balance sheet item related to the $3 +million purchase of a silver mine located near Silver City, New Mexico (the “Alhambra mine”). +Specifically, Santa Fe told the engagement team that the company wired $500,000 to Laws’ +personal bank account in April 2017 (a related party transaction that required heightened scrutiny), +and that Laws subsequently wired that amount to an attorney in Silver City representing the seller +of the Alhambra mine. Further, Santa Fe told the engagement team that the funds represented a +down payment to be applied to the total purchase price of the mine, and were being held in escrow +by the seller’s attorney. Ha, as the senior manager, was aware of Santa Fe’s description of the +transaction. In reality, although the agreement to purchase the Alhambra mine was real, there was +no escrow associated with the transaction. Laws simply misappropriated $500,000 from Santa Fe. + +10. Ha knew of red flags with respect to the $500,000 asset classified as an “escrow +deposit” on Santa Fe’s June 30, 2017 balance sheet, including that Santa Fe represented that the +funds had been transferred to Laws’ personal bank account prior to being placed in escrow, and +that the contract to purchase the Alhambra mine, which was provided to the engagement team, did +not contain any reference to a $500,000 down payment to be placed in escrow. + +11. The engagement partner, who had overall responsibility for the engagement and its +performance, instructed the engagement team to confirm that the funds were in fact held in escrow + +6 On October 1, 2018, Santa Fe filed a Form 8-K stating that the company’s previously filed financial +statements could no longer be relied upon. + +5 +by the Alhambra mine seller’s attorney. But when the engagement team asked Santa Fe for contact +information for the attorney holding the escrowed funds, Laws claimed the attorney (“Attorney +A”) had died after the escrow was established, and that the funds were now held by another +attorney in Silver City (“Attorney B”) who was serving as a court-appointed “special master” for +Attorney A’s escrow account. A junior engagement team member emailed Attorney B seeking +verification, but Attorney B responded by email stating, “I am not involved in the matter.” The +junior engagement team member forwarded to Ha the email from Attorney B. + +12. Despite these unusual circumstances and the significant red flag raised by Attorney +B’s response, Ha did not inform the engagement partner of the email. Moreover, neither Ha nor +any other member of the engagement team obtained sufficient appropriate audit evidence to +determine whether the related party transaction had been properly accounted for and disclosed. +There were several simple steps that Ha could have caused the engagement team to take to obtain +evidence supporting these transactions, but did not. For example, had Ha or the engagement team +followed-up with Attorney B, they would have learned that: (1) Attorney B, consistent with his +email to the engagement team, had no knowledge of the purported escrow account, and was not +acting as a “special master” with respect to Attorney A’s affairs; and (2) Attorney A had died in +2015 (Attorney B knew this), before the purported existence of the escrow account. In addition, +had Ha performed a simple Internet search it would have shown that Attorney A died in 2015, +before Laws purportedly wired the funds to Attorney A. Moreover, Ha never sought a third-party +bank confirmation, which would have demonstrated that the funds were never wired to Attorney A +or held by Attorney B. And Ha never sought to contact the seller of the Alhambra mine, who +would have told Ha or the engagement team that the purported escrow account did not exist. + +13. On or about June 19, 2018, Ha learned that, according to Santa Fe’s CFO, Attorney +B was “not willing to cooperate” with the engagement team. Even though this representation was +inconsistent with Attorney B’s email that he was “not involved in the matter,” Ha did not perform +or direct any further follow-up, and he did not share the CFO’s representation with the engagement +partner. + +14. On or around June 19, 2018, Santa Fe claimed that Attorney B had returned the +$500,000 down payment, and provided a copy of a statement from Laws’ personal bank account to +the engagement team. The bank statement, which was heavily redacted and incomplete, +purportedly showed a “pending” deposit into Laws’ personal bank account as of June 14, 2018. + +15. The bank statement, a forgery created by Laws, contained unusual discrepancies +and inconsistencies. For example, the deposit was listed as “pending” in one portion of the bank +statement, but as a “posted” transaction (i.e., available for immediate withdrawal) in another +portion. A junior member of the engagement team reviewed the bank statement, but Ha never saw +those facial inconsistencies because he never reviewed it, even though it was a material, related +party transaction accompanied by significant red flags. Ha also never sought a third-party +confirmation from Laws’ bank. + + +6 +16. On July 3, 2018, over two weeks after the $500,000 was supposedly deposited in +Laws’ account, the engagement partner asked Ha and a junior engagement team member if the +deposit was still “pending,” or whether it had been transferred from Laws’ personal account to +Santa Fe or to the seller of the Alhambra mine. In response, the junior engagement team member +told the engagement partner and Ha that Santa Fe’s CFO represented that Laws’ bank had placed +“some sort of hold” on the funds. + +17. Shortly before the engagement partner authorized the firm to issue an unqualified +audit report for the period ended June 30, 2017, Ha told the engagement partner that the +engagement team had addressed the issue regarding the escrow of Santa Fe’s funds. Ha did not +explain how the issue purportedly had been resolved and, moreover, did not tell the engagement +partner that Attorney B represented he was “not involved in the matter” or that the CFO +represented, inconsistently, that Attorney B “would not cooperate” with the audit. The audit +workpaper concerning the $500,000 escrow deposit, which Ha reviewed and signed, failed to +document how the engagement team purportedly resolved the issue or the representation from +Attorney B. +Audit Failures Concerning Additional Advances to Laws +18. During the course of the audit, Ha discovered that Laws was purportedly +conducting additional company business, including purchases of equipment and procurement of +various services, through his personal bank account. Santa Fe did not affirmatively disclose these +related party transactions; the engagement team identified the transactions when auditing Santa +Fe’s general ledger. For the fiscal year ended June 30, 2017, Santa Fe advanced approximately +$400,000 to Laws for this purpose. These funds advanced to Laws exceeded the $300,000 +materiality threshold for the fiscal year 2017 financial statements as determined by the engagement +team, which again warranted heightened scrutiny. + +19. The engagement team requested from Santa Fe Laws’ bank statements and the +underlying invoices supporting the transactions. The engagement team also requested copies of +the checks Laws had written to the vendors. In response to these requests, Laws provided various +invoices and incomplete, heavily redacted bank statements. These invoices and bank statements +included obvious discrepancies and inconsistencies. For example, one bank statement showed +individual debits that vastly exceeded the total debits for the month. Further, several of the +invoices provided were handwritten and missing common items such as sales tax. Ha, however, +never reviewed these documents, even though these were material, related-party transactions that +were not previously disclosed to the firm. Moreover, although initially requested, Laws never +provided the engagement team with cancelled checks. As such, the engagement team never +verified who was ultimately paid from the Santa Fe funds advanced to Laws’ personal account. + +20. There were several other simple steps that Ha could have taken to obtain evidence +supporting these transactions, but did not. For example, the engagement team did not conduct any +physical or remote inspection of the equipment supposedly purchased by Laws for Santa Fe, and +did not obtain any written confirmations from third parties, such as from vendors or Laws’ bank. + +7 +Ha Failed to Comply with PCAOB Auditing Standards During the Audit of Santa Fe’s 2017 +Fiscal Year Financial Statements +21. PCAOB standards require an auditor to exercise due care with professional +skepticism. (AS 1015.07.) “Professional skepticism is an attitude that includes a questioning +mind and a critical assessment of audit evidence.” (Id.) + +22. PCAOB standards also require that an auditor obtain “sufficient appropriate audit +evidence to provide a reasonable basis for his or her opinion.” (AS 1105.04.) “As the risk [of +material misstatement] increases, the amount of evidence that the auditor should obtain also +increases.” (AS 1105.05.) Moreover, “[t]o be appropriate, audit evidence must be both relevant +and reliable ….” (AS 1105.06.) In addition, if evidence is obtained from one source that is +inconsistent with evidence obtained from another source, an auditor should perform additional +procedures. (AS 1105.29.) + +23. PCAOB standards require the auditor to design and perform audit procedures “in a +manner that addresses the risks of material misstatement associated with related parties and +relationships and transactions with related parties.” (AS 2410.11.) The auditor should also “look +to the requirements in paragraphs .66-.67A of AS 2401, Consideration of Fraud in a Financial +Statement Audit, for related party transactions that are also significant unusual transactions.” (Id.) + +24. PCAOB standards provide that the auditor should design and perform procedures +“to obtain an understanding of the business purpose (or the lack thereof) of each significant +unusual transaction that the auditor has identified.” (AS 2401.66A.) The auditor’s procedures +should include evaluating “whether the business purpose (or the lack thereof) indicates that the +significant unusual transaction may have been entered into to engage in fraudulent financial +reporting or conceal misappropriation of assets.” (AS 2401.67.) + +25. PCAOB standards provide that in identifying and assessing risks of material +misstatement, the auditor should emphasize to all engagement team members that if “information +or other conditions indicate that a material misstatement due to fraud might have occurred, the +need to probe the issues, acquire additional evidence as necessary, and consult with other team +members and, if appropriate, others in the firm including specialists.” (AS 2110.53.) + +26. PCAOB standards do not permit an auditor to rely on less than persuasive evidence +because he or she believes management is honest. (AS 1015.09.) “Inquiry of company personnel, +by itself, does not provide sufficient audit evidence to reduce audit risk to an appropriately low +level for a relevant assertion ….” (AS 1105.17.) Moreover, management representations “are not +a substitute for the application of those auditing procedures necessary to afford a reasonable +basis for an opinion regarding the financial statements under audit.” (AS 2805.02.) + +27. PCAOB standards provide that engagement team members performing supervisory +activities, like Ha, should review the work of “engagement 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 1201.05(c).) The “extent + +8 +of supervision” should take into account “[t]he risks of material misstatement” and “[t]he +knowledge, skill, and ability of each engagement team member.” (AS 1201.06(c)-(d).) + +28. Ha failed to comply with these standards. First, Ha failed to exercise due +professional care, maintain professional skepticism, and obtain sufficient appropriate audit +evidence to evaluate management’s explanations or representations concerning the purported +$500,000 held in escrow for the purchase of the Alhambra mine. Numerous red flags existed, such +that the related party transaction should have been assessed as a significant unusual transaction, +including transfers to the personal bank account of the CEO, the contract to purchase the mine that +did not contain any reference to a $500,000 down payment to be placed in escrow, and inconsistent +representations between the CFO and Attorney B concerning the escrowed funds. Moreover, Ha +did not perform or direct the engagement team to perform any number of simple steps that would +likely have exposed the fact that the funds were not in escrow. For example, despite its +importance, Ha also did not review Laws’ personal bank record purporting to show that the +company’s funds had been returned to Laws, relying instead on the representations of a junior +member of the engagement team. Finally, instead of adequately conveying all important +information to the engagement partner, Ha failed to inform the engagement partner about Attorney +B’s email that he was “not involved in the matter” or the CFO’s inconsistent representation that +Attorney B was “not willing to cooperate” with the engagement team. + +29. Second, Ha failed to exercise due professional care, maintain professional +skepticism, and to obtain sufficient appropriate audit evidence to evaluate management’s +explanations or representations with respect to the additional funds advanced to Laws. Ha knew +that Laws was conducting a material amount of purported Santa Fe business through his personal +bank account. Instead of appropriately verifying Santa Fe management’s representations about +how Laws used these funds by, for example, collecting additional evidence such as check copies or +written confirmations, or conducting a physical or remote inspection of the items purportedly +purchased, Ha relied upon the engagement team’s review of Laws’ incomplete, heavily redacted +bank statements and invoices with obvious discrepancies. + +30. Further, Ha failed to prepare audit documentation of sufficient detail regarding the +2017 audit. PCAOB standards provide that “[a]udit documentation should be prepared in +sufficient detail to provide a clear understanding of its purpose, source, and the conclusions +reached. Also, the documentation should be appropriately organized to provide a clear link to +the significant findings or issues.” (AS 1215.04.) Moreover, an auditor must identify all +significant issues in an engagement completion document (“ECD”), and be specific enough in the +ECD for an Engagement Quality Review (“EQR”) partner to understand the issues. (AS 1215.13.) +The ECD is specifically intended, in part, to aid the EQR partner in fulfilling his or her +responsibilities. + +31. The funds transferred by Santa Fe to Laws accounted for over half of Santa Fe’s +total assets and involved related-party transactions, some of which were not disclosed by Santa Fe +to the engagement team. As discussed above, numerous red flags existed in connection with these +transfers. Nonetheless, Ha failed to include documentation in the firm’s workpapers, including in + +9 +the ECD, regarding the significant issues outlined above surrounding the purported escrow of +$500,000 and the other Santa Fe funds advanced to Laws. + +32. PCAOB standards also require that an auditor communicate certain information to +the audit committee, including any “significant unusual transactions” (i.e., transactions that “appear +to be unusual due to their timing, size, or nature”). (AS 1301.12.) An auditor must also +communicate to the audit committee “transactions with related parties that were previously +undisclosed to the auditor.” (AS 2410.19.) The firm’s communications to Santa Fe’s audit +committee, as reviewed and signed off on by Ha, including the “AS 1301” Letter to the audit +committee (named after the relevant PCAOB standard), contained no reference to the issues +surrounding the purported $500,000 escrow or to the other funds advanced to Laws. +FINDINGS + 33. Based on the foregoing, the Commission finds that Ha 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.7 +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Ha’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Ha is denied the privilege of appearing or practicing before the Commission as +accountant. + + B. After two years from the date of this order, Ha 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 Ha’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 + +7 Pursuant to Section 4C(b) and Rule 102(e)(1)(iv), “improper professional conduct” includes two types +of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation of +professional standards in circumstances where heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in violations of professional standards, that indicate a lack of +competence. + +10 + 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) Ha, 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) Ha, 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 Ha’s or the firm’s quality control system that would indicate that Ha +will not receive appropriate supervision; + (c) Ha 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) Ha 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. + +C. The Commission will consider an application by Ha 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 Ha’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4174.txt b/raw/aaer/2020/AAER-4174.txt new file mode 100644 index 0000000000000000000000000000000000000000..fe308c505adc9b6b19f3141de0d834f22ab64396 --- /dev/null +++ b/raw/aaer/2020/AAER-4174.txt @@ -0,0 +1,580 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90017 / September 28, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4174 / September 28, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20084 + + +In the Matter of + +FULTON FINANCIAL +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 Fulton Financial Corporation (“Fulton” 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. Fulton Financial Corporation (“Fulton”) is a financial holding company that +operates regional banks in the mid-Atlantic. From late 2016 through mid-2017 (the “Relevant +Period”), Fulton made material misrepresentations and omissions in its public filings and failed to +maintain accurate books and records and sufficient internal accounting controls. Specifically, +Fulton’s public filings during the Relevant Period inaccurately described the process that Fulton +used to value its mortgage servicing rights (“MSR”) asset and determine its MSR valuation +allowance. + +2. Over two quarters, Fulton departed from its stated valuation practices and +maintained a $1.3 million MSR valuation allowance that was not supported by its publicly +disclosed MSR valuation process and then belatedly reversed the allowance in the following +quarter, which increased its earnings per share (“EPS”) by a penny at a time when it otherwise +would have fallen short of analyst consensus expectations. Taken together, Fulton’s disclosures +during the Relevant Period misrepresented both the role played by Fulton’s management and by a +third-party expert in valuing the MSRs. The disclosures also inaccurately presented the company’s +quarter-over-quarter financial performance. + +3. In addition, Fulton failed to devise and maintain a sufficient system of internal +accounting controls related to its closing process, use of a third-party valuation expert in its fair +value analysis, management’s review for reasonableness of the inputs to a third-party expert’s +discounted cash flow analysis, and the documentation and review of proposed but unrecorded +accounting adjustments. Fulton also maintained inaccurate books and records that reflected an +erroneous valuation allowance over two quarters that was $1.3 million higher than it would have +been had Fulton followed its disclosed valuation process. + +4. Accordingly, Fulton violated Section 13(a) of the Exchange Act and Rules 13a-1, +13a-13 and 12b-20 thereunder and Exchange Act Sections 13(b)(2)(A) and (B). + +Respondent + +5. Fulton Financial Corporation is a financial holding company incorporated in +Pennsylvania and headquartered in Lancaster, Pennsylvania with a reported balance sheet of +approximately $18.9 billion as of year-end 2016. Fulton provides retail and commercial financial +services in Pennsylvania, Delaware, Maryland, New Jersey and Virginia. During the Relevant +Period, Fulton operated through six subsidiary community banks, including Fulton Bank, N.A., +and eight non-bank entities. Fulton’s common stock is registered with the Commission pursuant to +Section 12(b) of the Exchange Act, and is traded on Nasdaq under the symbol “FULT.” Fulton +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. + + 3 +Facts + +Background + +6. MSRs are assets that represent the economic value of residential mortgage servicing +rights retained by Fulton after the underlying loans are sold (e.g., for securitization). As of year- +end 2016, Fulton maintained a portfolio of MSRs with a fair value of approximately $38.2 million. +Fulton evaluates its MSR portfolio for impairment on a quarterly basis and establishes a valuation +allowance if and to the extent the carrying value of the MSR portfolio exceeds its estimated fair +value (i.e., if the asset is impaired). Prior to the Relevant Period, Fulton recorded and reported an +MSR valuation allowance of $1.7 million in the second quarter of 2016, and then increased the +allowance by $1.3 million in the third quarter. + +7. The MSR valuation allowance is established through a charge against Fulton’s +earnings. If subsequent valuations indicate that the MSRs are no longer impaired, Fulton is +required by generally accepted accounting principles to reduce the valuation allowance. + +8. Prior to 2013, Fulton performed valuations of its MSR portfolio without external +assistance. Beginning in 2013, as disclosed in Fulton’s public filings, Fulton retained a third-party +valuation expert to assess the fair value of its MSRs on a quarterly basis through a discounted cash +flow analysis based on Fulton’s MSR portfolio data and market-based inputs. Fulton disclosed that +management’s role was to review the inputs to the valuation expert’s analysis for reasonableness. +The valuation expert’s fair value, sometimes referred to as the “spot value,” was expressed both in +dollars and in basis points (the fair value of the MSRs divided by the unpaid principal balance of +the serviced loans). The valuation expert also provided a range of values around the spot value +separated by ten (and later, 15) total basis points, which represented the range in which the +valuation expert expected the portfolio would trade were it offered for sale. + +9. As stated in Fulton’s written accounting policy, Fulton used the valuation expert’s +fair value analysis to assess the need for, and determine the amount of, an MSR valuation +allowance in the event the asset was impaired. From 2013 through the third quarter of 2016, in +accordance with Fulton’s accounting policy, Fulton determined the need for a valuation allowance +using its own “range” that was similar to, but narrower than, the valuation expert’s range. Pursuant +to Fulton’s “range approach” accounting policy, Fulton assessed MSR fair value based on a six +basis point “range” and determined the need for, and amount of, any MSR valuation allowance +based on the high end of the range (i.e., the spot value provided by the third-party expert plus three +basis points). + +10. As a general rule, during the Relevant Period, Fulton followed a two-day closing +process for quarter and year-end. At the end of the second business day of the month following +quarter or year-end (“Day 2”), Fulton internally reported its preliminary EPS results to members of +senior management. Fulton nevertheless made accounting entries after “Day 2” of the close during +the Relevant Period and in other quarters. + + 4 +11. However, Fulton did not have a written policy or procedure setting forth appropriate +guidance as to when accounting adjustments proposed after “Day 2” of the close would or would +not be recorded. While Fulton did prepare and provide its Audit Committee and independent +auditor with a quarterly memorandum setting out proposed but unrecorded adjustments, it did not +consistently record MSR and other adjustments proposed after “Day 2” of the close. For example, +in some quarters, Fulton recorded MSR adjustments proposed on “Day 3” of the close, but in other +quarters, it elected not to record an adjustment on “Day 3,” on the grounds that the valuation +analysis supporting the proposed adjustments was received “late” in the closing process. This +inconsistency caused Fulton’s quarter-over-quarter financial performance to be inaccurately +presented. + +Fulton Incurs $3 Million MSR Impairment and Establishes Valuation Allowance + +12. In the first quarter of 2016, Fulton did not have an MSR valuation allowance +because the fair value of its MSRs (as determined under Fulton’s “range approach” accounting +policy) exceeded the carrying value. In the second and third quarters of 2016, however, the value +of Fulton’s MSRs declined. In the second quarter, Fulton established a $1.7 million MSR +valuation allowance (which decreased Fulton’s pre-tax income), and then in the third quarter, it +increased the allowance by an additional $1.3 million (again decreasing Fulton’s pre-tax income), +in each case consistent with Fulton’s accounting policy and the valuation provided by Fulton’s +third-party valuation expert. + +13. As of September 30, 2016, Fulton’s MSR valuation allowance totaled $3 million. +Both of the adjustments to Fulton’s MSR valuation allowance in the second and third quarters of +2016 were made on “Day 3” of Fulton’s quarter-end closing process. + +Fourth Quarter 2016: Accounting Policy Change and Three MSR Valuation Reports + +14. In each of the first three quarters of 2016, Fulton’s EPS exceeded analyst consensus +expectations by a penny. + +15. As the result of increasing interest rates in late 2016, Fulton’s MSRs had increased +in value and Fulton anticipated reversing at least some of the valuation allowance, which would +have the effect of increasing pre-tax income. In late December, Fulton internally projected that its +EPS would beat consensus estimates by a penny in the fourth quarter with a partial reversal of the +MSR valuation allowance. + +MSR Accounting Policy Change + +16. In light of the interest rate increases in late 2016, Fulton asked its valuation expert +to prepare an “interim” valuation report as of November 30, 2016 (the “November Interim +Report”). The November Interim Report, which Fulton received on December 14, indicated a +significant increase (over 8%) in the fair value of Fulton’s MSR portfolio and would have + 5 +supported the reversal of the entire $3 million valuation allowance in the fourth quarter under +Fulton’s “range approach” accounting policy. + +17. Reversing the $3 million allowance would have increased Fulton’s pre-tax income +and raised its EPS by a little over a penny. At the time, Fulton’s financial performance in the +quarter was in line with analyst consensus expectations. + +18. After receiving the November Interim Report, Fulton proposed a change to its +accounting policy to use the valuation expert’s spot value for measuring impairment, rather than +the “range approach.” Fulton’s external auditor supported the change in policy, so long as it was +applied consistently going forward. + +19. The change to the accounting policy had the effect of lowering the fair value of +Fulton’s MSRs that was used to determine the valuation allowance, thereby decreasing the amount +of the valuation allowance that would be reversed. As a result of the change, Fulton stood to retain +more than $1 million in the valuation allowance heading into 2017 based on the November Interim +Report. + +Multiple Fourth Quarter 2016 MSR Valuation Reports + +20. In preparation for the 2016 fourth quarter close, Fulton asked its valuation expert +whether, given where interest rates were at the time, it was reasonable to use the November Interim +Report to estimate the fair value of Fulton’s MSRs as of the end of December instead of +completing another valuation as of December 31, 2016. The valuation expert noted some +uncertainty as the result of several December benchmark transactions, which would increase fair +value over the anticipated increase as the result of interest rate trends. The valuation expert +suggested that Fulton could either “assume” an increase in value of two to three basis points +(although the valuation could be slightly more in light of recent benchmark transactions) or solicit +a refreshed valuation report with market data as of the end of the quarter (December 31). Fulton +then asked the valuation expert to provide a refreshed valuation report (the “Standard December +Report”) to be delivered by the morning of Wednesday, January 4, which was “Day 2” of the +closing period. + +21. Prior to receiving the Standard December Report, however, Fulton proceeded with +its closing process and decreased its MSR valuation allowance by $1.7 million based on the +November Interim Report and the application of the new spot value accounting policy change. +Approximately $1.3 million remained in the valuation allowance. + +22. At the end of the day on January 4 (“Day 2”), Fulton ran its preliminary EPS +calculation, which showed $0.24 for the quarter, in line with analyst expectations. + +23. Fulton received the Standard December Report in the morning on January 5, 2017, +which was “Day 3” in Fulton’s two-day closing process. The Standard December Report +contained a higher than expected valuation, more than four basis points above the valuation in the +November Interim Report. Under the new spot value accounting policy, this valuation would have + 6 +supported the reversal of the entire $3 million allowance, not just the $1.7 million reversal that +Fulton recorded the day before. + +24. Fulton was concerned about the “box” the Standard December Report had put them +in, and internally expressed reservations about recording an additional valuation allowance reversal +without looking at the broader issue of other adjustments. + +25. A manager in Fulton’s financial reporting and control function subsequently +contacted the valuation expert and expressed surprise that the Standard December Report “came in +so much higher” than the November Interim Report given the recent change in interest rates. The +manager explained that Fulton had closed its books using the November Interim Report and asked +the valuation expert if there was “any opportunity to re-evaluate some of [the expert’s] +assumptions to lower the value.” + +26. The valuation expert responded that “giving you a lower value is not a problem,” +but that interest rates are not the only consideration when estimating fair value. The valuation +expert noted that there were three significant benchmark deals in December with favorable bid +levels, and when estimating fair value, “it’s necessary that we take into consideration not just what +transpired with rates but also buyer appetite.” + +27. Nevertheless, the valuation expert also stated in its response that it would be “happy +to accommodate” Fulton by “lowing [sic] by a couple of [basis points],” since a two-basis point +lower valuation “still falls with[in] our range.” The manager responded that “[l]owering by a +couple (or 3)” basis points would be Fulton’s preference. A couple of hours later, the valuation +expert provided Fulton with an “adjusted” report with a three-basis point lower value (the “Revised +December Report”). + +28. The manager did not disagree with the valuation expert’s views that fair value +should take into consideration buyer appetite, and thus did not challenge the reasonableness of this +input. + +29. Instead, the manager sought, and the valuation expert provided, a reduction in the +result of the valuation expert’s otherwise objective discounted cash flow analysis to accommodate +Fulton’s “preference” for a lower valuation. By obtaining a lower valuation in the Revised +December Report, Fulton was able to memorialize a smaller proposed but unrecorded adjustment +related to the MSR valuation allowance, and in particular, one that was not materially different +than the MSR valuation adjustment that Fulton already had recorded based on the November +Interim Report. + +30. This was the only time that Fulton’s engagement with its valuation expert resulted +in the issuance of a report with a revised valuation. Fulton’s engagement with the valuation expert +in the fourth quarter of 2016 was inconsistent with its practices in other quarters and also was +inconsistent with the process described in its public disclosures. During the Relevant Period, +Fulton had no written policy governing how Fulton management was to review the valuation +expert’s inputs for reasonableness as disclosed in its public filings. + 7 + +No Documentation or Disclosure of Fulton’s Communication with the Valuation Expert + +31. Fulton ultimately closed its books using the November Interim Report and then +prepared an internal memorandum entitled, “Accounting Policy – Mortgage Servicing Rights,” +which explained its methodology for calculating the reduction in the MSR valuation allowance. +The memorandum stated that there was a November and “a” December valuation, but did not note +that there were actually two December valuations. Moreover, the memorandum did not explain +that “the” December valuation reflected a spot value that was revised following communications +with the third-party expert in which Fulton expressed a preference for a two to three basis point +lower valuation. + +32. Throughout the Relevant Period, Fulton had no written policy requiring that +communications between Fulton and the valuation expert be memorialized and shared with +Fulton’s external auditor or the Audit Committee. + +33. Neither the existence of the Standard December Report nor the higher valuation +reflected therein nor Fulton’s communications with the valuation expert that influenced the +Revised December Report were disclosed to Fulton’s external auditor or to Fulton’s Audit +Committee. + +Fulton’s 2016 Form 10-K + +34. Fulton’s public filings did not disclose the existence of the multiple December +valuation reports or that Fulton’s communications with the valuation expert had influenced the +MSR valuation ultimately reported. + +35. Disclosures in Fulton’s 2016 Form 10-K, which was filed with the Commission on +February 27, 2017, indicated that the fair value of Fulton’s MSRs in 2016 was supported by third- +party expert analysis and that the only involvement of Fulton’s management was to review the +expert’s report for reasonableness. The disclosures further stated that when the third-party expert’s +valuations indicate that impairment no longer exists, the valuation allowance will be reversed. + +36. For example, the notes to Fulton’s financial statements stated that MSR “[f]air +values are determined at the end of each quarter through a discounted cash flows valuation, +prepared by a third-party valuation expert” and that “[b]ased on a fair value analysis, the +Corporation determined that net additions of $1.3 million to the valuation allowance were +appropriate during 2016.” + +37. Under “Critical Accounting Policies” and the notes to Fulton’s financial statements, +Fulton’s Form 10-K stated that “[m]anagement tests the reasonableness of the significant inputs to +the third-party valuation in comparison to market data.” + + 8 +38. The notes to Fulton’s financial statements also provided that “[i]f subsequent +valuations indicate that impairment no longer exists, the valuation allowance is reduced through an +increase to servicing income.” + +39. These statements were misleading because, in the fourth quarter of 2016, the MSR +fair value reflected in Fulton’s Form 10-K, $38.2 million, was not arrived at through a discounted +cash flow analysis by a third-party expert that was subject only to Fulton’s management reviewing +the expert’s inputs for reasonableness. Rather, this fair value reflected a change that was made to +the third-party expert’s valuation only after the interaction described above with a Fulton manager. + +40. Finally, in the fourth quarter of 2016, it was not accurate that “[i]f subsequent +valuations indicate that impairment no longer exists, the valuation allowance is reduced through an +increase to servicing income.” Rather, in that quarter, when a subsequent valuation indicated that +impairment no longer existed, Fulton first changed its accounting policy to support a lower +valuation, and then later, when another subsequent valuation indicated that impairment no longer +existed, Fulton requested a lower valuation, which was not supported by Fulton’s disclosed MSR +valuation process. + +First Quarter 2017: Fulton Does Not Reverse the MSR Valuation Allowance + +41. Heading into the close of the first quarter of 2017, Fulton’s internal projections +indicated that Fulton would beat analyst EPS consensus estimates by three cents, even without +reversing the rest of the MSR valuation allowance + +42. On April 4, 2017 (“Day 2” of Fulton’s close), shortly before 5:00 p.m., Fulton +received the MSR valuation expert’s report for the first quarter of 2017. The expert’s valuation +report showed a further increase in the value of Fulton’s MSR portfolio, and, based on Fulton’s +MSR accounting policy, the valuation would have supported the reversal of the MSR valuation +allowance. + +43. Fulton did not reverse the MSR allowance, however, and instead carried forward +the remaining $1.3 million allowance from the fourth quarter of 2016. Thus, Fulton’s first quarter +2017 valuation allowance was not determined in accordance with Fulton’s disclosed MSR +valuation process. + +44. Fulton’s reported EPS in the first quarter of 2017 beat analyst consensus estimates +by two cents without reversing the MSR valuation allowance. + +Inconsistent Explanations for Failure to Reverse the MSR Valuation Allowance + +45. In connection with the first quarter 2017 close, an employee within Fulton’s +financial reporting and control function questioned why there was a $1.3 million valuation +allowance in place when there was a fair value surplus of $2.8 million based on the MSR valuation +report. The reason provided was that the non-reversal of the valuation allowance largely offset the + 9 +impact of another adjustment and that both of the adjustments would be reflected on Fulton’s +proposed but unrecorded adjustments schedule. + +46. This explanation for maintaining the allowance, which involved an unrelated +adjustment, was inconsistent with Fulton’s accounting policy and also was inconsistent with +internal documentation and disclosures concerning MSR valuation and impairment analysis in the +first quarter of 2017. + +47. For example, Fulton’s Audit Committee was told that “[a]s a result of not receiving +the mortgage servicing valuation report until late in the process, the increase in the valuation was +not reflected in the first quarter. This amount was approximately $1.3 million. This will be +included in the proposed accounting adjustments for the quarter.” + +48. The timing of the receipt of the valuation report in the first quarter of 2017 (shortly +before 5:00 p.m. on “Day 2”), however, did not prohibit Fulton from recording an adjustment to +the allowance. It was not unusual for Fulton to record entries after “Day 2” of the closing process. +Indeed, both of the adjustments that Fulton made to the MSR valuation allowance in the second +and third quarters of 2016 were recorded on “Day 3.” + +49. Fulton’s practice with respect to recording adjustments to the MSR valuation +allowance based on when the expert’s valuation report was received was thus inconsistent from +quarter to quarter. During this quarter and throughout the Relevant Period, Fulton had no written +policy governing the length of its quarter and year-end closing process or that set out a process for +consistently documenting and recording adjustments proposed during the closing process. + +First Quarter 2017 Form 10-Q + +50. Fulton’s Form 10-Q for the first quarter of 2017, which was filed with the +Commission on May 5, 2017, did not reflect either of the two explanations for the decision to +retain the MSR valuation allowance, and did not accurately reflect the process that Fulton followed +to arrive at the fair value of its MSRs and its decision to maintain $1.3 million in the MSR +valuation allowance. + +51. For example, the notes to Fulton’s financial statements provided that, “[f]air values +are determined at the end of each quarter through a discounted cash flows valuation performed by +a third-party valuation expert” and that “[b]ased on its fair value analysis, the Corporation +determined that no adjustment to the valuation allowance was necessary for the three months +ended March 31, 2017.” + +52. These statements in Fulton’s Form 10-Q were misleading because they gave the +misimpression that the third-party valuation expert’s fair value analysis in the first quarter of 2017 +indicated that Fulton’s MSRs were still impaired. To the contrary, Fulton’s valuation expert’s +analysis supported the conclusion that Fulton’s MSRs were no longer impaired and reversal of the +remaining $1.3 million valuation allowance was necessary. Thus, Fulton did not base its decision + 10 +that “no adjustment to the valuation allowance was necessary” on the expert’s report through the +process described in its disclosures. + +Second Quarter 2017: MSR Valuation Allowance Reversed; EPS Consensus Estimates Met + +53. In the second quarter of 2017, Fulton’s management expressed an interest in +waiting until late in the closing process, when it would have a better understanding of its projected +EPS, before determining whether to reverse the MSR valuation allowance. + +54. Fulton did ultimately reverse the remaining $1.3 million MSR valuation allowance +in the second quarter of 2017, thereby increasing pre-tax income. The reversal was consistent with +Fulton’s accounting policy and the valuation expert’s report. Without the benefit of the reversal of +the remaining $1.3 million allowance in the second quarter of 2017, Fulton would have missed +consensus estimates by a penny. + +55. Fulton’s earnings press release for the second quarter of 2017 noted that +“[m]ortgage banking income increased $1.5 million, or 33.6 percent, due primarily to a $1.3 +million reversal of the valuation allowance for [MSRs] in the current quarter,” but the press release +did not disclose that the reversal was two quarters late. + +Second Quarter 2017 Form 10-Q + +56. Fulton’s Form 10-Q for the second quarter of 2017, which was filed with the +Commission on August 4, 2017, did not disclose information regarding the process that resulted in +the valuation allowance being maintained through the prior two quarters. + +57. Fulton’s 10-Q stated that its “[m]ortgage servicing income increased $3.4 million +during the first half of 2017 compared to the same period in 2016 as a result of a $1.3 million +reduction to the [MSR] valuation allowance during the second quarter of 2017.” These +disclosures, however, were misleading because they gave the misimpression that the reversal of the +valuation allowance was timely, when, in fact, the reversal was two quarters late. + +Fulton’s Misleading Public Disclosures + +58. For the foregoing reasons, Fulton’s 2016 Form 10-K and Forms 10-Q for the first +and second quarters of 2017 contain material misstatements and omissions regarding: (1) the +process for determining the fair value of Fulton’s MSRs and the calculation of its valuation +allowance; (2) the use of a third-party valuation expert’s report for determining fair value; (3) +management’s involvement in determining the MSR valuation outcome; and (4) the timeliness of +the reversal of the MSR valuation allowance in the second quarter of 2017. + +59. During the Relevant Period, Fulton departed from its usual and stated practices with +respect to MSR valuation. These departures included: (1) Fulton’s communications with the +valuation expert that went beyond reviewing for reasonableness the inputs to the third-party +expert’s discounted cash flow analysis, and instead reflected Fulton’s requested change to the + 11 +valuation; and (2) disregarding the valuation expert’s report in the first quarter of 2017, which had +the effect of lowering its MSR carrying value and providing a misimpression of continued +impairment. + +60. As a result, Fulton erroneously maintained a MSR valuation allowance that was not +the product of its third-party expert’s discounted cash flow analysis with inputs reviewed by +management for reasonableness. Fulton reversed the valuation allowance in the second quarter of +2017 instead of the fourth quarter of 2016 when it should have been reversed under Fulton’s +disclosed valuation process. + +61. Fulton’s misleading disclosures created the appearance of consistent earnings trends +across reporting periods and deprived investors of the ability to understand management’s +involvement in fair value calculations. Thus, Fulton violated its financial reporting obligations +under the Exchange Act. + +Fulton’s Inaccurate Books and Records and Internal Accounting Control Failures + +62. Over two consecutive quarters, Fulton recorded and then maintained an erroneous +MSR valuation allowance which was not determined in accordance with Fulton’s disclosed MSR +valuation process, which caused its general ledger to not fairly and accurately reflect the value of +the MSRs in reasonable detail. + +63. In addition, Fulton failed to implement internal accounting controls that were +sufficient to provide reasonable assurances that financial statements were accurately stated in +accordance with generally accepted accounting principles. + +64. While Fulton maintained certain internal accounting controls related to its MSR +valuation allowance calculation, those controls did not provide for sufficient documentation and +review of communications with the third-party valuation expert regarding Fulton management’s +review of the third-party expert’s analysis. + +65. Moreover, Fulton failed to devise and maintain internal accounting controls +governing the completeness and accuracy of documentation related to proposed but unrecorded +adjustments. Such controls would have assisted in providing reasonable assurances that +documentation included sufficient detail for meaningful review of unrecorded adjustments, +particularly those that have the potential impact to EPS. + +Violations + +66. As a result of the conduct described above, Fulton 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 +mandate that periodic reports contain such further material information as may be necessary to +make the required statements not misleading. + +67. As a result of the conduct described above, Fulton 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. + +68. As a result of the conduct described above, Fulton 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. + +Fulton’s Remedial Efforts + +69. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Fulton and cooperation afforded the Commission staff. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Fulton 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. Fulton shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $1,500,000 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 + + 13 +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Fulton as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita Bandy, Associate 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. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4175.txt b/raw/aaer/2020/AAER-4175.txt new file mode 100644 index 0000000000000000000000000000000000000000..0651a8e645a36322adb59321308c85e3e6a7bbd9 --- /dev/null +++ b/raw/aaer/2020/AAER-4175.txt @@ -0,0 +1,720 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10854 / September 28, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90018 / September 28, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4175 / September 28, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20085 + + + + +In the Matter of + +INTERFACE, INC., +GREGORY J. BAUER, CPA, + and + PATRICK C. LYNCH, CPA, + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF + 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, AND +RULE 102(e) OF THE COMMISSION’S RULES +OF PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Interface, +Inc. (“Interface”) 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 Gregory J. Bauer, +CPA (“Bauer”), pursuant to Section 8A of the Securities Act, Sections 4C1 and 21C of the + +1 Section 4C provides, in relevant part, that: + +2 +Exchange Act, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice,2 and against Patrick +C. Lynch, CPA (“Lynch”) pursuant to Sections 4C and 21C of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +II. + + In anticipation of the institution of these proceedings, Interface, Bauer, and Lynch +(collectively “Respondents”) have submitted Offers of Settlement (the “Offers”) which the +Commission has determined to accept. Solely for the purpose of these proceedings and any other +proceedings brought by or on behalf of the Commission, or to which the Commission is a party, +and without admitting or denying the findings herein, except as to the Commission’s jurisdiction +over them and the subject matter of these proceedings, which are admitted, and except as provided +herein in Section V, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-And-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +And-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. From the second quarter of 2015 through the second quarter of 2016, Interface, a +global designer and manufacturer of modular carpet, reported earnings per share (“EPS”) that did + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found … to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 +not accurately reflect the company’s underlying performance. During these five consecutive +financial quarters, Interface’s then-Corporate Controller, Bauer, directed or otherwise caused his +subordinates to book unsupported, manual accounting adjustments to Interface’s management +bonus accruals, expenses related to a key independent consultant (“Consultant”), and stock based +compensation. These adjustments did not comply with generally accepted accounting principles +(“GAAP”) and artificially inflated Interface’s income and EPS, which resulted in Interface meeting +or beating consensus estimates for EPS and showing earnings growth. Interface’s then-Chief +Financial Officer (“CFO”), Lynch, also caused Bauer to direct entries in two quarters that lacked +support and did not comply with GAAP. Bauer and Lynch were able to direct or cause these +improper adjustments because Interface failed to have sufficient accounting controls or procedures +in place to prevent unsupported, manual, period end, journal entries. Interface lacked critical +journal entry controls and Bauer’s subordinate accountants were not knowledgeable in GAAP. +2. The adjustments and misstatements were also material to Interface’s financial +statements and caused Interface to make false disclosures in public filings, press releases, and +earnings calls about its actual EPS results, its earnings growth, and its pattern of meeting or beating +consensus analyst estimates. Had Lynch and Bauer ensured the financial statements complied with +GAAP, Interface’s reported earnings would have been more volatile than reported, and in two +quarters in which it reported meets of analyst consensus EPS, Interface would have in fact missed +the consensus estimates. Consequently, Interface’s conduct was materially misleading to investors +in violation of the federal securities laws. +RESPONDENTS +3. Interface is a Georgia corporation with its principal place of business located in +Atlanta, GA. The company’s shares are registered with the Commission pursuant to Section +12(b) of the Exchange Act and trades on the NASDAQ Exchange under the symbol “TILE.” +Interface 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. +4. Bauer, age 44, resides in Smyrna, GA, and is a CPA licensed in the State of +Georgia. Bauer was Interface’s Vice President and Controller from 2011 through October 2017, +at which time he was promoted to the position of Vice President of Finance and Chief +Accounting Officer. Interface placed Bauer on paid administrative leave on April 23, 2019, and +terminated his employment on July 15, 2020. +5. Lynch, age 50, resides in Marietta, GA and is a CPA licensed in the State of +Georgia. His license lapsed in approximately 2004. Lynch was Interface’s CFO from June 2001 +to November 2016, at which time he left Interface to be the CFO of another company. From +May 2019 to the present, Lynch has served as the CFO of a privately-held consolidating +subsidiary of a public holding company. +4 +FACTS + +Second Quarter of 2015 + +6. In Q2 2015, Interface reported EPS of $0.33 and its earnings release stated that it +had “finished with earnings per share that tied our all-time record in the fourth quarter of 2007.” +In truth, Interface did not achieve record EPS in Q2 2015 because it understated its actual +expenses for management bonuses by $1.58 million, which in turn inflated its pre-tax income by +5% and its EPS by $0.02. +7. In early June 2015, after learning that Interface was required to pay an unexpected +$725,000 death benefit, Bauer directed a $500,000 reduction to the management bonus accrual. +Bauer’s contemporaneous instruction stated that decreasing the bonus accrual would limit to +about “a 250k hit” the net income impact of the unexpected death benefit expense. +8. Bauer’s decision to reduce the management bonus accrual in order to offset the +surprise death benefit expense did not comply with GAAP. +9. Interface paid non-discretionary management bonuses based on the achievement +of established targets for operating income before incentives (“OIBI”) and cash flow. If +Interface met the stated “goal” for those targets, management would receive 100% of their bonus +potential. If Interface exceeded the goal, management would receive up to a maximum, 150%, +of their bonus potential depending on the amount by which the goal was exceeded. +10. The internal financial forecasts reviewed by Lynch and Bauer and provided to the +board of directors in Lynch’s monthly and quarterly board reports reflected Interface’s best +estimates for probable OIBI and cash flow. Throughout the relevant period, Lynch and Bauer +understood the formulas for calculating the bonus amount. During the quarterly closing process, +they both reviewed the bonus accrual and together determined whether to book any adjustments +to it. +11. At the time that Bauer improperly reduced the bonus accrual by $500,000, +Interface’s best estimate was that annual bonuses at levels far greater than 100% would be paid. +Reducing the accrual by $500,000, however, caused Interface’s accrual level to fall far below the +100% level. +12. During the closing process for the second quarter, when Interface was on track to +report an all-time record EPS of $0.33, Bauer kept the accrual level at well below 100% despite +the best estimates that showed a maximum, 150%, annual bonus was probable to be paid. As +CFO, Lynch should have known that the bonus accrual level did not match the levels indicated +by the company’s best estimates for OIBI and cash flows, but took no steps to ensure its +accuracy. +13. As a result and in total, Interface’s management bonus accrual and related +expenses for Q2 2015 were understated by approximately $1.58 million, or 5% of pre-tax +income, and its EPS was falsely inflated by $0.02. +5 +Third Quarter of 2015 + +14. In Q3 2015, Interface publicly reported that it had met consensus estimates for +EPS of $0.31, reflecting a continued pattern of meeting or beating analyst estimates for four +consecutive quarters. In truth, Lynch and Bauer had directed unsupported accounting entries and +otherwise misstated expenses, which inflated Interface’s pre-tax income by 12%, or a total of +over $3.12 million. Rather than report a meet of consensus EPS estimates, Interface should have +reported a $0.04 miss. +15. The first set of improper entries in Q3 2015 concerned Interface’s accounting for +a collateral split dollar life insurance arrangement that Interface had with its independent +Consultant. Under this arrangement, Interface agreed to pay for the annual premiums for a +whole life insurance policy owned by the Consultant. The Consultant, in turn, agreed to repay +those premiums to Interface in or around May 2016. As collateral for the premiums Interface +paid, the Consultant assigned to Interface the cash surrender value (“CSV”) of his policy up to +the amount of the premiums paid. Any amount of the policy’s CSV in excess of the premiums +paid belonged to the Consultant outright, with certain defined exceptions that did not and were +not probable to occur. Based on the plain language of Interface’s agreement with the Consultant, +the value of the CSV as reflected on Interface’s books should have never exceeded the amount of +unreimbursed premiums paid. Yet Interface historically recorded the full value of the CSV on its +balance sheet. +16. During Q3 2015, Bauer learned that the asset would need to be written down by +the amount recognized in excess of the premiums paid, $871,140. He also learned that the +Consultant would likely reimburse Interface for the premiums paid in May 2016. Yet Bauer did +not immediately write down the asset. Contrary to GAAP, Bauer instead began a process of +bleeding the value down in equal increments of $87,114 over ten months. By the end of the +quarter, Bauer had recorded just $174,228 against the $871,140 excess valuation. As a result, +Interface’s CSV asset and associated income were inflated by approximately $697,000 (the +difference between $871,140 and $174,228). This error, standing alone, increased Interface’s +EPS by almost $0.01, and, if it had been recorded properly, would have changed Interface’s +reported meet of consensus estimates to a miss. +17. The second set of improper entries in Q3 2015 concerned Interface’s stock based +compensation and management bonus. In October 2015, Interface’s finance department +prepared the first draft of Interface’s Q3 2015 consolidated internal financial statements, which +showed that actual EPS for the quarter was $0.02 shy of the $0.31 analyst consensus estimate. +Bauer unreasonably directed his staff to book adjustments to achieve “a pick up of about 740k,” +and later that same day, Bauer and his staff improperly reduced the expense for a stock grant by +$628,000. The adjustment did not comply with GAAP and artificially inflated Interface’s EPS +by almost $0.01. Standing alone, correcting this error would have changed Interface’s reported +meet of consensus estimates to a miss. +18. On the same day that Bauer reduced the stock grant expense, he also directed his +staff to increase the management bonus accrual by only $100,000 even though Interface’s best +estimates for OIBI and cash flows indicated that the management bonus liability was under- +6 +accrued by approximately $1.67 million. The stated justification for the entry was to “correct +bonus accrual,” but the adjustment still left the bonus accrual – and associated expenses – +understated by approximately $1.57 million in Q3 2015. As CFO, Lynch should have known +that the bonus accrual level did not match the levels indicated by the company’s best estimates +for OIBI and cash flows, but took no steps to ensure its accuracy. As a result, Interface avoided +reporting a $0.016 reduction to its EPS for the quarter and a miss of consensus estimates. +19. A third and final set of entries concerned the annual bonus that Interface was +obligated by contract to pay its Consultant. Updated Q3 2015 internal financial statements +reflected the adjustments described in the forgoing paragraphs, but still showed actual EPS to be +just shy of consensus estimates. Lynch and Bauer subsequently and unreasonably directed the +full reversal of the $225,000 that had been accrued to date for the Consultant’s bonus. This last- +minute manual adjustment did not comply with GAAP. The Consultant’s bonus was paid pro +rata, and thus, it was incorrect to reverse the full (or any) amount. This error artificially boosted +Interface’s EPS by $0.002 – just enough for Interface to round up to $0.31 and report a meet of +analyst consensus EPS estimates. +20. In total, Interface’s income for Q3 2015 was overstated by approximately $3.12 +million, or 12% of pre-tax income, and its EPS was inflated by $0.04. +Fourth Quarter of 2015 + +21. In Q4 2015, Interface reported a quarterly EPS of $0.28 and an annual EPS of +$1.10, which represented a record for Interface and a $0.02 beat of consensus estimates for the +year. While the quarter’s EPS was a $0.01 miss of consensus, it was just enough to allow +Interface to report a $0.02 beat of estimates for the year, and Interface’s earnings release +highlighted that the “fourth quarter rounded out a phenomenal year in which Interface posted all- +time records for net income and earnings per share.” In truth, however, Interface’s results were +artificially inflated by Bauer’s adjustments to the Consultant’s bonus, the CSV, and the +management bonus. Had the financial statements complied with GAAP at the end of 2015, +Interface would have reported a $0.03 miss of the consensus for the quarter, and instead of +beating analyst consensus estimates for the year, Interface would have reported only a meet. +22. After the third quarter’s books had closed and the company reported that it met +analyst consensus EPS estimates, Bauer resumed the monthly accrual for the Consultant’s bonus. +By year end, Interface had accrued a balance of only $75,000 even though the Consultant was +due his full $300,000 bonus. However, neither Lynch nor Bauer directed the $225,000 increase +required to make up for the reversal in the previous quarter. +23. Bauer also directed unsupported adjustments to the Consultant’s CSV. During the +closing process for the quarter, Bauer directed his financial manager to “reverse half…for now” +of the approximately $436,000 they had recorded by that time to write down the CSV asset as +part of their improper bleed down process. This adjustment did not comply with GAAP and +served only to artificially reduce expense by approximately $218,000. A few days later, Bauer +also stopped the monthly bleed-down. As a result, Interface overstated the CSV asset and +7 +associated income by approximately $653,000, which in turn inflated its quarter-end and year- +end EPS by $0.01. +24. Less than an hour after he had directed the $218,000 CSV expense reduction, +Bauer also directed that a $350,000 balance he had in another liability account be used to +decrease expense generally by $150,000 and increase the management bonus accrual by +$200,000 without any corresponding increase to bonus expense. Bauer’s adjustments did not +comply with GAAP, as Interface’s internal financial statements and best estimates at the time +made clear that the bonus was under-accrued by approximately $949,000. As CFO, Lynch also +should have known that the bonus accrual level did not match the levels indicated by the +company’s best estimates for OIBI and cash flows, but took no steps to ensure its accuracy. By +increasing the accrual by only $200,000, Interface’s bonus accrual and related expenses +remained understated at year end by approximately $749,000, which in turn inflated its quarter- +end and year-end EPS by $0.01. +25. In total, Bauer’s improper adjustments and Lynch’s failure to ensure the bonus +accruals were accurate caused Interface to overstate income by a total of $1.63 million, or 7% of +the quarter’s pre-tax income. They also caused Interface’s EPS to be inflated by $0.02. In +reality, Interface should have reported EPS of $0.26 for the quarter and $1.08 for the year. +First Quarter of 2016 +26. In Q1 2016, Interface reported an EPS of $0.20, meeting consensus estimates and +representing a quarter-over-quarter increase of $0.01. However, these results were inflated +because Lynch and Bauer had directed unsupported adjustments to the bonus accruals and +otherwise caused Interface’s stock based compensation expense to be understated. Bauer also +directed unsupported and improper adjustments to the CSV. Given these adjustments, rather +than report growth and a meet of consensus, Interface should have reported an EPS of just $0.17 +– a $0.02 quarter-over-quarter decline and a $0.03 miss of consensus. +27. During the Q1 2016 closing process, when weak sales weighed down Interface’s +performance, Bauer directed that the remaining $218,000 CSV write-down balance be reversed +in full. That same day, Lynch and Bauer directed their staff to reverse the entire $740,000 +balance in the management bonus accrual even though Interface’s best estimates for OIBI and +cash flow suggested that an accrual of approximately $1 million was necessary in the quarter. +Together, these adjustments – which did not comply with GAAP – resulted in an immediate +$958,000 increase to income and a $0.01 increase in EPS. +28. A few days later, and after discussing with Lynch how the company would +“articulate to [the] street” its declining sales trends, Bauer directed his financial manager to +increase the CSV asset’s value another $210,000, stating simply, “Think we are gonna need that +cash surrender value….” Given this asset increase and Interface’s intervening payment of +another premium, Bauer continued to overstate the CSV asset, now by a total of $994,000. Like +the other entries Bauer directed, this CSV adjustment did not comply with GAAP, increased +EPS, and enabled Interface to report a $0.20 meet of consensus estimates. +8 +29. Lynch and Bauer also caused Interface to understate the company’s stock based +compensation expense in Q1 2016, allowing the company to report an EPS meet. Although the +internal financial statements and best estimates for annual EPS plus dividends (“EPSD”) showed +it was probable that one of the company’s stock grants would vest in full by the end of the year, +Interface did not record any associated increase in expense. As CFO and Controller, +respectively, Lynch and Bauer should have known that the stock expense accrual level did not +match the levels indicated by the company’s best estimates for EPSD, but took no steps to ensure +its accuracy. As a result, Interface’s stock expense for the quarter was understated by +approximately $387,000. +30. In total, Interface’s income for Q1 2016 was overstated by approximately $2.43 +million, or 15% of pre-tax income, and its EPS was inflated by $0.03. +Second Quarter of 2016 +31. In Q2 2016, Interface reported EPS of $0.32, which Interface and its senior +management described in the accompanying press release and earnings call as “strong,” the +“second best quarterly earnings ever,” and “just a penny short of the all-time record.” In truth, +Bauer had directed improper and unsupported accounting entries and otherwise improperly +misstated expenses, which inflated Interface’s pre-tax income by 7%, or approximately $1.9 +million. Interface’s true EPS of $0.30 actually reflected a $0.03 quarter-over-quarter and $0.01 +year-to-date decline in earnings. +32. The first set of improper entries that Bauer directed concerned the CSV. The day +after Interface reported its Q1 2016 meet of analyst estimates for EPS, Bauer once again began +bleeding down the CSV asset. As expected, in May 2016, the Consultant fully reimbursed +Interface for the premiums paid – leaving Interface with no claim to the CSV at all. Instead of +reducing the full value of the CSV asset, Bauer left $179,000 on Interface’s books. This error +alone, if corrected at the time, would have cost Interface $0.01 in EPS due to rounding. +33. The second set of improper entries concerned the management bonus accrual. By +quarter end, Interface’s bonus accrual was at an approximate 50% achievement level given the +improper reversal at the end of Q1 2016. The company’s internal financial statements and best +estimates for OIBI and cash flows at the end of Q2 2016 showed a probable bonus achievement +of approximately 69% – indicating that Interface needed to increase expense to meet the +expected liability. Nevertheless, Bauer directed a $400,000 reduction in bonus expense, which +increased reported EPS by one penny with rounding. As CFO, Lynch should have known that +the bonus accrual level did not match the levels indicated by the company’s best estimates for +OIBI and cash flows, but took no steps to ensure its accuracy. As a result of their conduct, +Interface’s management bonus accrual and related expenses were understated by a total of +$951,000 in Q2 2016, which inflated EPS by $0.01. +34. Lynch and Bauer also caused Interface to understate its stock based compensation +expense in Q2 2016, which enabled it to report a $0.32 EPS. As in the prior quarter, the internal +financial statements and best estimates for EPSD showed it was probable that one of the +company’s stock grants would vest in full by the end of the year. Nevertheless, Interface did not +9 +record the associated increase in expense, and Interface’s stock expense was therefore +understated by a cumulative total of $774,000 in Q2 2016. As CFO and Controller, respectively, +Lynch and Bauer should have known that the stock expense accrual level did not match the +levels indicated by the company’s best estimates for EPSD, but took no steps to ensure its +accuracy. Correcting this error at the time would have cost Interface almost another $0.01. +35. In total, Interface’s income for Q2 2016 was overstated by approximately $1.9 +million, or 7% of pre-tax income, and its EPS was inflated by $0.02. +Interface Lacked Accurate Books and Records and Sufficient Internal Accounting Controls +36. These adjustments to Interface’s expenses, which inflated EPS quarter after +quarter, were made in part because Interface lacked sufficient internal accounting controls over +(a) significant recurring accruals subject to management estimate including incentives and stock +based compensation, (b) journal entries, and (c) period-end adjustments made during the closing +process. Interface did not require, for example, corporate level accounting entries to have +supporting documentation, and corporate finance staff regularly recorded manual adjustments +with nothing more than an email or oral directive. In addition, Bauer’s direct reports did not +analyze or consider the propriety of the entries he directed, and Interface’s Internal Audit +function did not perform procedures sufficient to ensure adjustments directed by Lynch and +Bauer had support and complied with GAAP. +37. As a result, Interface’s internal accounting controls were not designed or +maintained to provide reasonable assurance that Interface’s financial statements would be +presented in conformity with GAAP. Interface’s books, records and accounts also did not +accurately and fairly reflect, in reasonable detail, Interface’s transactions and disposition of +assets. +Conduct During the Investigation +38. Between November 2017 and March 2018, Interface employees caused Interface +to produce documents in response to Commission investigative requests that were suggestive of +contemporaneous support for journal entries that, in truth, did not exist at the time the entries +were recorded. One of these employees also certified as contemporaneous business records +certain documents that, in fact, had been modified after the investigation began. These +shortcomings had the effect of impeding the staff’s investigation. +39. When Interface learned of these issues, Interface promptly informed the Staff, +conducted an internal review, took disciplinary and remedial measures, and reported its findings. +Sales of Interface Stock +40. Interface awarded restricted stock grants to certain executives and management +under Interface’s Omnibus Stock Incentive Plan. On July 30, 2015, Interface filed a Form S-8, +registering an additional $4.9 million of shares at a maximum offering price per share of $23.46. +The Form S-8 incorporated by reference all of Interface’s subsequent annual and quarterly +10 +reports filed thereafter until termination of the offering, including Interface’s 2015 Form 10-K +and its 2015 and 2016 Forms 10-Q filed during the relevant period. +41. Lynch received Interface stock under the Omnibus Stock Incentive Plan and, +pursuant to a 10b5-1 plan executed on March 14, 2016, sold a total of 7,500 shares for proceeds +of $134,861 between March 18, 2016, and July 28, 2016. +42. Bauer also received Interface stock under the Omnibus Stock Incentive Plan. On +March 10, 2016, he sold 8,270 shares of Interface stock for total proceeds of $138,283. +VIOLATIONS +43. Section 17(a)(2) of the Securities Act proscribes the receipt of “money or property +by means of any untrue statement of a material fact or any omission to state a material fact +necessary in order to make the statements made, in light of the circumstances under which they +were made, not misleading.” Section 17(a)(3) of the Securities Act proscribes engaging “in any +transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser.” A violation of these provisions does not require scienter and may rest on a +finding of negligence. See Aaron v. SEC, 446 U.S. 680, 685, 701-02 (1980). +44. 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. 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), cert. denied, 440 U.S. 913 (1979). In addition to the information +expressly required to be included in such reports, Rule 12b-20 of the Exchange Act requires +issuers to add such further material information, if any, as may be necessary to make the required +statements, in the light of the circumstances under which they are made not misleading. A +violation of these reporting provisions does not require scienter and may rest on a finding of +negligence. See SEC v. Wills, 472 F. Supp. 1250, 1268 (D.D.C. 1978). +45. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets. Section 13(b)(2)(B) of the Exchange Act requires all reporting +companies 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. Scienter is not +an element of the books and records and internal control provisions. See Ponce v. SEC, 345 F.3d +722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also +does not impose a scienter requirement”). +46. Rule 13b2-1 also prohibits any person from directly or indirectly, falsifying or +causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A). A violation +of Rule 13b2-1 does not require scienter and may rest on a finding of negligence. World-Wide +Coin Investments, 567 F. Supp. 724, 749 (N.D. Ga. 1983). +11 +FINDINGS + +47. Based on the foregoing, the Commission finds that Respondent Interface 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 Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. +48. Based on the foregoing, the Commission finds that Respondent Bauer: (a) +willfully4 violated Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Rule 13b2-1; +and (b) caused Interface’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder. +49. Based on the foregoing, the Commission finds that Respondent Lynch: (a) +willfully5 violated Exchange Act Rule 13b2-1; and (b) caused Interface’s violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a- +11, and 13a-13 promulgated thereunder. +INTERFACE’S COOPERATION AND REMEDIAL EFFORTS + +50. In determining to accept Respondent Interface’s Offer, the Commission +considered the cooperation and remedial acts promptly undertaken by Interface. Interface has +taken disciplinary action, enhanced review of the finance area, expanded and enhanced its +corporate finance department, and instituted enhanced training, policies and procedures to +prevent and detect the type of misconduct described in the Order. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Interface shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +promulgated thereunder. + +B. Bauer shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), + +4 A willful violation of the securities laws means merely “‘that the person charged with the +duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting +Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor +“‘also be aware that he is violating one of the Rules or Acts.’” Id. (quoting Gearhart & Otis, Inc. +v. SEC, 348 F.2d 798, 803 (D.C. Cir. 1965)). + +5 Id. +12 +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and +13b2-1 promulgated thereunder. + +C. Lynch 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, 13a-1, 13a-11, 13a-13, and 13b2-1 promulgated thereunder. + + D. Bauer is denied the privilege of appearing or practicing before the Commission as +an accountant. + + E. After three (3) years 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: + + 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 Bauer’s work in his practice +before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which he works or +in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Bauer, 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) Bauer, 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 +13 +respondent’s or the firm’s quality control system that would +indicate that Bauer will not receive appropriate supervision; + (c) Bauer 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) Bauer acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +F. The Commission will consider an application by 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 as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + G. Lynch is denied the privilege of appearing or practicing before the Commission as +an accountant. + + H. After one (1) year from the date of this order, Lynch 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 Lynch’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 +14 +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) Lynch, 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) Lynch, 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 Lynch will not receive appropriate supervision; + (c) Lynch 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) Lynch acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +I. The Commission will consider an application by Lynch 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 Lynch’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +J. Interface shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount 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. +15 + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Interface as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + +K. Bauer shall, within ten (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 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 +16 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Bauer as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + +L. Lynch shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $70,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(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 +Lynch as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Anita B. Bandy, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + 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 agrees that they shall, within 30 days after entry of a final order +17 +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 Bauer and Lynch, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Bauer and Lynch 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 and Lynch of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4176.txt b/raw/aaer/2020/AAER-4176.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a68fcbd002dcbc79d2f48a6f61699c4a11c327c --- /dev/null +++ b/raw/aaer/2020/AAER-4176.txt @@ -0,0 +1,89 @@ + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90025 / September 28, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4176 / September 28, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-16783 + +In the Matter of +Kanako Matsumoto, 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 4, 2015, Kanako Matsumoto, CPA (“Matsumoto”) 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 Matsumoto pursuant to +Rule 102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to +Matsumoto’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’s order found that Matsumoto engaged in improper professional +conduct while serving as the manager on Peterson Sullivan, LLP’s audit of the financial +statements of a private investment fund, Summit Stable Value Fund. Matsumoto failed to +comply with American Institute of Certified Public Accountants audit standards by failing to +obtain sufficient appropriate audit evidence about the existence of certain fund assets, failing to +exercise appropriate professional judgment and professional skepticism, and failing to properly +supervise the audit. +In her 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, Matsumoto +attests that she will undertake to have hers work reviewed by the independent audit committee of +any company for which she works, or in some other manner acceptable to the Commission, + +1 See Accounting and Auditing Enforcement Release No. 3681 dated September 4, 2015. Matsumoto was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. +while practicing before the Commission in this capacity. Matsumoto is not, at this time, seeking +to appear or practice before the Commission as an independent accountant. If she should wish to +resume appearing and practicing before the Commission as an independent accountant, she will +be required to submit an application to the Commission showing that she has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Matsumoto’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 Matsumoto, it appears that she has complied with the terms of the September 4, 2015 order +suspending her from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to her character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against her pursuant to Rule 102(e) of the Commission's Rules of Practice, and +that Matsumoto, by undertaking to have her work reviewed by the independent audit committee +of any company for which she works, or in some other manner acceptable to the Commission, in +her practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Kanako Matsumoto, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. +By the Commission. + +Vanessa Countryman +Secretary + + +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/2020/AAER-4177.txt b/raw/aaer/2020/AAER-4177.txt new file mode 100644 index 0000000000000000000000000000000000000000..4379ce3b9b0911b3930fac30e65a8d4c70453680 --- /dev/null +++ b/raw/aaer/2020/AAER-4177.txt @@ -0,0 +1,548 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10860 / September 29, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90042 / September 29, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4177 / September 29, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20099 + +In the Matter of + +MANITEX +INTERNATIONAL, INC., + +Respondent. + + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. +The Securities and Exchange Commission (“Commission” or “SEC”) deems it appropriate +that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) against Manitex International, Inc. (“Manitex” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Manitex 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, Manitex 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 Manitex’s Offer, the Commission finds1 that: +SUMMARY +1. This matter involves financial and accounting fraud by senior officers and +employees at Manitex, a publicly-traded company that manufactures and distributes cranes, +forklifts and other heavy equipment and machinery. During downturns in Manitex’s business, +certain of Manitex’s officers and employees engaged in two distinct, fraudulent schemes involving +the use of related party entities to engage in fraudulent accounting practices. The first fraud was +perpetrated by Andrew Rooke (“Rooke”), Manitex’s former Chief Operating Officer (“COO”), and +Stephen Harrison (“Harrison”), the former general manager of Manitex’s Crane & Machinery +subsidiary. The second fraud, which resulted in a restatement, involved Rooke, Harrison and +Michael Schneider (“Schneider”), Manitex’s former Controller and Chief Financial Officer +(“CFO”). As a result of the two schemes, Manitex issued materially misstated financial statements +in its public filings for every period from at least the fourth quarter of 2014 through the second +quarter of 2017. +2. In the first scheme, Manitex improperly accounted for and misled its outside auditor +about its contributions of purported inventory from one of its subsidiaries to Lift Ventures, LLC +(“Lift Ventures”), a joint venture created on December 16, 2014. Beginning in approximately +January 2014, Rooke and Harrison created false inventory lists and shipping documents which +were provided to Manitex’s outside auditor to cover up a $1.39 million inventory shortfall at one of +Manitex’s subsidiaries. Subsequently, at Rooke’s direction, Manitex purportedly contributed the +$1.39 million in nonexistent inventory to Lift Ventures, a joint venture Rooke and Manitex created +with three foreign partners, and it was recorded on Manitex’s books as a non-marketable equity +investment. As a result, Manitex overstated its 2014 operating income by approximately 11% and +pre-tax income by approximately 15%. Manitex continued to list its contribution to Lift Ventures +at or close to its full value in its periodic filings with the Commission until September 2016. +3. In the second scheme, Manitex improperly recognized revenue on and misled its +auditor about approximately $12 million in purported “bill and hold” sales of cranes to S.V.W. +Crane Equipment Company (“SVW”). In March 2016, Manitex approached SVW to enter into an +agreement to purchase Manitex cranes and rent them to third parties. SVW had no operations, +revenue, or significant assets, and did not have the financial ability to obtain financing or otherwise +pay for or store the cranes purchased from Manitex. At Rooke’s direction, Harrison took charge of +the SVW relationship, secured the financing for SVW’s crane purchases, and, on behalf of +Manitex, guaranteed the financing for the cranes. Harrison, in consultation with Rooke, then +created a purported financing subsidiary for SVW called Rental Consulting Services Company +(“RCSC”), to conceal the fact that Manitex was making the financing payments. In order to make +the payments, Harrison created a series of fraudulent invoices on RCSC letterhead for fictitious +services that RCSC purportedly provided to Manitex. Schneider approved the payments although + +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 +he knew that the RCSC invoices were not genuine. Manitex should not have recognized revenue +on the purported sales. As a result of the fraud, Manitex overstated its 2016 net revenues by over +6.9% and its 2016 gross profits by approximately 8.2%. On April 3, 2018, Manitex issued restated +financial statements for 2016 and the first two quarters of 2017.2 +4. As a result of the conduct described above, Manitex violated Section 17(a) of the +Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules +10b-5, 12b-20, 13a-1, and 13a-13 thereunder. +RESPONDENT +5. Manitex International, Inc., is a Michigan corporation headquartered in +Bridgeview, Illinois, that manufactures and distributes cranes, forklifts and heavy equipment. +Manitex operates through several subsidiaries both in the United States and Europe, including +Crane & Machinery which also was headquartered in Bridgeview, Illinois. Manitex and its +predecessors have been in business since 1993. Manitex has a class of securities registered under +Section 12(b) of the Exchange Act and its shares trade on the NASDAQ as “MNTX.” During the +relevant period, Manitex sold securities to the public pursuant to several Form S-3 registration +statements filed with the Commission. A broad range of investors purchased Manitex stock in +these offerings. During the relevant period, the Form S-3 registration statements incorporated by +reference the company’s public filings with the Commission. +OTHER RELEVANT INDIVIDUALS AND ENTITIES +6. Andrew Rooke, 62 years old, is a resident of Bloomfield Hills, Michigan. Rooke +was Manitex’s President and COO from at least May 2008 until December 2016. As COO, Rooke +was Manitex’s second-highest ranking officer, and reported directly to the Chief Executive Officer +(“CEO”). Rooke’s responsibilities included overseeing and assisting the CFO with financial +forecasting, investor relations, and forward-looking business transactions. He also oversaw +Manitex’s operating segment general managers and reviewed and commented on Manitex’s +quarterly and annual reports. Rooke left Manitex for a position at another company in December +2016. +7. Stephen Harrison, 72 years old, is a resident of Lemont, Illinois. From at least +2008 until approximately 2016, Harrison was the general manager of Manitex’s Crane & +Machinery subsidiary. Between 2016 and his termination in January 2018, Harrison served as +Manitex’s Director of Rental Fleet and Finance. Harrison reported to Rooke while Rooke was +COO and then reported to Manitex’s CEO until Harrison’s termination. +8. Michael Schneider, 56 years old, is a resident of Arlington Heights, Illinois. From +at least November 2015 until August 2017, Schneider served as Manitex’s Controller. From +August 2017 until his termination in January 2018, Schneider served as Manitex’s CFO. +Schneider reported to Manitex’s previous CFO until August 2017 and to Manitex’s CEO + +2 In addition to the adjustments for the second fraud, Manitex also made other unrelated adjustments to its +previously issued financial statements. + 4 +thereafter. Schneider has been a licensed Certified Public Accountant (“CPA”) in the State of +Illinois since May 1995. +9. S.V.W. Crane Equipment Company is a Texas corporation established in 1996, +with its office in Pearland, Texas. Prior to the start of its relationship with Manitex in 2016, SVW +had no operations, revenues, or significant assets. +10. Rental Consulting Services Company is a Texas corporation established in June +2016, as a subsidiary of SVW. RCSC was created and controlled by Harrison on Manitex’s behalf. +FACTS +11. Manitex manufactures and distributes cranes, forklifts and heavy equipment. +Historically, many of Manitex’s largest customers purchased its equipment for use in support of +the oil and gas industry. As a result, Manitex’s business generally experienced a downturn in +periods when the price of oil diminished substantially. +The Lift Ventures Inventory Fraud +12. In January 2014, during a downturn in Manitex’s business, Manitex’s Load King +subsidiary in Elk Point, South Dakota reported to Manitex’s headquarters that it had found a +shortfall of approximately $1.4 million while conducting its year-end 2013 physical inventory +count. After learning about the shortfall, Rooke asked Harrison to travel to South Dakota to meet +with Load King’s general manager and controller to address the inventory shortfall. +13. ASC 330 (“Inventory”) is the relevant accounting standard for inventory issued by +the Financial Accounting Standards Board (“FASB”). ASC 330-10 sets forth guidance concerning +the subsequent measurement of inventory, including the recording of inventory values at the lower +of cost or market value. For entities employing First-In-First-Out inventory measurement, as was +the case with Manitex, ASC-330-10-35-1B specifically states that when “evidence exists that the +net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss +in earnings in the period in which it occurs.” +14. At Rooke’s instruction, Harrison directed Load King’s general manager and +controller to override the physical inventory count and add the missing inventory back onto Load +King’s books and records so that Load King would not have to write off the missing inventory and +recognize a loss in earnings. When the general manager asked Rooke for further information, +Rooke told him to follow Harrison’s instructions. Harrison provided Load King’s general manager +and controller with lists purporting to show the missing inventory and told them that the inventory +was physically located at Manitex’s Crane & Machinery subsidiary in Manitex’s headquarters in +Illinois. In reality, however, the inventory did not exist and should have been written off. +15. At Rooke’s direction, Harrison also provided Crane & Machinery’s controller with +fictitious journal entries memorializing the inventory transfer and instructed the controller to record +the transfer in Crane & Machinery’s books and records. In May 2014, Crane & Machinery’s +controller transmitted a list of the fake inventory to Manitex’s external auditor as support for the + 5 +inventory transfer. No one at Manitex informed the external auditor that the inventory list was +fake and could not be relied upon. +16. In the fall of 2014, senior officials at Manitex, including Rooke, began discussing +the creation of a joint venture with a foreign company owned by a Manitex executive. However, +they decided not to proceed with the joint venture after Manitex, in consultation with its external +auditor, determined that the joint venture would need to be consolidated on Manitex’s books and +records. +17. Manitex’s CEO then tasked Rooke with forming an independent joint venture with +the related foreign company and two additional foreign partners that would not need to be +consolidated. The purported purpose of the new entity was to utilize inventory that Manitex no +longer was using in North America to manufacture cranes and forklifts. +18. Later in 2014, at Rooke’s direction, Harrison created fake shipping documents to +reflect the transfer of the $1.39 million of nonexistent Load King inventory to the related foreign +company’s U.S. operation. Harrison used the names and letterhead of real transportation +companies that did business with Manitex in creating the shipping documents to make them appear +to be authentic. He and Rooke then used different colored pens to sign the documents with fake +names to make it appear as if the documents had been signed by both the shipping and receiving +parties. Rooke told Harrison that the fake shipping documents were needed to provide Manitex’s +external auditor with audit evidence that the inventory had been transferred. Harrison also rented +storage trailers to “store” the nonexistent inventory in case Manitex’s auditor asked where the +inventory was located. +19. On December 16, 2014, Manitex formed Lift Ventures with the three foreign +companies and agreed to contribute inventory and licenses in exchange for a 25% interest in the +joint venture. Rooke signed the joint venture agreement on Manitex’s behalf and chose which +inventory to contribute. +20. On December 31, 2014, at Rooke’s direction, Manitex contributed to Lift Ventures +$4.56 million of older inventory from a Canadian subsidiary and the $1.39 million of nonexistent +Load King inventory purportedly held at Crane & Machinery. The inventory contributions were +recorded in Manitex’s books and records as a non-marketable equity investment. +21. In January 2015, with Rooke’s knowledge, Crane & Machinery’s controller +provided the fake shipping documents that Rooke and Harrison had created to Manitex’s external +auditor to substantiate the Load King inventory contributions. No one at Manitex informed the +external auditor that the documents were fake or could not be relied upon. +22. In reality, the $1.39 million Load King inventory contribution did not exist and +never was transferred to Lift Ventures. +23. As a result of the fraudulent conduct above, Manitex overstated its 2014 operating +income by approximately 11% and its pre-tax income by approximately 15%. These amounts +were material to Manitex’s financial statements. + 6 +24. Despite his knowledge of the fraud, Rooke signed management representation +letters to Manitex’s external auditor between 2014 and the third quarter of 2016 denying any +knowledge of fraud. +25. Manitex continued to list its equity investment in Lift Ventures at close to its +original value in its Forms 10-Q and 10-K until the third quarter of 2016 when Manitex determined +its investment was fully impaired and wrote off its entire remaining investment of approximately +$5.65 million in Lift Ventures. +The SVW Revenue Recognition Fraud +26. After another downturn in the oil and gas services industry in late 2015 impacted +the demand by many of Manitex’s customers, Manitex began seeking new purchasers for its +cranes. Manitex decided to expand its small rental business, and Harrison was charged with +developing a rental business plan. +27. In March 2016, Manitex entered into an agreement with SVW, a dormant company +that never had any operations, revenue, or significant assets, to purchase Manitex cranes and rent +them to third parties. As part of the agreement, between April 2016 and January 2017, Manitex +paid SVW’s owner a monthly fee of $16,000 to find rental customers for Manitex and SVW. +SVW did not find any rental customers for the cranes. +28. SVW did not have a storage facility or the ability to take physical delivery of the +cranes. Manitex kept the cranes at an offsite storage yard it leased in Texas and recorded the sales +in its books and records as “bill and hold” transactions. +29. In April 2016, Rooke asked Harrison to take charge of the SVW relationship. +30. Because SVW did not have the financial ability to obtain financing or otherwise +pay for the cranes it was purchasing from Manitex, Harrison negotiated with various financing +companies and prepared financing documents for SVW’s owner to sign. In consultation with +Rooke, Harrison also prepared “remarketing agreements” which obligated Manitex to guarantee +that payments would be made to fulfill SVW’s financing obligations. Harrison also orally told the +financing companies that Manitex would buy back any cranes from SVW upon default. +31. In order to conceal the fact that Manitex was paying for SVW’s financing +obligations, Harrison proposed the idea of creating a purported financing subsidiary for SVW. +Rooke sarcastically suggested the possibility of calling the purported subsidiary “Vandalay +Industries,” the name of a fake company repeatedly referenced in the Seinfeld television show. +Harrison named the subsidiary RCSC, created RCSC as a corporate entity, and listed SVW’s +owner as its president. Harrison also opened a bank account for RCSC and listed himself and +SVW’s owner as co-signers. In reality, RCSC was controlled by Harrison and Rooke, and SVW’s +owner was unaware of the RCSC bank account and had no control over RCSC. +32. Harrison directed SVW’s owner to send him all of the invoices for the SVW crane +financing loans. Then, in order to make the financing payments through Crane & Machinery, +Harrison created a series of fraudulent invoices on RCSC letterhead primarily for “consulting” and + 7 +other fictitious services that RCSC purportedly provided to Manitex. In reality, none of the RCSC +invoices were legitimate and they instead contained fictitious descriptions for amounts necessary to +fund the monthly payments that SVW was required to make to the financing companies for the +cranes it purchased from Manitex. +33. Harrison submitted the fake invoices to Crane & Machinery’s controller for entry +into Crane & Machinery’s payment system. Harrison then directed Crane & Machinery’s +controller to submit the fake invoices to Schneider, as Manitex’s controller, for approval. +34. Schneider knew that the RCSC invoices were not genuine and, on at least two +occasions, changed the invoice descriptions to reflect another purpose in order to make them more +believable. Schneider also knew that the purpose of the invoices was to make SVW’s financing +payments for its purported purchases of cranes from Manitex. Rooke also knew that the invoices +were fictitious and were designed to conceal Manitex’s payments of SVW’s financing obligations. +Despite this knowledge, Rooke instructed Schneider to pay the invoices when Harrison brought +them to Schneider. +35. Based on the RCSC invoices prepared by Harrison, and upon Schneider’s approval, +Manitex made payments through Crane & Machinery of approximately $1.3 million to RCSC in +2016 and approximately $600,000 during 2017 to cover SVW’s financing obligations in +connection with SVW’s “purchase” of the cranes from Manitex. +36. Pursuant to its agreement with Manitex, SVW “purchased” 39 cranes from Manitex +for a combined cost of $15 million throughout 2016, including: approximately $9.7 million during +the first quarter of 2016, approximately $2.9 million during the second quarter of 2016, +approximately $1.7 million during the third quarter of 2016, and approximately $538,000 during +the fourth quarter of 2016. SVW later returned 10 of the 39 cranes to Manitex during the third and +fourth quarters of 2016. As a result, Manitex recorded revenue of approximately $12 million from +the remaining 29 cranes purportedly sold to SVW during 2016. +37. When its business started to improve in late 2016, Manitex began “purchasing” +the cranes back from SVW and reselling them to third-party customers. +38. Despite his knowledge discussed above, Rooke signed quarterly management +representation letters to Manitex’s external auditor denying any knowledge of fraud during the first +three quarters of 2016 before he left his employment at Manitex. +39. Despite his knowledge discussed above, Schneider signed management +representation letters to Manitex’s external auditor denying any knowledge of fraud for year-end +2016 and the first two quarters of 2017. +40. Harrison forged the signature of SVW’s owner on at least one of the audit +confirmations provided to Manitex’s external auditor for the 2016 audit. +41. In October 2017, Manitex’s auditor began asking questions about the accounting +for the crane sales to SVW after discovering a lease agreement listing Manitex as the debt-holder + 8 +for certain of the cranes. In the course of the inquiry, the external auditor also discovered certain of +the facts discussed above. +42. Shortly after the external auditor began its inquiry, Manitex engaged an outside law +firm to conduct an investigation. Based on the investigation’s findings, Manitex terminated +Harrison’s and Schneider’s employment. Rooke was no longer at the company, having previously +left his employment at Manitex in December 2016. +43. After consulting with the external auditor, Manitex determined that it should not +have recognized revenue on the crane sales to SVW. On November 6, 2017, Manitex announced +that its quarterly and annual financial statements for 2016 and the first two quarters of 2017 should +not be relied upon and that a restatement was possible. +44. On April 3, 2018, Manitex filed an amended Form 10-K for 2016 and amended +Forms 10-Q for the first two quarters of 2017 restating its financial results. The restated financial +statements indicated that, as a result of the SVW transactions, Manitex had overstated its 2016 net +revenues by approximately $12 million and its 2016 gross profits by approximately $2.45 million, +representing material overstatements of 6.91% and 8.19%, respectively. The financial statements +for the affected periods included the following material misstatements attributable to SVW: +Impact of SVW Transactions on Net Revenue + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Net +Revenues +102,361* 96,277 74,131 288,959 67,852 51,592 +SVW Transactions (9,688) (2,940) (495) (11,961) 836 459 +Other Adjustments** (45,443) (47,592) (34,505) (103,801) (28,569) - +Net Adjustments (55,131) (50,532) (35,000) (115,762) (27,733) 459 + +Restated Net Revenues 47,230 45,745 39,131 173,197 40,119 52,051 + +Impact of SVW +Transactions as +Percentage of Restated +Net Revenues +-20.5% -6.4% -1.3% -6.9% +2.1% +0.9% + +Impact of SVW Transactions on Gross Profit + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Gross +Profit +18,445 16,845 11,655 48,584 11,793 9,429 +SVW Transactions (2,048) (334) (353) (2,452) 219 182 +Other Adjustments** (7,652) (8,350) (4,760) (16,195) (4,620) (207) + 9 +Net Adjustments (9,700) (8,684) (5,113) (18,647) (4,401) (25) + +Restated Gross Profit 8,745 8,161 6,542 29,937 7,392 9,404 + +Impact of SVW +Transactions as +Percentage of Restated +Gross Profit +-23.4% -4.1% -5.4% -8.2% +3.0% +1.9% +*All Dollar Amounts in Thousands. +** The other adjustments primarily were associated with retroactive presentation of discontinued operations under ASC +205-20. + +VIOLATIONS +45. As a result of the conduct described above, Manitex violated Section 17(a) of the +Securities Act which prohibits fraudulent conduct in connection with the offer or sale of securities, +and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent +conduct in connection with the purchase or sale of securities. +46. As a result of the conduct described above, Manitex violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder which require issuers +of securities registered pursuant to Section 12 of the Exchange Act to file periodic and other +reports with the Commission, including annual, quarterly and current reports, on the appropriate +forms and within the period specified on the form that must contain any material information +necessary to make the required statements made in the report not misleading. +47. As a result of the conduct described above, Manitex violated Section 13(b)(2)(A) of +the Exchange Act which requires issuers of securities registered pursuant to Section 12 of the +Exchange Act to make and keep books, records and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and dispositions of assets. +48. As a result of the conduct described above, Manitex 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, among other things, permit +preparation of financial statements in accordance with Generally Accepted Accounting Principles +to maintain accountability of assets. +MANITEX’S REMEDIAL EFFORTS AND COOPERATION +49. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Manitex and cooperation afforded the Commission staff. +50. Manitex shared facts developed in its internal investigation, including providing +regular updates and analyses and identifying key documents, and also facilitating the +Commission staff’s interviews with witnesses. + 10 +51. Manitex also has taken certain remedial measures, including dismissing or +disciplining employees involved in the conduct described above, and hiring a third-party +consultant to assist Manitex in reviewing and revising its internal controls and procedures. +Manitex has made other organizational changes, such as hiring a new CFO and corporate +controller, and reconfiguring its internal audit function. +UNDERTAKINGS +52. Manitex undertakes to: +a. Cooperate fully with the Commission in any and all investigations, +litigations or other proceedings relating to or arising from the matters +described in the Order. +b. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information reasonably requested by the Commission’s +staff, with a custodian declaration as to their authenticity, if requested. +c. Use its best efforts to cause Manitex’s current and former employees, +officers, directors and consultants to be interviewed by the Commission’s +staff at such times and places as the staff reasonably may direct. +d. Use its best efforts to cause Manitex’s current and former employees, +officers, directors and consultants to appear and testify truthfully and +completely without service of a notice or subpoena in such investigations, +depositions, hearings or trials as may be reasonably requested by the +Commission’s staff. +53. Manitex undertakes to: +a. Continue to review Manitex’s policies, procedures, controls, and training +relating to financial reporting, and to implement, if and where appropriate, +additional policies, procedures, controls and training. +b. At the end of the review, which in no event shall be more than six months +after the date of this Order, Manitex will submit a report to the Commission +staff. The report shall describe the work conducted prior to the date of this +Order, including any changes to Manitex’s policies, procedures, controls and +training relating to financial reporting as a result of that review. The report +shall also describe the additional review performed and any additional +changes. +c. Fully remediate the deficiencies in its internal control over financial +reporting that constituted material weaknesses identified in Manitex’s +Form 10-K filed with the Commission on March 10, 2020 by December +31, 2021, unless an extension has been provided by the Commission’s +staff pursuant to paragraph 54 below. + 11 +d. In the event that the material weaknesses are not fully remediated by +December 31, 2021 and no extension has been provided pursuant to +Paragraph 54, engage an independent consultant (“IC”), not unacceptable +to the Commission’s staff by March 1, 2022 to conduct a comprehensive +review of the then outstanding material weaknesses and of Manitex’s +policies, procedures, controls and training relating to financial reporting, +and to recommend, if and where appropriate, policies, procedures, controls +and training designed to provide reasonable assurances that Manitex’s +internal control over financial reporting is effective. +e. Cooperate fully with the IC by providing access to its own files, books, +records, and personnel as reasonably requested for its review. Manitex’s +engagement of the IC will require the IC to complete its review and make its +recommendations, if any, within six months of being retained. Manitex will +promptly adopt all recommendations of the IC; provided however, that +within sixty (60) days after receiving the IC’s recommendations, Manitex +may, in writing, advise the IC and the Commission (addressed to the +Assistant Director identified below) of any recommendation that it considers +to be unnecessary, unduly burdensome, impractical, or costly. As to any +such recommendations, Manitex shall within thirty (30) days thereafter +propose in writing an alternative policy, procedure, or control designed to +achieve the same objective or purpose. As to any recommendation on which +Manitex and the IC do not agree within forty-five (45) days, after attempting +in good faith to reach an agreement, Manitex will abide by the determination +of the IC. +f. Require the IC 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 IC shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Manitex, +or any of its present or former affiliates, directors, officers, employees, or +agents acting in their capacity. The agreement will also provide that the +IC 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 IC in +performance of his/her duties under this Order shall not, without prior +written consent of the Commission, enter into any employment, +consultant, attorney-client, auditing or other professional relationship with +Manitex, 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. +g. Require that these undertakings shall be binding upon any acquirer or +successor in interest to Manitex. +h. Certify, in writing, compliance with the undertakings set forth above. The +certification shall identify the undertaking(s), provide written evidence of + 12 +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 Manitex +agrees to provide such evidence. The certification and supporting material +shall be submitted to Anne C. McKinley, Assistant Director, with a copy +to the Office of Chief Counsel of the Enforcement Division, no later than +sixty (60) days from the date of the completion of the undertakings. +54. For good cause shown, the Commission’s staff may extend any of the procedural +dates set forth above in Paragraph 53. In the event Manitex decides to request an extension of +any such dates, it shall provide the Commission’s staff a written extension request that explains +the circumstances and rationale for such request. The written extension request shall be +submitted to Anne C. McKinley, Assistant Director, no later than thirty (30) days before the +applicable deadline. +55. Any reports by the IC will likely include confidential financial, proprietary, +competitive business or commercial information. Public disclosure of the reports could +discourage cooperation, impede pending or potential government investigations or undermine the +objectives of the reporting requirement. For these reasons, among others, the reports and the +contents thereof are intended to remain and shall remain non-public, except (1) pursuant to court +order, (2) as agreed to by the parties in writing, (3) to the extent that the Commission determines +in its sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (4) as otherwise required by law. +56. Any reports submitted by Manitex will likely include confidential financial, +proprietary, competitive business or commercial information. Public disclosure of the reports +could discourage cooperation, impede pending or potential government investigations or +undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain non-public, except (1) +pursuant to court order, (2) as agreed to by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (4) as otherwise required by law. +57. In determining whether to accept the Offer, the Commission has considered these +undertakings. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 promulgated thereunder. + 13 +B. Respondent shall comply with the undertakings enumerated in paragraphs 53-56 +above. +C. Respondent shall pay a civil money penalty in the amount of $350,000 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: the first $87,500 within 90 days of the date of this Order, the second $87,500 within +180 days of the Order, the third $87,500 within 270 days of the Order and the fourth $87,500 +within 360 days of the Order. 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 +Manitex International, 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 Anne C. +McKinley, Assistant Director, Securities and Exchange Commission, Chicago Regional Office, +175 West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. + 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 + 14 +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4178.txt b/raw/aaer/2020/AAER-4178.txt new file mode 100644 index 0000000000000000000000000000000000000000..66e0d721f0b2712759b3aa66efc50959e561cccd --- /dev/null +++ b/raw/aaer/2020/AAER-4178.txt @@ -0,0 +1,533 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10861 / September 29, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90043 / September 29, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4178 / September 29, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20100 + +In the Matter of + +ANDREW ROOKE, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Andrew +Rooke (“Rooke” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 + 2 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves financial and accounting fraud by Rooke, the former Chief +Operating Officer (“COO”) of Manitex International, Inc. (“Manitex”), a publicly-traded company +that manufactures and distributes cranes, forklifts and other heavy equipment and machinery. + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . (1) not to possess the requisite qualifications to represent others; (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to +have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + 3 +During downturns in Manitex’s business, Rooke, along with other senior Manitex employees, +engaged in two distinct, fraudulent schemes involving the use of related party entities to engage in +fraudulent accounting practices. The first fraud was perpetrated by Rooke and the former general +manager of Manitex’s Crane & Machinery subsidiary (the “GM”). The second fraud, which +resulted in a restatement, involved Rooke, the GM and Manitex’s former Controller and Chief +Financial Officer (the “CFO”). As a result of the two schemes, Manitex issued materially +misstated financial statements in its public filings for every period from at least the fourth quarter +of 2014 through the second quarter of 2017. + +2. In the first scheme, Manitex improperly accounted for and misled its outside auditor +about its contributions of purported inventory from one of its subsidiaries to Lift Ventures, LLC +(“Lift Ventures”), a joint venture created on December 16, 2014. Beginning in approximately +January 2014, Rooke and the GM created false inventory lists and shipping documents which were +provided to Manitex’s outside auditor to cover up a $1.39 million inventory shortfall at one of +Manitex’s subsidiaries. Subsequently, at Rooke’s direction, Manitex purportedly contributed the +$1.39 million in nonexistent inventory to Lift Ventures, a joint venture Rooke and Manitex created +with three foreign partners, and it was recorded on Manitex’s books as a non-marketable equity +investment. As a result, Manitex overstated its 2014 operating income by approximately 11% and +pre-tax income by approximately 15%. Manitex continued to list its contribution to Lift Ventures +at or close to its full value in its periodic filings with the Commission until September 2016. + +3. In the second scheme, Manitex improperly recognized revenue on and misled its +auditor about approximately $12 million in purported “bill and hold” sales of cranes to S.V.W. +Crane Equipment Company (“SVW”). In March 2016, Manitex approached SVW to enter into an +agreement to purchase Manitex cranes and rent them to third parties. SVW had no operations, +revenue, or significant assets, and did not have the financial ability to obtain financing or otherwise +pay for or store the cranes purchased from Manitex. At Rooke’s direction, the GM took charge of +the SVW relationship, secured the financing for SVW’s crane purchases, and, on behalf of +Manitex, guaranteed the financing for the cranes. The GM, in consultation with Rooke, then +created a purported financing subsidiary for SVW called Rental Consulting Services Company +(“RCSC”), to conceal the fact that Manitex was making the financing payments. In order to make +the payments, the GM created a series of fraudulent invoices on RCSC letterhead for fictitious +services that RCSC purportedly provided to Manitex. The CFO approved the payments although +he knew that the RCSC invoices were not genuine. Manitex should not have recognized revenue +on the purported sales. As a result of the fraud, Manitex overstated its 2016 net revenues by over +6.9% and its 2016 gross profits by approximately 8.2%. On April 3, 2018, Manitex issued restated +financial statements for 2016 and the first two quarters of 2017.4 + +4. As a result of his conduct, Rooke willfully violated Section 17(a) of the Securities +Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 +promulgated thereunder. Rooke also willfully aided and abetted and caused Manitex’s violations + +4 In addition to the adjustments for the second fraud, Manitex also made other unrelated +adjustments to its previously issued financial statements. + 4 +of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 and 13a-13 +promulgated thereunder. + +RESPONDENT + +5. Andrew Rooke, 62 years old, is a resident of Bloomfield Hills, Michigan. Rooke +was Manitex’s President and COO from at least May 2008 until December 2016. As COO, Rooke +was Manitex’s second-highest ranking officer, and reported directly to the Chief Executive Officer +(“CEO”). Rooke’s responsibilities included overseeing and assisting the CFO with financial +forecasting, investor relations, and forward-looking business transactions. He also oversaw +Manitex’s operating segment general managers and reviewed and commented on Manitex’s +quarterly and annual reports. Rooke left Manitex for a position at another company in December +2016. From 1986 to 2020, Rooke was a member of the Institute of Chartered Accountants of +England and Wales, a professional credential corresponding to that of a certified public accountant +in the United States. + +OTHER RELEVANT ENTITIES + +6. Manitex International, Inc., is a Michigan corporation headquartered in +Bridgeview, Illinois, that manufactures and distributes cranes, forklifts and heavy equipment. +Manitex operates through several subsidiaries both in the United States and Europe, including +Crane & Machinery which also was headquartered in Bridgeview, Illinois. Manitex and its +predecessors have been in business since 1993. Manitex has a class of securities registered under +Section 12(b) of the Exchange Act and its shares trade on the NASDAQ as “MNTX.” During the +relevant period, Manitex sold securities to the public pursuant to several Form S-3 registration +statements filed with the Commission. A broad range of investors purchased Manitex stock in +these offerings. During the relevant period, the Form S-3 registration statements incorporated by +reference the company’s public filings with the Commission. + +7. S.V.W. Crane Equipment Company is a Texas corporation established in 1996, +with its office in Pearland, Texas. Prior to the start of its relationship with Manitex in 2016, SVW +had no operations, revenues, or significant assets. + +8. Rental Consulting Services Company is a Texas corporation established in June +2016, as a subsidiary of SVW. RCSC was created and controlled by the GM on Manitex’s behalf. + +FACTS + +9. Manitex manufactures and distributes cranes, forklifts and heavy equipment. +Historically, many of Manitex’s largest customers purchased its equipment for use in support of +the oil and gas industry. As a result, Manitex’s business generally experienced a downturn in +periods when the price of oil diminished substantially. + + + + 5 +The Lift Ventures Inventory Fraud +10. In January 2014, during a downturn in Manitex’s business, Manitex’s Load King +subsidiary in Elk Point, South Dakota reported to Manitex’s headquarters that it had found a +shortfall of approximately $1.4 million while conducting its year-end 2013 physical inventory +count. After learning about the shortfall, Rooke asked the GM to travel to South Dakota to meet +with Load King’s general manager and controller to address the inventory shortfall. +11. ASC 330 (“Inventory”) is the relevant accounting standard for inventory issued by +the Financial Accounting Standards Board (“FASB”). ASC 330-10 sets forth guidance concerning +the subsequent measurement of inventory, including the recording of inventory values at the lower +of cost or market value. For entities employing First-In-First-Out inventory measurement, as was +the case with Manitex, ASC-330-10-35-1B specifically states that when “evidence exists that the +net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss +in earnings in the period in which it occurs.” +12. At Rooke’s instruction, the GM directed Load King’s general manager and +controller to override the physical inventory count and add the missing inventory back onto Load +King’s books and records so that Load King would not have to write off the missing inventory and +recognize a loss in earnings. When the general manager asked Rooke for further information, +Rooke told him to follow the GM’s instructions. The GM provided Load King’s general manager +and controller with lists purporting to show the missing inventory and told them that the inventory +was physically located at Manitex’s Crane & Machinery subsidiary in Manitex’s headquarters in +Illinois. In reality, however, the inventory did not exist and should have been written off. +13. At Rooke’s direction, the GM also provided Crane & Machinery’s controller with +fictitious journal entries memorializing the inventory transfer and instructed the controller to record +the transfer in Crane & Machinery’s books and records. In May 2014, Crane & Machinery’s +controller transmitted a list of the fake inventory to Manitex’s external auditor as support for the +inventory transfer. No one at Manitex informed the external auditor that the inventory list was +fake and could not be relied upon. +14. In the fall of 2014, senior officials at Manitex, including Rooke, began discussing +the creation of a joint venture with a foreign company owned by a Manitex executive. However, +they decided not to proceed with the joint venture after Manitex, in consultation with its external +auditor, determined that the joint venture would need to be consolidated on Manitex’s books and +records. +15. Manitex’s CEO then tasked Rooke with forming an independent joint venture with +the related foreign company and two additional foreign partners that would not need to be +consolidated. The purported purpose of the new entity was to utilize inventory that Manitex no +longer was using in North America to manufacture cranes and forklifts. +16. Later in 2014, at Rooke’s direction, the GM created fake shipping documents to +reflect the transfer of the $1.39 million of nonexistent Load King inventory to the related foreign +company’s U.S. operation. The GM used the names and letterhead of real transportation + 6 +companies that did business with Manitex in creating the shipping documents to make them appear +to be authentic. He and Rooke then used different colored pens to sign the documents with fake +names to make it appear as if the documents had been signed by both the shipping and receiving +parties. Rooke told the GM that the fake shipping documents were needed to provide Manitex’s +external auditor with audit evidence that the inventory had been transferred. The GM also rented +storage trailers to “store” the nonexistent inventory in case Manitex’s auditor asked where the +inventory was located. +17. On December 16, 2014, Manitex formed Lift Ventures with the three foreign +companies and agreed to contribute inventory and licenses in exchange for a 25% interest in the +joint venture. Rooke signed the joint venture agreement on Manitex’s behalf and chose which +inventory to contribute. +18. On December 31, 2014, at Rooke’s direction, Manitex contributed to Lift Ventures +$4.56 million of older inventory from a Canadian subsidiary and the $1.39 million of nonexistent +Load King inventory purportedly held at Crane & Machinery. The inventory contributions were +recorded in Manitex’s books and records as a non-marketable equity investment. +19. In January 2015, with Rooke’s knowledge, Crane & Machinery’s controller +provided the fake shipping documents that Rooke and the GM had created to Manitex’s external +auditor to substantiate the Load King inventory contributions. No one at Manitex informed the +external auditor that the documents were fake or could not be relied upon. +20. In reality, the $1.39 million Load King inventory contribution did not exist and +never was transferred to Lift Ventures. +21. As a result of the fraudulent conduct above, Manitex overstated its 2014 operating +income by approximately 11% and its pre-tax income by approximately 15%. These amounts +were material to Manitex’s financial statements. +22. Despite his knowledge of the fraud, Rooke signed management representation +letters to Manitex’s external auditor between 2014 and the third quarter of 2016 denying any +knowledge of fraud. +23. Manitex continued to list its equity investment in Lift Ventures at close to its +original value in its Forms 10-Q and 10-K until the third quarter of 2016 when Manitex determined +its investment was fully impaired and wrote off its entire remaining investment of approximately +$5.65 million in Lift Ventures. +The SVW Revenue Recognition Fraud +24. After another downturn in the oil and gas services industry in late 2015 impacted +the demand by many of Manitex’s customers, Manitex began seeking new purchasers for its +cranes. Manitex decided to expand its small rental business, and the GM was charged with +developing a rental business plan. + + 7 +25. In March 2016, Manitex entered into an agreement with SVW, a dormant company +that never had any operations, revenue, or significant assets, to purchase Manitex cranes and rent +them to third parties. As part of the agreement, between April 2016 and January 2017, Manitex +paid SVW’s owner a monthly fee of $16,000 to find rental customers for Manitex and SVW. +SVW did not find any rental customers for the cranes. + +26. SVW did not have a storage facility or the ability to take physical delivery of the +cranes. Manitex kept the cranes at an offsite storage yard it leased in Texas and recorded the sales +in its books and records as “bill and hold” transactions. + +27. In April 2016, Rooke asked the GM to take charge of the SVW relationship. + +28. Because SVW did not have the financial ability to obtain financing or otherwise +pay for the cranes it was purchasing from Manitex, the GM negotiated with various financing +companies and prepared financing documents for SVW’s owner to sign. In consultation with +Rooke, the GM also prepared “remarketing agreements” which obligated Manitex to guarantee that +payments would be made to fulfill SVW’s financing obligations. The GM also orally told the +financing companies that Manitex would buy back any cranes from SVW upon default. + +29. In order to conceal the fact that Manitex was paying for SVW’s financing +obligations, the GM proposed the idea of creating a purported financing subsidiary for SVW. +Rooke sarcastically suggested the possibility of calling the purported subsidiary “Vandalay +Industries,” the name of a fake company repeatedly referenced in the Seinfeld television show. The +GM named the subsidiary RCSC, created RCSC as a corporate entity, and listed SVW’s owner as +its president. The GM also opened a bank account for RCSC and listed himself and SVW’s owner +as co-signers. In reality, RCSC was controlled by the GM and Rooke, and SVW’s owner was +unaware of the RCSC bank account and had no control over RCSC. + +30. The GM directed SVW’s owner to send him all of the invoices for the SVW crane +financing loans. Then, in order to make the financing payments through Crane & Machinery, the +GM created a series of fraudulent invoices on RCSC letterhead primarily for “consulting” and +other fictitious services that RCSC purportedly provided to Manitex. In reality, none of the RCSC +invoices were legitimate and they instead contained fictitious descriptions for amounts necessary to +fund the monthly payments that SVW was required to make to the financing companies for the +cranes it purchased from Manitex. + +31. The GM submitted the fake invoices to Crane & Machinery’s controller for entry +into Crane & Machinery’s payment system. The GM then directed Crane & Machinery’s +controller to submit the fake invoices to the CFO, who at the time, was Manitex’s controller, for +approval. + +32. The CFO knew that the RCSC invoices were not genuine and, on at least two +occasions, changed the invoice descriptions to reflect another purpose in order to make them more +believable. The CFO also knew that the purpose of the invoices was to make SVW’s financing +payments for its purported purchases of cranes from Manitex. Rooke also knew that the invoices + 8 +were fictitious and were designed to conceal Manitex’s payments of SVW’s financing obligations. +Despite this knowledge, Rooke instructed the CFO to pay the invoices when the GM brought them +to the CFO. + +33. Based on the RCSC invoices prepared by the GM, and upon the CFO’s approval, +Manitex made payments through Crane & Machinery of approximately $1.3 million to RCSC in +2016 and approximately $600,000 during 2017 to cover SVW’s financing obligations in +connection with SVW’s “purchase” of the cranes from Manitex. + +34. Pursuant to its agreement with Manitex, SVW “purchased” 39 cranes from Manitex +for a combined cost of $15 million throughout 2016, including: approximately $9.7 million during +the first quarter of 2016, approximately $2.9 million during the second quarter of 2016, +approximately $1.7 million during the third quarter of 2016, and approximately $538,000 during +the fourth quarter of 2016. SVW later returned 10 of the 39 cranes to Manitex during the third and +fourth quarters of 2016. As a result, Manitex recorded revenue of approximately $12 million from +the remaining 29 cranes purportedly sold to SVW during 2016. + +35. When its business started to improve in late 2016, Manitex began “purchasing” +the cranes back from SVW and reselling them to third-party customers. + +36. Despite his knowledge discussed above, Rooke signed quarterly management +representation letters to Manitex’s external auditor denying any knowledge of fraud during the first +three quarters of 2016 before he left his employment at Manitex. + +37. In October 2017, Manitex’s auditor began asking questions about the accounting +for the crane sales to SVW after discovering a lease agreement listing Manitex as the debt-holder +for certain of the cranes. In the course of the inquiry, the external auditor also discovered certain of +the facts discussed above. + +38. Shortly after the external auditor began its inquiry, Manitex engaged an outside law +firm to conduct an investigation. Based on the investigation’s findings, Manitex terminated the +GM’s and the CFO’s employment. Rooke was no longer at the company, having previously left +his employment at Manitex in December 2016. + +39. After consulting with the external auditor, Manitex determined that it should not +have recognized revenue on the crane sales to SVW. On November 6, 2017, Manitex announced +that its quarterly and annual financial statements for 2016 and the first two quarters of 2017 should +not be relied upon and that a restatement was possible. + +40. On April 3, 2018, Manitex filed an amended Form 10-K for 2016 and amended +Forms 10-Q for the first two quarters of 2017 restating its financial results. The restated financial +statements indicated that, as a result of the SVW transactions, Manitex had overstated its 2016 net +revenues by approximately $12 million and its 2016 gross profits by approximately $2.45 million, +representing material overstatements of 6.91% and 8.19%, respectively. The financial statements +for the affected periods included the following material misstatements attributable to SVW: + 9 + +Impact of SVW Transactions on Net Revenue + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Net +Revenues +102,361* 96,277 74,131 288,959 67,852 51,592 +SVW Transactions (9,688) (2,940) (495) (11,961) 836 459 +Other Adjustments** (45,443) (47,592) (34,505) (103,801) (28,569) - +Net Adjustments (55,131) (50,532) (35,000) (115,762) (27,733) 459 + +Restated Net Revenues 47,230 45,745 39,131 173,197 40,119 52,051 + +Impact of SVW +Transactions as +Percentage of Restated +Net Revenues +-20.5% -6.4% -1.3% -6.9% +2.1% +0.9% + +Impact of SVW Transactions on Gross Profit + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Gross +Profit +18,445 16,845 11,655 48,584 11,793 9,429 +SVW Transactions (2,048) (334) (353) (2,452) 219 182 +Other Adjustments** (7,652) (8,350) (4,760) (16,195) (4,620) (207) +Net Adjustments (9,700) (8,684) (5,113) (18,647) (4,401) (25) + +Restated Gross Profit 8,745 8,161 6,542 29,937 7,392 9,404 + +Impact of SVW +Transactions as +Percentage of Restated +Gross Profit +-23.4% -4.1% -5.4% -8.2% +3.0% +1.9% +*All Dollar Amounts in Thousands. +** The other adjustments primarily were associated with retroactive presentation of discontinued operations under ASC +205-20. + +VIOLATIONS + +41. As a result of the conduct described above, Rooke willfully violated Section 17(a) +of the Securities Act which prohibits fraudulent conduct in connection with the offer or sale of +securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in connection with the purchase or sale of securities. + + 10 +42. As a result of the conduct described above, Rooke willfully violated Section +13(b)(5) of the Exchange Act which prohibits anyone from knowingly circumventing or knowingly +failing to implement a system of internal accounting controls, or knowingly falsifying any book, +record or account. Also, Rooke willfully violated Exchange Act Rule 13b2-1, which prohibits +any person from, directly or indirectly, falsifying or causing to be falsified, any book, record or +account subject to Exchange Act Section 13(b)(2). + +43. As a result of the conduct described above, Rooke willfully violated Exchange +Act Rule 13b2-2, which prohibits any director or officer of an issuer from, directly or indirectly: +(a) making or causing to be made a materially false or misleading statement; or (b) omitting or +causing another person to omit to state a material fact necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading, to +an accountant in connection with financial statement audits, reviews, or examinations or the +preparation or filing of any document or report required to be filed with the Commission. + +44. As a result of the conduct described above, Rooke willfully aided and abetted and +caused Manitex’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and +13a-13 promulgated thereunder which require issuers of securities registered pursuant to Section +12 of the Exchange Act to file periodic and other reports with the Commission, including annual, +quarterly and current reports, on the appropriate forms and within the period specified on the form +that must contain any material information necessary to make the required statements made in the +report not misleading. + +45. As a result of the conduct described above, Rooke willfully aided and abetted and +caused Manitex’s violations of Section 13(b)(2)(A) of the Exchange Act which requires issuers of +securities registered pursuant to Section 12 of the Exchange Act to make and keep books, records +and accounts which, in reasonable detail, accurately and fairly reflect their transactions and +dispositions of assets. + +46. As a result of the conduct described above, Rooke willfully aided and abetted and +caused Manitex’s violations of 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, among other things, permit preparation of financial statements in +accordance with Generally Accepted Accounting Principles. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Rooke’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED +that: + + 11 +A. Respondent Rooke 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-13, 13b2-1 and +13b2-2 promulgated thereunder. + +B. Respondent Rooke is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. Respondent Rooke is prohibited, pursuant to Section 21C(f) of the Exchange Act, +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 Rooke shall pay a civil money penalty in the amount of $80,000.00 to +the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: (1) $16,000.00, within ten days of entry of this Order; (2) $16,000.00, within 90 days +of entry of this Order; (3) $16,000.00, within 180 of days of entry of this Order; (4) $16,000.00, +within 270 days of entry of this Order; and (5) $16,000.00, within 360 of days of entry of this +Order. Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the +Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + 12 +Payments by check or money order must be accompanied by a cover letter identifying +Andrew Rooke 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 Anne C. McKinley, Assistant +Director, Securities and Exchange Commission, Chicago Regional Office, 175 West Jackson +Boulevard, Suite 1450, Chicago, Illinois 60604. + 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. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4179.txt b/raw/aaer/2020/AAER-4179.txt new file mode 100644 index 0000000000000000000000000000000000000000..6c666dd576cd4893b211b6e607d05d6b1977abbe --- /dev/null +++ b/raw/aaer/2020/AAER-4179.txt @@ -0,0 +1,419 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10862 / September 29, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90044 / September 29, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4179 /September 29, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20101 + +In the Matter of + +STEPHEN HARRISON, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +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 Stephen Harrison (“Harrison” 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 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 finds1 that: + +SUMMARY + +1. This matter involves financial and accounting fraud by Harrison, the former general +manager of the Crane & Machinery subsidiary of Manitex International, Inc. (“Manitex”), a +publicly-traded company that manufactures and distributes cranes, forklifts and other heavy +equipment and machinery. During downturns in Manitex’s business, Harrison, along with other +senior Manitex employees, engaged in two distinct, fraudulent schemes involving the use of related +party entities to engage in fraudulent accounting practices. The first fraud was perpetrated by +Harrison and Manitex’s former Chief Operating Officer (the “COO”). The second fraud, which +resulted in a restatement, involved Harrison, the COO, and Manitex’s former Controller and Chief +Financial Officer (the “CFO”). As a result of the two schemes, Manitex issued materially +misstated financial statements in its public filings for every period from at least the fourth quarter +of 2014 through the second quarter of 2017. +2. In the first scheme, Manitex improperly accounted for and misled its outside auditor +about its contributions of purported inventory from one of its subsidiaries to Lift Ventures, LLC +(“Lift Ventures”), a joint venture created on December 16, 2014. Beginning in approximately +January 2014, Harrison and the COO created false inventory lists and shipping documents which +were provided to Manitex’s outside auditor to cover up a $1.39 million inventory shortfall at one of +Manitex’s subsidiaries. Subsequently, at the COO’s direction, Manitex purportedly contributed the +$1.39 million in nonexistent inventory to Lift Ventures, a joint venture the COO and Manitex +created with three foreign partners, and it was recorded on Manitex’s books as a non-marketable +equity investment. As a result, Manitex overstated its 2014 operating income by approximately +11% and pre-tax income by approximately 15%. Manitex continued to list its contribution to Lift +Ventures at or close to its full value in its periodic filings with the Commission until September +2016. +3. In the second scheme, Manitex improperly recognized revenue on and misled its +auditor about approximately $12 million in purported “bill and hold” sales of cranes to S.V.W. +Crane Equipment Company (“SVW”). In March 2016, Manitex approached SVW to enter into an +agreement to purchase Manitex cranes and rent them to third parties. SVW had no operations, +revenue, or significant assets, and did not have the financial ability to obtain financing or otherwise +pay for or store the cranes purchased from Manitex. At the COO’s direction, Harrison took charge +of the SVW relationship, secured the financing for SVW’s crane purchases, and, on behalf of +Manitex, guaranteed the financing for the cranes. Harrison, in consultation with the COO, then +created a purported financing subsidiary for SVW called Rental Consulting Services Company +(“RCSC”), to conceal the fact that Manitex was making the financing payments. In order to make + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + 3 +the payments, Harrison created a series of fraudulent invoices on RCSC letterhead for fictitious +services that RCSC purportedly provided to Manitex. The CFO approved the payments although +he knew that the RCSC invoices were not genuine. Manitex should not have recognized revenue +on the purported sales. As a result of the fraud, Manitex overstated its 2016 net revenues by over +6.9% and its 2016 gross profits by approximately 8.2%. On April 3, 2018, Manitex issued restated +financial statements for 2016 and the first two quarters of 2017.2 +4. As a result of his conduct, Harrison violated Section 17(a) of the Securities Act, and +Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 +promulgated thereunder. Harrison also caused Manitex’s violations of Exchange Act Sections +13(b)(2)(A) and 13(b)(2)(B). +RESPONDENT + +5. Stephen Harrison, 72 years old, is a resident of Lemont, Illinois. From at least +2008 until approximately 2016, Harrison was the general manager of Manitex’s Crane & +Machinery subsidiary. Between 2016 and his termination in January 2018, Harrison served as +Manitex’s Director of Rental Fleet and Finance. Harrison reported to the COO while he was COO +and then reported to Manitex’s CEO until Harrison’s termination. +OTHER RELEVANT ENTITIES + +6. Manitex International, Inc., is a Michigan corporation headquartered in +Bridgeview, Illinois, that manufactures and distributes cranes, forklifts and heavy equipment. +Manitex operates through several subsidiaries both in the United States and Europe, including +Crane & Machinery which also was headquartered in Bridgeview, Illinois. Manitex and its +predecessors have been in business since 1993. Manitex has a class of securities registered under +Section 12(b) of the Exchange Act and its shares trade on the NASDAQ as “MNTX.” During the +relevant period, Manitex sold securities to the public pursuant to several Form S-3 registration +statements filed with the Commission. A broad range of investors purchased Manitex stock in +these offerings. During the relevant period, the Form S-3 registration statements incorporated by +reference the company’s public filings with the Commission. +7. S.V.W. Crane Equipment Company is a Texas corporation established in 1996, +with its office in Pearland, Texas. Prior to the start of its relationship with Manitex in 2016, SVW +had no operations, revenues, or significant assets. +8. Rental Consulting Services Company is a Texas corporation established in June +2016, as a subsidiary of SVW. RCSC was created and controlled by Harrison on Manitex’s behalf. + + + +2 In addition to the adjustments for the second fraud, Manitex also made other unrelated +adjustments to its previously issued financial statements. + 4 +FACTS +9. Manitex manufactures and distributes cranes, forklifts and heavy equipment. +Historically, many of Manitex’s largest customers purchased its equipment for use in support of +the oil and gas industry. As a result, Manitex’s business generally experienced a downturn in +periods when the price of oil diminished substantially. +The Lift Ventures Inventory Fraud +10. In January 2014, during a downturn in Manitex’s business, Manitex’s Load King +subsidiary in Elk Point, South Dakota reported to Manitex’s headquarters that it had found a +shortfall of approximately $1.4 million while conducting its year-end 2013 physical inventory +count. After learning about the shortfall, the COO asked Harrison to travel to South Dakota to +meet with Load King’s general manager and controller to address the inventory shortfall. +11. ASC 330 (“Inventory”) is the relevant accounting standard for inventory issued by +the Financial Accounting Standards Board (“FASB”). ASC 330-10 sets forth guidance concerning +the subsequent measurement of inventory, including the recording of inventory values at the lower +of cost or market value. For entities employing First-In-First-Out inventory measurement, as was +the case with Manitex, ASC-330-10-35-1B specifically states that when “evidence exists that the +net realizable value of inventory is lower than its cost, the difference shall be recognized as a loss +in earnings in the period in which it occurs.” +12. At the COO’s instruction, Harrison directed Load King’s general manager and +controller to override the physical inventory count and add the missing inventory back onto Load +King’s books and records so that Load King would not have to write off the missing inventory and +recognize a loss in earnings. When the general manager asked the COO for further information, +the COO told him to follow Harrison’s instructions. Harrison provided Load King’s general +manager and controller with lists purporting to show the missing inventory and told them that the +inventory was physically located at Manitex’s Crane & Machinery subsidiary in Manitex’s +headquarters in Illinois. In reality, however, the inventory did not exist and should have been +written off. +13. At the COO’s direction, Harrison also provided Crane & Machinery’s controller +with fictitious journal entries memorializing the inventory transfer and instructed the controller to +record the transfer in Crane & Machinery’s books and records. In May 2014, Crane & +Machinery’s controller transmitted a list of the fake inventory to Manitex’s external auditor as +support for the inventory transfer. No one at Manitex informed the external auditor that the +inventory list was fake and could not be relied upon. +14. In the fall of 2014, senior officials at Manitex, including the COO, began discussing +the creation of a joint venture with a foreign company owned by a Manitex executive. However, +they decided not to proceed with the joint venture after Manitex, in consultation with its external +auditor, determined that the joint venture would need to be consolidated on Manitex’s books and +records. + 5 +15. Manitex’s CEO then tasked the COO with forming an independent joint venture +with the related foreign company and two additional foreign partners that would not need to be +consolidated. The purported purpose of the new entity was to utilize inventory that Manitex no +longer was using in North America to manufacture cranes and forklifts. +16. Later in 2014, at the COO’s direction, Harrison created fake shipping documents to +reflect the transfer of the $1.39 million of nonexistent Load King inventory to the related foreign +company’s U.S. operation. Harrison used the names and letterhead of real transportation +companies that did business with Manitex in creating the shipping documents to make them appear +to be authentic. He and the COO then used different colored pens to sign the documents with fake +names to make it appear as if the documents had been signed by both the shipping and receiving +parties. The COO told Harrison that the fake shipping documents were needed to provide +Manitex’s external auditor with audit evidence that the inventory had been transferred. Harrison +also rented storage trailers to “store” the nonexistent inventory in case Manitex’s auditor asked +where the inventory was located. +17. On December 16, 2014, Manitex formed Lift Ventures with the three foreign +companies and agreed to contribute inventory and licenses in exchange for a 25% interest in the +joint venture. The COO signed the joint venture agreement on Manitex’s behalf and chose which +inventory to contribute. +18. On December 31, 2014, at the COO’s direction, Manitex contributed to Lift +Ventures $4.56 million of older inventory from a Canadian subsidiary and the $1.39 million of +nonexistent Load King inventory purportedly held at Crane & Machinery. The inventory +contributions were recorded in Manitex’s books and records as a non-marketable equity +investment. +19. In January 2015, with the COO’s knowledge, Crane & Machinery’s controller +provided the fake shipping documents that the COO and Harrison had created to Manitex’s +external auditor to substantiate the Load King inventory contributions. No one at Manitex +informed the external auditor that the documents were fake or could not be relied upon. +20. In reality, the $1.39 million Load King inventory contribution did not exist and +never was transferred to Lift Ventures. +21. As a result of the fraudulent conduct above, Manitex overstated its 2014 operating +income by approximately 11% and its pre-tax income by approximately 15%. These amounts +were material to Manitex’s financial statements. +22. Manitex continued to list its equity investment in Lift Ventures at close to its +original value in its Forms 10-Q and 10-K until the third quarter of 2016 when Manitex determined +its investment was fully impaired and wrote off its entire remaining investment of approximately +$5.65 million in Lift Ventures. + + + 6 +The SVW Revenue Recognition Fraud +23. After another downturn in the oil and gas services industry in late 2015 impacted +the demand by many of Manitex’s customers, Manitex began seeking new purchasers for its +cranes. Manitex decided to expand its small rental business, and Harrison was charged with +developing a rental business plan. +24. In March 2016, Manitex entered into an agreement with SVW, a dormant company +that never had any operations, revenue, or significant assets, to purchase Manitex cranes and rent +them to third parties. As part of the agreement, between April 2016 and January 2017, Manitex +paid SVW’s owner a monthly fee of $16,000 to find rental customers for Manitex and SVW. +SVW did not find any rental customers for the cranes. +25. SVW did not have a storage facility or the ability to take physical delivery of the +cranes. Manitex kept the cranes at an offsite storage yard it leased in Texas and recorded the sales +in its books and records as “bill and hold” transactions. +26. In April 2016, the COO asked Harrison to take charge of the SVW relationship. +27. Because SVW did not have the financial ability to obtain financing or otherwise +pay for the cranes it was purchasing from Manitex, Harrison negotiated with various financing +companies and prepared financing documents for SVW’s owner to sign. In consultation with the +COO, Harrison also prepared “remarketing agreements” which obligated Manitex to guarantee that +payments would be made to fulfill SVW’s financing obligations. Harrison also orally told the +financing companies that Manitex would buy back any cranes from SVW upon default. +28. In order to conceal the fact that Manitex was paying for SVW’s financing +obligations, Harrison proposed the idea of creating a purported financing subsidiary for SVW. The +COO sarcastically suggested the possibility of calling the purported subsidiary “Vandalay +Industries,” the name of a fake company repeatedly referenced in the Seinfeld television show. +Harrison named the subsidiary RCSC, created RCSC as a corporate entity, and listed SVW’s +owner as its president. Harrison also opened a bank account for RCSC and listed himself and +SVW’s owner as co-signers. In reality, RCSC was controlled by Harrison and the COO, and +SVW’s owner was unaware of the RCSC bank account and had no control over RCSC. +29. Harrison directed SVW’s owner to send him all of the invoices for the SVW crane +financing loans. Then, in order to make the financing payments through Crane & Machinery, +Harrison created a series of fraudulent invoices on RCSC letterhead primarily for “consulting” and +other fictitious services that RCSC purportedly provided to Manitex. In reality, none of the RCSC +invoices were legitimate and they instead contained fictitious descriptions for amounts necessary to +fund the monthly payments that SVW was required to make to the financing companies for the +cranes it purchased from Manitex. +30. Harrison submitted the fake invoices to Crane & Machinery’s controller for entry +into Crane & Machinery’s payment system. Harrison then directed Crane & Machinery’s +controller to submit the fake invoices to the CFO, who at the time was Manitex’s controller, for +approval. + 7 +31. The CFO knew that the RCSC invoices were not genuine and, on at least two +occasions, changed the invoice descriptions to reflect another purpose in order to make them more +believable. The CFO also knew that the purpose of the invoices was to make SVW’s financing +payments for its purported purchases of cranes from Manitex. The COO also knew that the +invoices were fictitious and were designed to conceal Manitex’s payments of SVW’s financing +obligations. Despite this knowledge, the COO instructed the CFO to pay the invoices when +Harrison brought them to the CFO. +32. Based on the RCSC invoices prepared by Harrison, and upon the CFO’s approval, +Manitex made payments through Crane & Machinery of approximately $1.3 million to RCSC in +2016 and approximately $600,000 during 2017 to cover SVW’s financing obligations in +connection with SVW’s “purchase” of the cranes from Manitex. +33. Pursuant to its agreement with Manitex, SVW “purchased” 39 cranes from Manitex +for a combined cost of $15 million throughout 2016, including: approximately $9.7 million during +the first quarter of 2016, approximately $2.9 million during the second quarter of 2016, +approximately $1.7 million during the third quarter of 2016, and approximately $538,000 during +the fourth quarter of 2016. SVW later returned 10 of the 39 cranes to Manitex during the third and +fourth quarters of 2016. As a result, Manitex recorded revenue of approximately $12 million from +the remaining 29 cranes purportedly sold to SVW during 2016. +34. When its business started to improve in late 2016, Manitex began “purchasing” +the cranes back from SVW and reselling them to third-party customers. +35. Harrison forged the signature of SVW’s owner on at least one of the audit +confirmations provided to Manitex’s external auditor for the 2016 audit. +36. In October 2017, Manitex’s auditor began asking questions about the accounting +for the crane sales to SVW after discovering a lease agreement listing Manitex as the debt-holder +for certain of the cranes. In the course of the inquiry, the external auditor also discovered certain of +the facts discussed above. +37. Shortly after the external auditor began its inquiry, Manitex engaged an outside law +firm to conduct an investigation. Based on the investigation’s findings, Manitex terminated +Harrison’s and the CFO’s employment. The COO was no longer at the company, having +previously left his employment at Manitex in December 2016. +38. After consulting with the external auditor, Manitex determined that it should not +have recognized revenue on the crane sales to SVW. On November 6, 2017, Manitex announced +that its quarterly and annual financial statements for 2016 and the first two quarters of 2017 should +not be relied upon and that a restatement was possible. +39. On April 3, 2018, Manitex filed an amended Form 10-K for 2016 and amended +Forms 10-Q for the first two quarters of 2017 restating its financial results. The restated financial +statements indicated that, as a result of the SVW transactions, Manitex had overstated its 2016 net +revenues by approximately $12 million and its 2016 gross profits by approximately $2.45 million, + 8 +representing material overstatements of 6.91% and 8.19%, respectively. The financial statements +for the affected periods included the following material misstatements attributable to SVW: +Impact of SVW Transactions on Net Revenue + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Net +Revenues +102,361* 96,277 74,131 288,959 67,852 51,592 +SVW Transactions (9,688) (2,940) (495) (11,961) 836 459 +Other Adjustments** (45,443) (47,592) (34,505) (103,801) (28,569) - +Net Adjustments (55,131) (50,532) (35,000) (115,762) (27,733) 459 + +Restated Net Revenues 47,230 45,745 39,131 173,197 40,119 52,051 + +Impact of SVW +Transactions as +Percentage of Restated +Net Revenues +-20.5% -6.4% -1.3% -6.9% +2.1% +0.9% + +Impact of SVW Transactions on Gross Profit + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Gross +Profit +18,445 16,845 11,655 48,584 11,793 9,429 +SVW Transactions (2,048) (334) (353) (2,452) 219 182 +Other Adjustments** (7,652) (8,350) (4,760) (16,195) (4,620) (207) +Net Adjustments (9,700) (8,684) (5,113) (18,647) (4,401) (25) + +Restated Gross Profit 8,745 8,161 6,542 29,937 7,392 9,404 + +Impact of SVW +Transactions as +Percentage of Restated +Gross Profit +-23.4% -4.1% -5.4% -8.2% +3.0% +1.9% +*All Dollar Amounts in Thousands. +** The other adjustments primarily were associated with retroactive presentation of discontinued operations under ASC +205-20. + +VIOLATIONS + +40. As a result of the conduct described above, Harrison violated Section 17(a) of the +Securities Act which prohibits fraudulent conduct in connection with the offer or sale of securities, + 9 +and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent +conduct in connection with the purchase or sale of securities. +41. As a result of the conduct described above, Harrison violated Section 13(b)(5) of +the Exchange Act which prohibits anyone from knowingly circumventing or knowingly failing to +implement a system of internal accounting controls, or knowingly falsifying any book, record or +account. Also, Harrison 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). +42. As a result of the conduct described above, Harrison violated Exchange Act Rule +13b2-2, which, among other things, prohibits any director or officer of an issuer, or any person +acting under their direction, from, directly or indirectly taking any action to coerce, manipulate, +mislead, or fraudulently influence any independent public or certified public accountant engaged in +the performance of an audit or review of the financial statements of that issuer that are required to +be filed with the Commisssion if they knew or should have known that such action, if successful, +could result in rendering the issuer’s financial statements materially misleading. +43. As a result of the conduct described above, Harrison caused Manitex’s violations of +Section 13(b)(2)(A) of the Exchange Act which requires issuers of securities registered pursuant to +Section 12 of the Exchange Act to make and keep books, records and accounts which, in +reasonable detail, accurately and fairly reflect their transactions and dispositions of assets. +44. As a result of the conduct described above, Harrison caused Manitex’s violations of +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, among +other things, permit preparation of financial statements in accordance with Generally Accepted +Accounting Principles. +RESPONDENT’S COOPERATION +In determining to accept the Offer, the Commission considered Respondent Harrison’s +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 Respondent Harrison’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + +A. Respondent Harrison 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), + 10 +13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 +promulgated thereunder. +B. Respondent Harrison is prohibited, pursuant to Section 21C(f) of the Exchange +Act, from acting as an officer or director of any issuer that has a class of securities registered +pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section +15(d) of the Exchange Act. + +C. Respondent Harrison acknowledges that the Commission is not imposing a civil +penalty based upon his cooperation in a Commission investigation and related enforcement +proceedings. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided 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 this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4180.txt b/raw/aaer/2020/AAER-4180.txt new file mode 100644 index 0000000000000000000000000000000000000000..76a5d32319813bb13259cde8b64a9cd2ebe933d9 --- /dev/null +++ b/raw/aaer/2020/AAER-4180.txt @@ -0,0 +1,460 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10863 / September 29, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90045 / September 29, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4180 / September 29, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20102 + +In the Matter of + +MICHAEL SCHNEIDER, +CPA + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND +A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Michael +Schneider, CPA (“Schneider” or “Respondent”) pursuant to Section 8A of the Securities Act of +1933 (“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . (1) not to possess the requisite qualifications to represent others; (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct; or (3) to +have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations issued thereunder. +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves financial and accounting fraud by Schneider, the former +Controller and Chief Financial Officer (“CFO”) of Manitex International, Inc. (“Manitex”), a +publicly-traded company that manufactures and distributes cranes, forklifts and other heavy +equipment and machinery. During a downturn in Manitex’s business, Schneider, along with other +senior Manitex employees, engaged in a fraudulent scheme involving the use of related party +entities to engage in fraudulent accounting practices. The fraud, which resulted in a restatement, +involved Schneider, Manitex’s former Chief Operating Officer (the “COO”), and the former +general manager of Manitex’s Crane & Machinery subsidiary (the “GM”). As a result of the +scheme, Manitex issued materially misstated financial statements in its public filings for every +period in 2016 through the second quarter of 2017. +2. In the scheme, Manitex improperly recognized revenue on and misled its auditor +about approximately $12 million in purported “bill and hold” sales of cranes to S.V.W. Crane +Equipment Company (“SVW”). In March 2016, Manitex approached SVW to enter into an +agreement to purchase Manitex cranes and rent them to third parties. SVW had no operations, +revenue, or significant assets, and did not have the financial ability to obtain financing or otherwise +pay for or store the cranes purchased from Manitex. At the COO’s direction, the GM took charge +of the SVW relationship, secured the financing for SVW’s crane purchases, and, on behalf of + + 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 +Manitex, guaranteed the financing for the cranes. The GM, in consultation with the COO, then +created a purported financing subsidiary for SVW called Rental Consulting Services Company +(“RCSC”), to conceal the fact that Manitex was making the financing payments. In order to make +the payments, the GM created a series of fraudulent invoices on RCSC letterhead for fictitious +services that RCSC purportedly provided to Manitex. Schneider approved the payments although +he knew that the RCSC invoices were not genuine. Manitex should not have recognized revenue +on the purported sales. As a result of the fraud, Manitex overstated its 2016 net revenues by over +6.9% and its 2016 gross profits by approximately 8.2%. On April 3, 2018, Manitex issued restated +financial statements for 2016 and the first two quarters of 2017.4 +3. As a result of his conduct, Schneider willfully violated Section 17(a) of the +Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and +13b2-2 promulgated thereunder. Schneider also willfully aided and abetted and caused Manitex’s +violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 +and 13a-13 promulgated thereunder. +RESPONDENT + +4. Michael Schneider, 56 years old, is a resident of Arlington Heights, Illinois. From +at least November 2015 until August 2017, Schneider served as Manitex’s Controller. From +August 2017 until his termination in January 2018, Schneider served as Manitex’s CFO. +Schneider reported to Manitex’s previous CFO until August 2017 and to Manitex’s CEO +thereafter. Schneider has been a licensed Certified Public Accountant (“CPA”) in the State of +Illinois since May 1995. +OTHER RELEVANT ENTITIES + +5. Manitex International, Inc., is a Michigan corporation headquartered in +Bridgeview, Illinois, that manufactures and distributes cranes, forklifts and heavy equipment. +Manitex operates through several subsidiaries both in the United States and Europe, including +Crane & Machinery which also was headquartered in Bridgeview, Illinois. Manitex and its +predecessors have been in business since 1993. Manitex has a class of securities registered under +Section 12(b) of the Exchange Act and its shares trade on the NASDAQ as “MNTX.” During the +relevant period, Manitex sold securities to the public pursuant to several Form S-3 registration +statements filed with the Commission. A broad range of investors purchased Manitex stock in +these offerings. During the relevant period, the Form S-3 registration statements incorporated by +reference the company’s public filings with the Commission. +6. S.V.W. Crane Equipment Company is a Texas corporation established in 1996, +with its office in Pearland, Texas. Prior to the start of its relationship with Manitex in 2016, SVW +had no operations, revenues, or significant assets. + +4 In addition to the adjustments for the second fraud, Manitex also made other unrelated +adjustments to its previously issued financial statements. + 4 +7. Rental Consulting Services Company is a Texas corporation established in June +2016, as a subsidiary of SVW. RCSC was created and controlled by the GM on Manitex’s behalf. +FACTS +8. Manitex manufactures and distributes cranes, forklifts and heavy equipment. +Historically, many of Manitex’s largest customers purchased its equipment for use in support of +the oil and gas industry. As a result, Manitex’s business generally experienced a downturn in +periods when the price of oil diminished substantially. +9. After a downturn in the oil and gas services industry in late 2015 impacted the +demand by many of Manitex’s customers, Manitex began seeking new purchasers for its cranes. +Manitex decided to expand its small rental business, and the GM was charged with developing a +rental business plan. +10. In March 2016, Manitex entered into an agreement with SVW, a dormant company +that never had any operations, revenue, or significant assets, to purchase Manitex cranes and rent +them to third parties. As part of the agreement, between April 2016 and January 2017, Manitex +paid SVW’s owner a monthly fee of $16,000 to find rental customers for Manitex and SVW. +SVW did not find any rental customers for the cranes. +11. SVW did not have a storage facility or the ability to take physical delivery of the +cranes. Manitex kept the cranes at an offsite storage yard it leased in Texas and recorded the sales +in its books and records as “bill and hold” transactions. +12. In April 2016, the COO asked the GM to take charge of the SVW relationship. +13. Because SVW did not have the financial ability to obtain financing or otherwise +pay for the cranes it was purchasing from Manitex, the GM negotiated with various financing +companies and prepared financing documents for SVW’s owner to sign. In consultation with the +COO, the GM also prepared “remarketing agreements” which obligated Manitex to guarantee that +payments would be made to fulfill SVW’s financing obligations. The GM also orally told the +financing companies that Manitex would buy back any cranes from SVW upon default. +14. In order to conceal the fact that Manitex was paying for SVW’s financing +obligations, the GM proposed the idea of creating a purported financing subsidiary for SVW. The +COO sarcastically suggested the possibility of calling the purported subsidiary “Vandalay +Industries,” the name of a fake company repeatedly referenced in the Seinfeld television show. The +GM named the subsidiary RCSC, created RCSC as a corporate entity, and listed SVW’s owner as +its president. The GM also opened a bank account for RCSC and listed himself and SVW’s owner +as co-signers. In reality, RCSC was controlled by the GM and the COO, and SVW’s owner was +unaware of the RCSC bank account and had no control over RCSC. +15. The GM directed SVW’s owner to send him all of the invoices for the SVW crane +financing loans. Then, in order to make the financing payments through Crane & Machinery, the +GM created a series of fraudulent invoices on RCSC letterhead primarily for “consulting” and +other fictitious services that RCSC purportedly provided to Manitex. In reality, none of the RCSC + 5 +invoices were legitimate and they instead contained fictitious descriptions for amounts necessary to +fund the monthly payments that SVW was required to make to the financing companies for the +cranes it purchased from Manitex. +16. The GM submitted the fake invoices to Crane & Machinery’s controller for entry +into Crane & Machinery’s payment system. The GM then directed Crane & Machinery’s +controller to submit the fake invoices to Schneider, as Manitex’s controller, for approval. +17. Schneider knew that the RCSC invoices were not genuine. Schneider also knew +that the purpose of the invoices was to make SVW’s financing payments for its purported +purchases of cranes from Manitex. Despite his knowledge, on at least two occasions, Schneider +changed the invoice descriptions to reflect another purpose in order to make them more believable. +For example, Schneider changed the description on one invoice to reflect that RCSC had provided +services related to the sale of an unrelated Manitex subsidiary. On another invoice, Schneider +changed the description to reflect that it related to a trade show. The COO also knew that the +invoices were fictitious and were designed to conceal Manitex’s payments of SVW’s financing +obligations. Despite this knowledge, the COO instructed Schneider to pay the invoices when the +GM brought them to Schneider. +18. Based upon Schneider’s approval of the RCSC invoices prepared by the GM, +Manitex made payments through Crane & Machinery of approximately $1.3 million to RCSC in +2016 and approximately $600,000 during 2017 to cover SVW’s financing obligations in +connection with SVW’s “purchase” of the cranes from Manitex. +19. Pursuant to its agreement with Manitex, SVW “purchased” 39 cranes from Manitex +for a combined cost of $15 million throughout 2016, including: approximately $9.7 million during +the first quarter of 2016, approximately $2.9 million during the second quarter of 2016, +approximately $1.7 million during the third quarter of 2016, and approximately $538,000 during +the fourth quarter of 2016. SVW later returned 10 of the 39 cranes to Manitex during the third and +fourth quarters of 2016. As a result, Manitex recorded revenue of approximately $12 million from +the remaining 29 cranes purportedly sold to SVW during 2016. +20. When its business started to improve in late 2016, Manitex began “purchasing” +the cranes back from SVW and reselling them to third-party customers. +21. Despite his knowledge discussed above, Schneider signed management +representation letters to Manitex’s external auditor denying any knowledge of fraud for year-end +2016 and the first two quarters of 2017. +22. In October 2017, Manitex’s auditor began asking questions about the accounting +for the crane sales to SVW after discovering a lease agreement listing Manitex as the debt-holder +for certain of the cranes. In the course of the inquiry, the external auditor also discovered certain of +the facts discussed above. +23. Shortly after the external auditor began its inquiry, Manitex engaged an outside law +firm to conduct an investigation. Based on the investigation’s findings, Manitex terminated + 6 +Schneider’s and the GM’s employment. The COO was no longer at the company, having +previously left his employment at Manitex in December 2016. +24. After consulting with the external auditor, Manitex determined that it should not +have recognized revenue on the crane sales to SVW. On November 6, 2017, Manitex announced +that its quarterly and annual financial statements for 2016 and the first two quarters of 2017 should +not be relied upon and that a restatement was possible. +25. On April 3, 2018, Manitex filed an amended Form 10-K for 2016 and amended +Forms 10-Q for the first two quarters of 2017 restating its financial results. The restated financial +statements indicated that, as a result of the SVW transactions, Manitex had overstated its 2016 net +revenues by approximately $12 million and its 2016 gross profits by approximately $2.45 million, +representing material overstatements of 6.91% and 8.19%, respectively. The financial statements +for the affected periods included the following material misstatements attributable to SVW: +Impact of SVW Transactions on Net Revenue + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Net +Revenues +102,361* 96,277 74,131 288,959 67,852 51,592 +SVW Transactions (9,688) (2,940) (495) (11,961) 836 459 +Other Adjustments** (45,443) (47,592) (34,505) (103,801) (28,569) - +Net Adjustments (55,131) (50,532) (35,000) (115,762) (27,733) 459 + +Restated Net Revenues 47,230 45,745 39,131 173,197 40,119 52,051 + +Impact of SVW +Transactions as +Percentage of Restated +Net Revenues +-20.5% -6.4% -1.3% -6.9% +2.1% +0.9% + +Impact of SVW Transactions on Gross Profit + +Reporting Period 1Q 2016 2Q 2016 3Q 2016 YE 2016 1Q2017 2Q2017 + +Originally Reported Gross +Profit +18,445 16,845 11,655 48,584 11,793 9,429 +SVW Transactions (2,048) (334) (353) (2,452) 219 182 +Other Adjustments** (7,652) (8,350) (4,760) (16,195) (4,620) (207) +Net Adjustments (9,700) (8,684) (5,113) (18,647) (4,401) (25) + +Restated Gross Profit 8,745 8,161 6,542 29,937 7,392 9,404 + + 7 +Impact of SVW +Transactions as +Percentage of Restated +Gross Profit +-23.4% -4.1% -5.4% -8.2% +3.0% +1.9% +*All Dollar Amounts in Thousands. +** The other adjustments primarily were associated with retroactive presentation of discontinued operations under ASC +205-20. + +VIOLATIONS +26. As a result of the conduct described above, Schneider willfully violated Section +17(a) of the Securities Act which prohibits fraudulent conduct in connection with the offer or sale +of securities, and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in connection with the purchase or sale of securities. +27. As a result of the conduct described above, Schneider willfully violated Section +13(b)(5) of the Exchange Act which prohibits anyone from knowingly circumventing or knowingly +failing to implement a system of internal accounting controls, or knowingly falsifying any book, +record or account. Also, Schneider willfully violated Exchange Act Rule 13b2-1, which prohibits +any person from, directly or indirectly, falsifying or causing to be falsified, any book, record or +account subject to Exchange Act Section 13(b)(2). +28. As a result of the conduct described above, Schneider willfully violated Exchange +Act Rule 13b2-2, which prohibits any director or officer of an issuer from, directly or indirectly: +(a) making or causing to be made a materially false or misleading statement; or (b) omitting or +causing another person to omit to state a material fact necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading, to +an accountant in connection with financial statement audits, reviews, or examinations or the +preparation or filing of any document or report required to be filed with the Commission. +29. As a result of the conduct described above, Schneider willfully aided and abetted +and caused Manitex’s violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, +and 13a-13 promulgated thereunder which require issuers of securities registered pursuant to +Section 12 of the Exchange Act to file periodic and other reports with the Commission, including +annual, quarterly and current reports, on the appropriate forms and within the period specified on +the form that must contain any material information necessary to make the required statements +made in the report not misleading. +30. As a result of the conduct described above, Schneider willfully aided and abetted +and caused Manitex’s violations of Section 13(b)(2)(A) of the Exchange Act which requires issuers +of securities registered pursuant to Section 12 of the Exchange Act to make and keep books, +records and accounts which, in reasonable detail, accurately and fairly reflect their transactions and +dispositions of assets. +31. As a result of the conduct described above, Schneider willfully aided and abetted +and caused Manitex’s violations of 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 + 8 +of internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to, among other things, permit preparation of financial statements in +accordance with Generally Accepted Accounting Principles. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Schneider’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED +that: + +A. Respondent Schneider 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- +13, 13b2-1 and 13b2-2 promulgated thereunder. + B. Respondent Schneider is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After 5 years from the date of this Order, Respondent Schneider 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 Schneider’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 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. + + 9 + Such an application must satisfy the Commission that: + + (a) Respondent Schneider, 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 Schneider, 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 Respondent Schneider will not receive +appropriate supervision; + (c) Respondent Schneider 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 Schneider acknowledges his responsibility, as long as +he appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission +and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and +quality control standards. + +D. The Commission will consider an application by Respondent Schneider 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 Schneider’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates good +cause will be considered on a facts and circumstances basis with due regard for protecting the +integrity of the Commission’s processes. + +E. Respondent Schneider is prohibited, pursuant to Section 21C(f) of the Exchange +Act, for a period of 5 years from the date of this Order, from acting as an officer or director of +any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or +that is required to file reports pursuant to Section 15(d) of the Exchange Act. + +F. Respondent Schneider shall pay a civil money penalty in the amount of $55,000.00 +to the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made within 10 days of + 10 +the entry of this Order. 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 +Michael Schneider 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 Anne C. McKinley, Assistant +Director, Securities and Exchange Commission, Chicago Regional Office, 175 West Jackson +Boulevard, Suite 1450, Chicago, Illinois 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, 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 + 11 +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4181.txt b/raw/aaer/2020/AAER-4181.txt new file mode 100644 index 0000000000000000000000000000000000000000..8a5d1ed5f0a2047642d9ca00a99f09d4829a64b6 --- /dev/null +++ b/raw/aaer/2020/AAER-4181.txt @@ -0,0 +1,253 @@ + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10867 / September 30, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90050 / September 30, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4181 / September 30, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20107 + +In the Matter of + +BGC PARTNERS, INC., + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO 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 BGC Partners, Inc. (“BGC” 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, 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 + + 2 +Proceedings, Pursuant to 8A of the Securities Act, and Section 21C of the Exchange Act, 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 + + These proceedings arise out of BGC’s false and misleading disclosures concerning how it +calculated a key non-GAAP financial measure, which BGC reported in its quarterly and annual +earnings releases and during earnings calls. BGC called this measure post-tax distributable earnings +(“Post-Tax DE”). From its first quarter of 2015 through its first quarter of 2016 (the “Relevant +Period”), BGC repeatedly emphasized Post-Tax DE as a key financial measure of its after-tax +profitability. To arrive at this measure, BGC multiplied distributable earnings before taxes (“Pre- +Tax DE”) by a DE tax rate. BGC, however, excluded certain expenses from its calculation of +Pre-Tax DE, while continuing to apply a tax deduction associated with these expenses when +calculating the DE tax provision and ultimately, Post-Tax DE. As a result, when calculating +Post-Tax DE, BGC took the benefit of a tax deduction without reducing Pre-Tax DE income by +the amount of the expense that was the basis for the deduction. + + BGC made materially false and misleading statements in its earnings releases during the +Relevant Period about how it calculated Post-Tax DE. Specifically, it stated in substance that the +provision for taxes on Pre-Tax DE took into account all of the adjustments that it made to Pre- +Tax DE. In fact, BGC included tax deductions in its Post-Tax DE calculation associated with +expenses not included in Pre-Tax DE. Because BGC included those deductions in its Post-Tax +DE calculation, its Post-Tax DE figure was inflated by over 30% in its year-end earnings release +for 2015 (the “2015 Earnings Release”), which was furnished to the Commission as an +attachment to a Form 8-K dated February 10, 2016. BGC’s calculation of Post-Tax DE for 2015 +also resulted in an artificially low effective DE tax rate of 15%. A lower effective DE tax rate +increased BGC’s Post-Tax DE, the company’s key non-GAAP measure of after-tax profitability. + +Respondent + 1. BGC is a global brokerage company servicing the financial and real estate +markets. It is a Delaware corporation headquartered in New York, New York. BGC’s common +stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act, and its +shares trade on the NASDAQ under the ticker “BGCP.” BGC files periodic reports, including +Forms 10-K and 10-Q with the Commission, pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + 3 +BGC’s Use of a Non-GAAP Financial Measure + + 2. During the Relevant Period, BGC misleadingly described Post-Tax DE in its +earnings releases as “pre-tax distributable earnings adjusted to assume that all pre-tax +distributable earnings were taxed at the same effective rate.” However, BGC’s Post-Tax DE +methodology did not calculate tax on all Pre-Tax DE. BGC increased Pre-Tax DE by excluding +various expenses. Many of these increases were not taxed because BGC then included +deductions associated with these expenses in calculations of its DE tax provision and ultimately, +Post-Tax DE. Put simply, when BGC calculated Post-Tax DE, BGC left out expenses that would +lower Pre-Tax DE, while at the same time, including those expenses as deductions when +calculating its DE tax provision. As a result, when calculating Post-Tax DE, BGC took the +benefit of a tax deduction without reducing Pre-Tax DE by the amount of the expense that was +the basis for the deduction. +BGC Excluded Expenses in Calculating Post-Tax DE + + 3. As discussed below, BGC used a variety of practices to calculate Post-Tax DE, +resulting in Post-Tax DE being inflated by over 30% in the annual 2015 Earnings Release and by +approximately 25% in the quarterly earnings release for the first quarter of 2016, dated April 27, +2016 (the “2016-1Q Earnings Release”). + +a. $100 Million Settlement + +4. On January 13, 2015, media reports stated that BGC had agreed to pay $100 +million to settle a lawsuit brought by another brokerage firm. In its 2014 GAAP financial +statements, filed in the 2014 Form 10-K, BGC recorded as an expense the approximately $100 +million settlement. In 2015, BGC paid out the settlement to the brokerage firm in cash. + +5. BGC did not reduce Pre-Tax DE for either 2014 or 2015 by any amount for that +legal settlement expense, which BGC had appropriately recognized in its 2014 GAAP financial +statements. However, BGC included a $100 million tax deduction associated with that legal +settlement expense when it calculated the tax provision used to arrive at 2015 Post-Tax DE. As a +result of this conduct, which BGC has never disclosed, BGC’s Post-Tax DE was approximately +19% greater in the 2015 Earnings Release than it would have been had BGC’s calculation not +included a tax deduction for the excluded expense. + +b. Partnership Unit Expenses + +6. In the 2015 Earnings Release, BGC did not reduce Pre-Tax DE by any amount for +partnership unit expenses, an expense related to equity-based employee compensation. +However, when BGC calculated the DE tax provision, it included an approximately $79.9 +million tax deduction for these expenses. As a result, BGC’s Post-Tax DE was +approximately 9% greater in the 2015 Earnings Release than it would have been had BGC’s +calculation not included a tax deduction for the excluded expense. + + + 4 + +c. Charitable Contributions + +7. During the Relevant Period, BGC also used expenses related to charitable +contributions to misleadingly calculate Post-Tax DE. In its 2016-1Q Earnings Release, BGC did +not reduce Pre-Tax DE by any amount for charitable contributions expenses. However, when +BGC calculated its DE tax provision, it included an approximately $17 million tax deduction for +charitable contributions paid in the first quarter of 2016. As a result of BGC taking this tax +deduction, along with tax deductions associated with partnership unit expenses that it also +excluded from Pre-Tax DE, BGC’s Post-Tax DE was approximately 25% greater in the 2016-1Q +Earnings Release than it would have been had BGC’s calculation not included a tax deduction +for the excluded expense. + +8. On May 27, 2016, BGC offered and sold senior notes to investors in a private +placement. + +Violations + +9. As a result of the conduct described above, BGC violated Sections 17(a)(2) and +17(a)(3) of the Securities Act. Section 17(a)(2) 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. Section 17(a)(3) of the +Securities Act 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. Negligence is +sufficient to establish violations of Sections 17(a)(2) and 17(a)(3). Aaron v. SEC, 446 U.S. 680, +697 (1980). + +10. As a result of the conduct described above, BGC violated Section 13(a) of the +Exchange Act and Rule 13a-11 thereunder, which 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, and mandate that periodic +reports contain such further material information as may be necessary to make the required +statements not misleading. + +11. As a result of the conduct described above, BGC violated Rule 100(b) of +Regulation G of the Exchange Act, which prohibits registrants from making public a non-GAAP +financial measure that contains an untrue statement of material fact or omits to state a material +fact necessary in order to make the presentation of the non-GAAP financial measure, in light of +the circumstances under which it is presented, not misleading. + +IV. + + + 5 + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent BGC’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, it is hereby ORDERED that: + + A. Respondent BGC 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, Section 13(a) of the +Exchange Act and Rule 13a-11 thereunder, and Rule 100(b) of Regulation G. + +B. BGC shall, within 7 days of the entry of this Order, pay a civil money penalty in +the amount of $1.4 million to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +BGC 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 Sandeep +Satwalekar, Division of Enforcement, Securities and Exchange Commission, 200 Vesey Street, +Suite 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 + + 6 +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4182.txt b/raw/aaer/2020/AAER-4182.txt new file mode 100644 index 0000000000000000000000000000000000000000..3bde17c86d40b2f1599f6721f5b225eee0a13990 --- /dev/null +++ b/raw/aaer/2020/AAER-4182.txt @@ -0,0 +1,237 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90052 / September 30, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4182 / Septemebr 30, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20109 + +In the Matter of + +HILTON WORLDWIDE +HOLDINGS 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 Hilton Worldwide Holdings Inc. (“Hilton” 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 arises from Hilton Worldwide Holdings Inc.’s failure to disclose in its +definitive proxy statements approximately $1.7 million worth of certain travel-related perquisites +and personal benefits it paid to, or on behalf of, its Chief Executive Officer, President, and member +of its board of directors (the “CEO”) and certain other executives who were eligible for travel- +related benefits (together with the CEO, the “Named Executive Officers”), from 2015 through +2018. The Board-authorized perquisites included, among other things, expenses associated with +the CEO’s personal use of Hilton’s corporate aircraft and the Named Executive Officers’ hotel +stays. In connection with this conduct, Hilton violated Sections 13(a) and 14(a) of the Exchange +Act and Rules 12b-20, 13a-1, and 14a-3 thereunder. +Respondent + 2. Respondent Hilton Worldwide Holdings Inc. is a Delaware corporation +headquartered in McLean, Virginia. Hilton is a global hospitality company with significant +operations in the United States. Hilton’s common stock is registered under Section 12(b) of the +Exchange Act and trades on the New York Stock Exchange under the ticker symbol “HLT.” +Background + 3. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers who receive at least $10,000 worth of such +items in a given year. Item 402 of Regulation S-K also requires identification of all perquisites and +personal benefits by type, and quantification of any perquisite or personal benefit that exceeds the +greater of $25,000 or 10% of total perquisites. + 4. In 2006, the Commission adopted amendments to executive compensation +disclosure rules, including Item 402 of Regulation S-K. See Commission’s Executive +Compensation and Related Person Disclosure Final Rule adopting release, Release Nos. 33- +8732A; 34-54302A; IC-27444A; File No. S7-03-06 (August 29, 2006) (the “Adopting Release”). + +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 +According to the Adopting Release, “an item is not a perquisite or personal benefit,” and does not +need to be reported, “if it is integrally and directly related to the performance of the executive’s +duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit +that has a personal aspect, without regard to whether it may be provided for some business reason +or for the convenience of the company, unless it is generally available on a non-discriminatory +basis to all employees.” The Adopting Release also states that “the concept of a benefit that is +‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical +distinction between an item that a company provides because the executive needs it to do the job, +making it integrally and directly related to the performance of duties, and an item provided for +some other reason, even where that other reason can involve both company benefit and personal +benefit.” + 5. According to the Adopting Release, even where the company “has determined that +an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an +expense is for the benefit or convenience of the company,” that determination “is not responsive to +the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure +purposes.” Indeed, “business purpose or convenience does not affect the characterization of an +item as a perquisite or personal benefit where it is not integrally and directly related to the +performance by the executive of his or her job.” +Facts + 6. Contrary to Item 402 of Regulation S-K and the Commission’s guidance in the +Adopting Release, Hilton’s system for identifying, tracking and calculating perquisites incorrectly +applied a standard whereby a business purpose would be sufficient to determine that certain items +were not perquisites or personal benefits that required disclosure. + 7. In definitive proxy statements disclosing executive compensation paid for 2015 +through 2018, which were filed in 2016 through 2019, Hilton mistakenly disclosed a total of +approximately $587,000 worth of “All Other Compensation” provided to its Named Executive +Officers, with an annual average of approximately $146,750. The disclosed “All Other +Compensation” consisted predominately of 401(k) contributions, insurance premiums, tax +reimbursements, and certain personal travel and lodging costs. +8. However, these same definitive proxy statements failed to disclose approximately +$1.7 million worth of travel-related perquisites and personal benefits provided to its Named +Executive Officers, thereby understating the “All Other Compensation” portion of its Named +Executive Officers’ compensation by an annual average of approximately $425,000. +9. Items that Hilton incorrectly viewed as business expenses and paid for on behalf of +its Named Executive Officers, but did not disclose, include, in the case of the CEO, expenses +associated with personal use of corporate aircraft, and in the case of Named Executive Officers, +expenses associated with hotel stays, as well as taxes related to such items. + 10. From 2016 through 2019, Hilton incorporated its definitive proxy statements into +its annual reports by reference. + 4 + 11. After receipt of a written document and information request from the Commission +staff, Hilton conducted an internal review of its perquisite disclosures and its system for +identifying, tracking and calculating perquisites. On April 24, 2020, Hilton filed a definitive proxy +statement, which, among other things, provided revised disclosures regarding perquisites and +personal benefits provided to its CEO in 2017 and 2018 and to other Named Executive Officers for +the same time period. +Violations + 12. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits issuers with securities registered pursuant to Section 12 of the Exchange Act from +soliciting proxies without furnishing proxy statements containing the information specified in +Schedule 14A, including executive compensation disclosures pursuant to Item 402 of Regulation +S-K. Item 402 of Regulation S-K requires disclosure of the total value of all perquisites and other +personal benefits provided to named executive officers (including chief executive officers) who +receive at least $10,000 worth of such items in a given year. Item 402 of Regulation S-K also +requires disclosure of all perquisites and personal benefits by type, and specific identification of +any perquisite or personal benefit that exceeds the greater of $25,000 or 10% of the total +perquisites. No showing of scienter is required to establish a violation of Section 14(a) of the +Exchange Act and Rule 14a-3 thereunder. See, e.g., Gerstle v. Gamble-Skogmo, Inc., 478 F.2d +1281, 1299-1300 (2d Cir. 1973). As a result of the conduct described above, Hilton violated +Section 14(a) of the Exchange Act and Rule 14a-3 thereunder. + 13. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. The Commission need not +prove scienter to establish a violation of Section 13(a) of the Exchange Act (or Exchange Act +Rules 12b-20 and 13a-1). See, e.g., SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998). As a +result of its incorporation of deficient proxy statements by reference in its annual reports, Hilton +violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. + 14. As a result of the conduct described above, Hilton 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. +Respondent’s Remedial Efforts +15. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. + 5 +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Hilton’s Offer. + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Hilton cease and desist +from committing or causing any violations and any future violations of Sections 13(a) and 14(a) of +the Exchange Act and Rules 12b-20, 13a-1, and 14a-3 thereunder. + + B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $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 +Hilton Worldwide 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 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 + 6 +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 $600,000 based upon its cooperation in a Commission investigation. If at any time +following the entry of the Order, the Division of Enforcement (“Division”) obtains information +indicating that Respondent knowingly provided materially false or misleading information or +materials to the Commission, or in a related proceeding, the Division may, at its sole discretion and +with prior notice to the Respondent, petition the Commission to reopen this matter and seek an +order directing that the Respondent pay an additional civil penalty. Respondent may contest by +way of defense in any resulting administrative proceeding whether it knowingly provided +materially false or misleading information, but may not: (1) contest the findings in the Order; or +(2) assert any defense to liability or remedy, including, but not limited to, any statute of limitations +defense. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4183.txt b/raw/aaer/2020/AAER-4183.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c6843757dbcbf135b151a31f5a7b2ce43469d4b --- /dev/null +++ b/raw/aaer/2020/AAER-4183.txt @@ -0,0 +1,464 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10868 / September 30, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90060 / September 30, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4183 / September 30, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20112 + + +In the Matter of + +HP 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 +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 HP Inc. (“HP” or “Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which is admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Exchange Act of 1933 and +Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease- +and-Desist Order (“Order”), as set forth below. + + 2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. This matter concerns HP’s failure to disclose between November 2015 and June +2016 material information regarding its print supplies channel inventory2 management and sales +practices. During that period, certain regional managers at HP undertook undisclosed sales +practices to increase quarterly operating profit, leading to an erosion of profit margin and an +increase in channel inventory, while failing to disclose known trends and uncertainties associated +with the conduct. +2. Beginning in the second fiscal quarter of 2015, certain regional managers at HP +used a variety of incentives to accelerate, or “pull-in,” sales that they otherwise expected to +materialize in later quarters. In addition to the pull-ins, management in one region sold printing +supplies to distributors known to be involved in selling the HP printing supplies outside of their +territory (internally described as “gray marketing,” and known in the region as “A-Business”) +causing significant margin erosion and cannibalization of HP sales in other regions. +3. Despite the risk that these sales practices could negatively impact HP’s operating +profit in future quarters, HP did not disclose to the market during the relevant time period that its +use of the pull-ins and A-Business were causing decreased margins and increased channel +inventory. HP further failed to disclose facts necessary to make its channel inventory disclosures +not misleading, including that the channel inventory metric employed by the company in +quarterly earnings calls only included channel inventory held by channel partners to which HP +sold directly and not by channel partners further down the distribution chain, thereby disclosing +only an incomplete picture of HP’s channel health. +4. In June 2016, HP announced that it was changing its go-to-market model, in part +to address the practices described above. In connection with that change, HP announced that it +would undertake a channel inventory reduction that would reduce HP’s net revenue by +approximately $450 million during the third and fourth quarters of 2016. HP’s stock price +dropped nearly 6% following the announcement. +Respondent +5. HP Inc. is incorporated in Delaware and headquartered in Palo Alto, California. +HP is a U.S. technology company that, among other things, manufactures and sells personal +computers, printers and printer supplies. On November 1, 2015, Hewlett-Packard Company + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other +person or entity in this or any other proceeding. +2 Channel inventory as used here refers to inventory sold by HP to its distribution channel that +has not yet been sold to end users. Increasing channel inventory indicates that HP has sold more +to its channel partners than the channel is selling to end users. + 3 +completed the spin-off of certain portions of its business into a separate company. The +remaining business was renamed HP Inc. HP retained Hewlett-Packard’s Printing, Personal +Systems and Corporate Investment Segment as well as its former stock ticker symbol on the New +York Stock Exchange (Ticker: HPQ), and it remained registered with the Commission pursuant +to Section 12(b) of the Exchange Act. HP’s fiscal year ends on October 31. +HP Emerges from Hewlett-Packard Split with a Focus on Supplies Revenue +6. Hewlett-Packard was founded in 1939 and developed into a leading American +technology company. On November 1, 2015, Hewlett-Packard separated into two public +companies, and HP emerged from that split operating Hewlett-Packard’s legacy Printing, +Personal Systems and Corporate Investments reportable segments. HP’s Printing segment is +comprised of Consumer Hardware, Commercial Hardware, and Supplies business units. The +Supplies business unit within the Printing segment sells supplies for use in HP printers, including +ink and toner. +7. HP operated three geographic regions: the Americas (“AMS”), Asia Pacific and +Japan (“APJ”) and Europe Middle East Africa (“EMEA”). These regions were consolidated into +HP’s corporate results at its worldwide level. HP policy and contracts with distributors +specifically prohibit the sale of HP products, including supplies, outside the distributor’s +authorized territory. +8. Prior to the split, consistent with the overall secular decline of printing, Hewlett- +Packard’s Printing segment had seen declining revenue for several years, with overall Printing +revenues, as well as Supplies revenues, declining for multiple quarters in a row. However, +because of the high profit margins, the Printing segment, and the Supplies business unit in +particular, still delivered consistent cash flow and operating profit that Hewlett-Packard used to +invest in its other business lines. +9. With the announcement of the split in November 2014, the Printing segment +would take on added importance for the smaller HP that would emerge post-split, especially its +Supplies business unit, which was the primary profit generator for the Printing segment. +Although the Printing segment had previously delivered solid cash flow and operating profit for +Hewlett-Packard, its declining revenue in recent years posed a risk to the smaller post-split +company. +10. HP executives recognized the need to improve revenue and profitability in the +Printing segment following the split, and emphasized the importance of meeting their Supplies +budgets. This led regional managers in the Supplies business unit to take a number of actions in +order to meet their individual budgets that ultimately increased channel inventory and reduced +profit margins worldwide. + + + 4 +Channel Inventory Metrics for HP’s “Push” Go-To-Market Model Only Told Part +of HP’s Channel Inventory Story + +11. Hewlett Packard historically, and HP following the split, operated its print +supplies business in what is known as a “push” go-to-market model. Under the push model, the +company would drive Supplies inventory to its channel partners using various sales incentives, +and then would use a combination of marketing spend and discounts (referred to as “contra +dollars”) to promote the movement of inventory through the channel to end users. Typically at +the end of quarters, sales managers would use these “contra dollars” to try to manage the +business to meet their sales targets to deliver on regional budgets for revenue, operating profit +and channel inventory. +12. HP operated its push model through a multi-tiered channel in all of its regions. +Although the number of tiers varied by region, HP would generally sell products directly to “Tier +1” distributors, which would then sell the products through to “Tier 2” resellers, which would +either sell to end users or to resellers further down the distribution chain. HP recognized revenue +on channel sales at the time of the initial sale to a channel partner. HP had no continuing +obligations following the sale to the Tier 1 partner, and the sales were not contingent on the +eventual sales on to the Tier 2 partner or end user. +13. HP measured its channel inventory levels using Weeks of Supply (WOS), a +calculation of HP’s Tier 1 channel inventory divided by an average of previous weeks’ sales in +order to give an indication of how many weeks of inventory were in the channel if sales +continued at the recent pace. HP did not disclose its WOS metric to the market (or the +calculations behind that metric), but on its quarterly earnings calls HP would disclose whether it +was within or above its internal targeted WOS range as a proxy for its channel health. Internally, +HP referred to the upper end of its WOS range as a ceiling, and regional managers were expected +to maintain their channel inventory below the WOS ceiling. +14. Under the push model, WOS was an important control over sales managers’ +incentives to push excess inventory into the channel. The WOS ceilings for each of the business +units were established by HP’s Finance Department annually and were recognized by sales +managers in the Printing segment as a “high-visibility” and “do not exceed metric.” +15. Undisclosed to the market, HP only included its Tier 1 channel partners’ +inventory in its WOS calculation. HP did not receive channel inventory data from all of its Tier +2 channel partners, and thus only estimated its Tier 2 channel inventory following the end of +quarters using incomplete data. As a result, HP did not report to the market Tier 2 channel +inventory, meaning that disclosures about the company’s position relative to its channel +inventory ceiling only told part of the story regarding HP’s channel health. This allowed HP +sales managers to reduce their WOS number when Tier 1 partners sold channel inventory to Tier +2, even when overall channel inventory was increasing. + + 5 +In Order to Meet Sales Targets, HP Provided Quarter-End Discounts to Pull +Forward Sales from Future Quarters +16. Consistent with a typical push model, HP offered discounts to its Tier 1 +distributors, which the distributors could offer to partners further down the distribution chain to +move product through the channel during the quarter. Beginning in early 2015 and undisclosed +to the market, HP sales managers began offering increased discounts at the end of quarters to +meet sales targets. +17. HP kept track of its sales performance through weekly “flash” reports that +predicted the outcome of quarterly metrics against budget based on the actual performance of +weeks past and anticipated performance for future weeks. Regional managers used the flash +reports to manage to budgeted revenue, operating profit and WOS numbers. By early 2015, HP +began to see regular gaps near the ends of quarters between the flash and budget. +18. In order to achieve their targets, certain managers within the Printing segment +took actions to accelerate sales into the channel to increase quarterly revenue. Known internally +as “accelerations” or “pull-ins,” the managers would authorize additional discounts to encourage +Tier 1 distributors to place orders earlier than they were otherwise planning to place them. In +internal presentations in early 2016, HP defined the accelerations as “pay[ing] the channel to +take additional shipments within a given quarter.” +19. Over time, this use of discounting at the end of quarters created a pattern of lower +sales during the first two months of the quarter and an expectation from the channel that HP +would offer larger discounts in the third month of the quarter. That pattern accelerated in late +2015 and early 2016, with HP managers offering steeper end-of-quarter discounts in order to +meet quarterly sales targets. As a result, HP’s end-of-quarter accelerations and pull-ins were at +lower profit margins than if the sales had materialized in line with anticipated demand. +20. This pattern led to a known trend of increasing channel inventory and lower +margin sales that continued over multiple quarters. HP’s Supplies Tier 1 channel inventory +increased from the middle of its WOS ranges in the fourth quarter of 2014, to above its WOS +range by the end of the second quarter in 2015. Although HP disclosed during quarterly earnings +calls in late 2015 and early 2016 that it was slightly above its targeted range, it failed to disclose +that it was only describing its inventory in Tier 1, and that it lacked visibility into its Tier 2 +channel inventory and beyond. +21. During this period, one regional general manager in the Printing segment +described “unhealthy levels of stock” in Tier 1 and Tier 2, saying that “we needed the Supplies +Revenue & we used significant amounts of contra to push in Supplies at T1 to > 2 weeks above +their optimal levels.” +22. Another regional general manager in the Printing segment explained that +“partners do not want to carry the level of toner that we push into their warehouses. . . . [b]ut we +push more toner in to help deliver on our financial plans.” + 6 +23. Another regional sales manager in the Supplies business unit complained that it +was “becoming increasingly difficult to get partners to place orders at any price” because HP +was “at historical highs with [its] accelerations.” +In Order to Meet Sales Targets, APJ Sales Personnel Engaged in Out-of- +Region Sales +24. In a further attempt to meet revenue and earnings targets, in early 2015 through +June 2016, certain HP sales managers in APJ sold to resellers or brokers known to sell HP +supplies outside of their territory, described internally as “gray marketing” and known in APJ as +“A-Business.” Despite increasing HP’s channel inventory and decreasing its margins +worldwide, the A-Business sales and their impact on HP’s channel inventory and margins were +not disclosed to the market. +25. To execute the A-Business, APJ sales teams sold supplies to resellers or brokers +who they expected would later sell those supplies outside of their territory. The practice had +occurred on a small scale in APJ for years and came to be included in APJ’s budgeting process. +To engage in the A Business, sales managers in APJ provided HP product to resellers and +brokers within their region at higher than normal discounts, knowing they would sell the goods +through a network of firms into the Middle East. +26. Beginning in early 2015 and continuing through the second quarter of 2016, sales +managers in APJ significantly increased the A-Business in order to fill gaps to sales targets. To +entice distributors to take additional product, sales managers offered discounts, in some instances +in excess of forty percent for A-Business sales, while discounts for local distributors were in the +teens. In certain instances, to avoid the gray-marketed goods going from one APJ country to +another and undercutting local prices, managers in certain APJ countries granted additional +discounts to their local distributors, further undercutting margins within the region. Internal +company documents described the A-Business in 2015 and the first half of 2016 being conducted +at contra levels three to four times HP’s normal contra rates. +27. As a result of the higher-than-normal discounts, between early 2015 and June +2016, HP saw a significant increase in product sold through A-Business. Some countries in HP’s +APJ region saw the amount of A-Business surpass the amount of their local business. In +addition, the size of the discounts granted to encourage A-Business climbed, as distributors +demanded larger discounts to accept the increased inventory. +28. Many of the goods sold in the A-Business from APJ later appeared in HP’s +European and African markets. HP managers in EMEA and elsewhere recognized that the A- +Business was “cannibalizing” sales from local HP distributors and reducing HP’s margins, +causing managers in those territories to reduce prices to combat gray marketing from the APJ +region. +29. As territories in HP’s EMEA region reduced prices to combat gray marketing +from the APJ region, some discounted goods from EMEA eventually made their way into certain +markets in the AMS region, causing further sales cannibalization and pressuring margins in the + 7 +AMS region as well. This influx of discounted goods from EMEA further exacerbated already +growing channel inventory challenges in the AMS region. +In an Attempt to Avoid Exceeding Tier 1 Channel Inventory Ceilings, HP +Managers Offered Additional Discounts to Tier 1 Channel Partners to Sell to +Tier 2 Channel Partners +30. In late 2015 and early 2016, as WOS in each of HP’s three regions approached or +exceeded their ceilings, HP’s worldwide executives demanded that regional managers remain +within their WOS ranges while still delivering sales and operating profit targets. +31. Trying to achieve those results, sales managers in the regions offered additional +discounts to HP’s Tier 1 distributors to encourage sales from Tier 1 to Tier 2. The movement of +channel inventory from Tier 1 to Tier 2 partners allowed the regions to reduce WOS, but did not +alter the overall inventory in the channel absent additional end-user sales. For regions that were +at or below their WOS ceiling, pushing inventory into Tier 2 provided additional room for +managers to sell into Tier 1 to increase revenue without exceeding the WOS ceilings. +32. In some cases, because the Tier 2 partners already had what they viewed to be +sufficient inventory, they demanded steeper discounts to offset the cost of holding the additional +inventory. The additional incentives that HP offered would be paid to the Tier 1 partners, which +would pass the discount on to the Tier 2 partner. +33. In some instances in APJ, regional sales managers engaged in “simultaneous sell- +in/sell-through deals,” also called “in-and-out sales,” described by one HP regional sales +manager as “indent supplies that sells-in [to Tier 1] and through [to Tier 2] immediately” which +had “no WOS implications and helps with our profit status.” Nevertheless, because the sales +were based on meeting HP’s budgeted numbers and not on specific end-user demand, they +further increased HP’s Tier 2 channel inventory. Because HP’s disclosures only described its +Tier 1 channel inventory, this additional inventory was not part of HP’s channel inventory +disclosures. +HP Addresses Pull-Ins and A-Business as Part of its Go-To-Market Model Change +34. In the first quarter of 2016 HP began considering a move from the company’s +traditional push model to a demand-driven pull model. Under the pull model, HP’s sales levels +into the channel would be based on end user demand. In connection with the change from the +push to the pull model, HP sales managers involved in the process emphasized the need for +significant channel inventory reductions. +35. HP created a working group to explore a potential change from a push to a pull +model. That working group identified four operational issues to be addressed. Among these +issues were HP’s inefficient use of contra, including regional end of quarter pull-ins to meet +profit targets, and the significant increase in A-Business at elevated contra levels. +36. In internal presentations associated with the change from a push to a pull model, +the company identified significant negative impacts from “WOS Correction” and “Sell-Out + 8 +Impact” that would decrease HP’s revenue and operating profit in the second half of fiscal year +2016. In an effort to lessen the negative impact to operating profit, HP timed the go-to-market +model change to coincide with a divestiture of certain software assets. +37. On June 21, 2016, HP held a “Business Update Call” midway through the +company’s third fiscal quarter. On the call, HP announced its change from a push to a pull +model, and it explained that the company would be making a “one-time investment to reduce the +level of supplies inventory across the channels.” HP disclosed that, “[a]s a result of the channel +inventory reduction, the supplies net revenue is expected to be reduced by $225 million in each +Q3 and Q4.” +38. The $450 million reduction represented 5% of HP’s reported Printing segment +net revenue for the second half of 2016. Asked by an analyst about the size of the inventory +reduction, HP’s CFO described it as “fairly material, because as I mentioned it’s about $450 +million over a couple of quarters.” Following the announcement, HP’s stock price dropped +nearly 6%, eliminating more than $1 billion of market capitalization. +HP’s Disclosure Failures Between 2015 and June 2016 +39. Between November 2015 and June 2016, HP’s disclosures regarding channel +inventory and gross margin omitted material information regarding the impact of the above- +mentioned practices on these metrics, causing HP’s disclosures to be incomplete and misleading. +As a result of the conduct described above, Respondent omitted material information in: (1) its +annual report on Form 10-K for fiscal year 2015; (2) its quarterly reports on Form 10-Qs for the +first and second quarters of 2016; and (3) on quarterly earnings calls during that time period. +40. Pursuant to Item 303 of Regulation S-K, 17 C.F.R. § 229.303, companies with an +obligation to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act are +required to disclose in Item 7 of Management’s Discussion and Analysis of Financial Condition +and Results of Operations of Form 10-K, among other things, information that the registrant +believes to be necessary to an understanding of the company’s “financial condition, changes in +financial condition and results of operations.” +41. Item 303(a)(3)(ii) of Regulation S-K, 17 C.F.R. § 229.303(a), requires such +companies to describe, among other things, “any known trends or uncertainties that have had or +that the registrant reasonably expects will have a material favorable or unfavorable impact on net +sales or revenues or income from continuing operations” in its annual report on Form 10-K. +Instruction 3 to Item 303(a) of Regulation S-K requires that the “discussion and analysis shall +focus specifically on material events and uncertainties known to management that would cause +reported financial information not to be necessarily indicative of future operating results or of +future financial condition.” +42. In its 2015 Form 10-K, HP failed to disclose the known trend of increased +quarter-end discounting leading to margin erosion and an increase in channel inventory, and the +unfavorable impact that the trend would have on HP’s sales and income from continuing +operations, causing HP’s reported results to not necessarily be indicative of its future operating + 9 +results. The failure to disclose that material trend caused HP’s 2015 Form 10-K to be materially +misleading. +43. Moreover, in periodic securities filings between November 2015 and June 2016, +HP repeatedly disclosed decreases in its operating profits caused by declines in HP’s gross +margin. In each instance, HP provided various reasons for the decline in gross margin but +omitted the material impact that pull-ins and the A-Business were having on HP’s gross margins. +Specifically, in its quarterly securities filings for the first two quarters of 2016, HP disclosed that +its decreasing gross margins were the result of “competitive pricing environment” and +“unfavorable currency impacts,” but omitted from its description the impact that its use of pull- +ins and A-Business was having on its gross margins. +44. Moreover, on quarterly earnings calls between November 2015 and June 2016, +HP repeatedly made disclosures regarding the level of its channel inventory relative to the +company’s “target weeks of supply range.” HP’s use of the phrase “channel inventory” without +definition gave the impression that the internal measurement included all of HP’s channel +inventory and was a measure of HP’s overall channel health. However, as described above, HP’s +internal channel inventory metric included only its Tier 1 channel inventory. HP’s failure to +describe its overall channel inventory provided the market with only a partial and misleading +picture of HP’s channel health and caused HP’s channel inventory disclosures to be materially +misleading. +45. In addition, in several instances where HP’s channel inventory was above its +target range, HP omitted from the disclosure the material impact that pull-ins and A-Business +were having on HP’s channel inventory. Specifically, on its quarterly earnings calls in +November 2015 and February 2016, HP omitted from its channel inventory disclosure the impact +that pull-ins and A-business had in causing channel inventory to increase above the target range. +46. During the relevant period, HP issued securities pursuant to employee benefit +plans, including certain incentive compensation plans and an employee stock purchase plan. +Pursuant to those plans, HP issued securities to employees upon their exercise of stock options +and sold securities through its employee stock purchase plan. HP received $0.4 billion in cash +from options exercises and purchases under its employee benefits plans in fiscal year 2015 and +$48 million in fiscal year 2016. +HP’s Disclosure Control Failures +47. Exchange Act Rule 13a-15(a) requires issuers such as HP to “maintain disclosure +controls and procedures . . . as defined in paragraph (e) of this section.” Paragraph (e) defines +disclosure controls and procedures to include, among other things, “disclosure controls and +procedures designed to ensure that information required to be disclosed by an issuer in the +reports that it files or submits under the Act is accumulated and communicated to the issuer's +management, including its principal executive and principal financial officers, or persons +performing similar functions, as appropriate to allow timely decisions regarding required +disclosure.” + 10 +48. HP lacked sufficient disclosure controls and procedures to ensure that the use of +pull-ins and A-Business to meet quarterly sales targets, and their negative impact on margin and +potential impact on future quarters, was provided to the HP executives responsible for the +company’s disclosures in a timely manner as required by Rule 13a-15(a). Among other things, +HP lacked company-wide controls over the use of discounts by regional management. +Moreover, HP’s lack of visibility into channel inventory levels below Tier 1 left it without +meaningful insight into its overall channel health. In addition, HP’s disclosure process lacked +sufficient interaction with operational personnel who reasonably would have been expected to +recognize that the known trends attributable to the pull-ins and A-Business were absent from +HP’s disclosures. +49. Instead, HP’s principal financial officers and principal executive officers who +were responsible for the company’s disclosures learned of the conduct in connection with HP’s +planned shift from a push to a pull model quarters after the actual conduct had taken place. HP’s +failure to have controls and procedures in place to ensure the timely provision of information to +the officers responsible for its disclosures violated Exchange Act Rule 13a-15(a). +Violations +50. As a result of the conduct described above, HP violated Section 17(a)(2) and (3) +of the Securities Act, which prohibit any person from directly or indirectly obtaining money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sales of +securities. +51. In addition, HP violated Section 13(a) of the Exchange Act and Rule 13a-1 and +13a-13 thereunder, which require reporting companies to file with the Commission complete and +accurate annual and quarterly reports. HP also violated Rule 12b-20 of the Exchange Act, which +requires an issuer to include in a statement or report filed with the Commission any information +necessary to make the required statements in the filing not materially misleading. +52. In addition, HP violated Exchange Act Rule 13a-15(a), which requires issuers +required to file reports pursuant to Section 13(a) or 15(d) to maintain disclosure controls and +procedures as defined in Exchange Act Rule 13a-15(e). + +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 shall cease and desist from committing or causing any violations and any future + 11 +violations of Section 17(a)(2) and (3) of the Securities Act and Section 13(a) of the Exchange Act +and Rules 13a-1, 13a-13, 13a-15, and 12b-20 thereunder. +B. Respondent shall, within 30 days of the entry of this Order, pay a civil monetary +penalty of $6,000,000.00 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury. If timely payment is not made, interest shall accrue pursuant to +31 U.S.C. § 3717. +Payments must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Service Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying HP +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 Associate Director Melissa Hodgman, +Division of Enforcement, Securities and Exchange Commission, 100 F Street, NE, Washington, DC +20549. +C. Amounts ordered to be paid as civil money penalties in this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it shall +not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that it shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of this +paragraph, a “Related Investor Action” means a private damages action brought against Respondent +by or on behalf of one or more investors based on substantially the same facts as alleged in the +Order instituted by the Commission in this proceeding. + 12 +D. It is further Ordered that, solely for purposes of exceptions to discharge set forth +in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + +By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4184.txt b/raw/aaer/2020/AAER-4184.txt new file mode 100644 index 0000000000000000000000000000000000000000..5fe0451015a4f0449acb75440a958ee507baefa6 --- /dev/null +++ b/raw/aaer/2020/AAER-4184.txt @@ -0,0 +1,173 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90089 / October 5, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4184 / October 5, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20117 + +In the Matter of + +NICHOLAS TORNELLO, +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 +Nicholas Tornello, CPA (“Respondent” or “Tornello”) 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 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. Tornello, age 33, is and has been a certified public accountant licensed to +practice in the State of New Jersey and Commonwealth of Pennsylvania. He served in various +positions in the accounting group of Hill International, Inc. (“Hill”) from 2009 until March 2017. + + 2. Hill was, at all relevant times, a Delaware corporation. During the relevant +period of time, Hill’s principal place of business was located in either Marlton, New Jersey or +Philadelphia, Pennsylvania. Hill is in the project and construction management consulting +business, and has operations worldwide. Since 2006, Hill has been registered pursuant to Section +12(g) and then 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”). Hill has been +quoted on the NYSE since 2008 under the ticker “Hill.” + + 3. On January 16, 2020, the Commission filed a complaint against Tornello in +SEC v. Hill International, Inc., et al. (No. 1:20-cv-00447-PAE) in the United States District +Court for the Southern District of New York. Subsequently, the case was transferred to the +United States District Court for the Eastern District of Pennsylvania and assigned a new civil +action number, SEC v. Hill International, Inc., et al., (No. 2:20-cv-02143-TJS). On October 1, +2020, the court entered an order permanently enjoining Tornello, by consent, from future +violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder and from aiding +and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, +13a-1, 13a-11, and 13a-13 thereunder. Tornello was also ordered to pay a $25,000 civil money +penalty. + + 4. The Commission’s complaint alleged, among other things, that Tornello +engaged in improper conduct resulting in the improper accounting for certain intercompany +transactions involving foreign currency fluctuations, which caused Hill to materially overstate its +net income in the company’s annual report on Form 10-K for each of the years ended December +31, 2014, 2015, and 2016 and in the company’s quarterly reports on Form 10-Q for each of the +quarters ended March 31, June 30, and September 30 in 2015 and 2016, and for the quarter +ended March 31, 2017. The Complaint alleged that Tornello engaged in a number of improper +accounting practices that materially increased Hill’s Accumulated Other Comprehensive Income +(“AOCI”) on its balance sheet and decreased expenses on its income statement in a departure +from generally accepted accounting principles (“GAAP”). + + + 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 Tornello’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Tornello is suspended from appearing or practicing before the Commission as an +accountant. + + B. After one year from the date of this order, Tornello 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 Tornello’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 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) Tornello, 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) Tornello, 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 Respondent’s + 4 +or the firm’s quality control system that would indicate that +Tornello will not receive appropriate supervision; +(c) Tornello 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) Tornello 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 Tornello 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 Tornello’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis +with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4185.txt b/raw/aaer/2020/AAER-4185.txt new file mode 100644 index 0000000000000000000000000000000000000000..77d8f52f7718c741a16015edca773a9b81925132 --- /dev/null +++ b/raw/aaer/2020/AAER-4185.txt @@ -0,0 +1,1390 @@ + + + + + + + + + + + + + + + + SEC.gov | Hill International, 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\/525196","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 + + + Hill International, Inc. et al. + + + + + + + + + + + + Hill International, Inc. et al. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Obtains Final Judgment Against, and Suspends, Accountant Formerly with Construction Management Consulting Company + + Litigation Release No. 24939 / October 5, 2020 + + Accounting and Auditing Enforcement Release No. 4185 / October 5, 2020 + + Securities and Exchange Commission v. Hill International, Inc. et al. , No. 1:20-cv-02143 (E.D. Pa. filed January 16, 2020) + + + + + + + + + On October 1, 2020, the U.S. District Court for the Eastern District of Pennsylvania entered a final consent judgment against Nicholas Tornello, a former senior accountant at Hill International, Inc. + + The SEC's complaint , filed on January 16, 2020, alleged that Tornello failed to correct approximately $5 million in accounting errors relating to foreign currency exchange losses incurred by Hill, and attempted to "bleed" those losses out over time. As alleged, this conduct reduced the negative impact of the losses, resulting in overstated net income on the company's financial statements. + + Without admitting or denying the SEC's allegations, Tornello consented to the entry of the final judgment, which enjoins him from violating the record-keeping and internal controls provisions of Section 13(b)(5) of the Securities and Exchange Act of 1934 and Rule 13b2-1 thereunder, and from aiding and abetting violations of the books and records and reporting provisions of 13(a) and13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. The judgment also orders Tornello to pay a $25,000 civil penalty. + + In addition, the Commission instituted administrative proceedings, made findings, and, pursuant to Rule 102(e) of the Commission's Rules of Practice, suspended Tornello from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, with a right to apply for reinstatement after one year. Without admitting or denying the Commission's findings, Tornello consented to the suspension. + + The company and Ronald Emma, Hill's former Chief Accounting Officer, previously settled the Commission's claims against them. + + The investigation and litigation were conducted by John V. Donnelly III, Jack Easton, Cecilia B. Connor, and Daniel Berman, and supervised by Jennifer C. Barry, Kingdon Kase, and Kelly L. Gibson of the Philadelphia Regional Office. + + + + + + + + + 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/2020/AAER-4186.txt b/raw/aaer/2020/AAER-4186.txt new file mode 100644 index 0000000000000000000000000000000000000000..5dda8cf57382a32baa3dc5df8e36ffe70a64c559 --- /dev/null +++ b/raw/aaer/2020/AAER-4186.txt @@ -0,0 +1,166 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90166 / October 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4186 / October 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20121 + +In the Matter of +JAMES DEPALMA, CPA +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against James +DePalma (“Respondent” or “DePalma”) 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 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. DePalma, age 69, is a resident of New Canaan, Connecticut. DePalma is a +founding member of a private equity firm which manages nearly 50% of the stock of Revolution +Lighting Technologies, Inc. In September 2012, DePalma was appointed to Revolution’s Board of +Directors, and in July 2015, he became Revolution’s Chief Financial Officer. DePalma retired +from these positions in May 2019. He remains a partner of the private equity firm. DePalma was +an audit partner at a major national audit firm where he worked from 1973 until 1994. DePalma +was registered as a Certified public accountant in the state of New York until 1997. + + 2. Revolution is a Delaware corporation headquartered in Stamford, +Connecticut. Revolution is a manufacturer and marketer of LED lighting solutions for customers +in the industrial, multi-family housing, commercial and government markets in the United States. +Until October 14, 2019, Revolution’s common stock traded on the NASDAQ (RVLT). On June +29, 2020, the Commission temporarily suspended trading in Revolution’s securities because it was +delinquent on its periodic filings with the Commission. + + 3. On September 24, 2020, the Commission filed a complaint against DePalma +in the civil action entitled SEC v. Revolution Lighting Technologies, Inc. et al, Civil Action No. +3:20-cv-01440-CSH, in the United States District Court for the District of Connecticut. On +October 9, 2020, the court entered an order permanently enjoining DePalma, by consent, from +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), +13(b)(5), 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a- +1, 13a-11, and 13a-13, 13a-14, and 13b2-1 thereunder. DePalma was also ordered to pay a +$100,000 civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that from at +least the fourth quarter of 2014 through the second quarter of 2018, DePalma as board member +and Chief Financial Officer of Revolution engaged in disclosure and accounting practices that +operated as a fraud and resulted in Revolution improperly recognizing revenue and reporting +materially false revenue amounts in its financial statements filed with the Commission. The +Complaint alleged that DePalma along with other Revolution executives inflated the revenue +Revolution reported each quarter and at the end of the year by counting revenue from sales much +earlier than accounting rules and Revolution’s own revenue recognition policies permitted. The +Complaint alleged DePalma inflated the revenue by using improper “bill and hold” transactions, +from which Revolution recognized revenue from the sale of lighting products before ever +delivering those products to the customer. + + 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 DePalma’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. DePalma is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, DePalma 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 +DePalma’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) DePalma, 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) DePalma, 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 DePalma’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + (c) DePalma 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 + + (d) DePalma 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 DePalma 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 DePalma’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis +with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4187.txt b/raw/aaer/2020/AAER-4187.txt new file mode 100644 index 0000000000000000000000000000000000000000..8cefff95c3dbe9f99701d45402b121ec89d7803c --- /dev/null +++ b/raw/aaer/2020/AAER-4187.txt @@ -0,0 +1,115 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90167 / October 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4187 / October 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20122 + +In the Matter of +DANIEL O’NEAL, +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Daniel +O’Neal (“Respondent” or “O’Neal”) 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 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. O’Neal, age 49, is a resident of Rome, Georgia. From November 2016 to +October 2017, O’Neal served as the Chief Financial Officer for Value Lighting, the largest division +of Revolution Lighting Technologies, Inc. (“Revolution”). In October 2017, O’Neal became the +CFO and Chief Operations Officer of Revolution’s Multifamily Division. In November 2018, +O’Neal was promoted to COO of Revolution. He remains at Revolution in an operational role. He +has never been a licensed CPA. + + 2. Revolution is a Delaware corporation headquartered in Stamford, +Connecticut. Revolution is a manufacturer and marketer of LED lighting solutions for customers +in the industrial, multi-family housing, commercial and government markets in the United States. +Until October 14, 2019, Revolution’s common stock traded on the NASDAQ (RVLT). On June +29, 2020, the Commission temporarily suspended trading in Revolution’s securities because it was +delinquent on its periodic filings with the Commission. + + 3. On September 24, 2020, the Commission filed a complaint against O’Neal +in the civil action entitled SEC v. Revolution Lighting Technologies, Inc. et al, Civil Action No. +3:20-cv-01440-CSH, in the United States District Court for the District of Connecticut. On +October 9, 2020, the court entered an order permanently enjoining O’Neal, by consent, from future +violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Sections 13(a), +13(b)(5), 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a- +1, 13a-11, and 13a-13, and 13b2-1 thereunder. O’Neal was also ordered to pay a $25,000 civil +money penalty. + + 4. The Commission’s complaint alleged, among other things, that from at least +the fourth quarter of 2016 through the second quarter of 2018, O’Neal as CFO of Revolution’s +largest division engaged in accounting practices that operated as a fraud and resulted in Revolution +improperly recognizing revenue and reporting materially false revenue amounts in its financial +statements filed with the Commission. The Complaint alleged that O’Neal along with other +Revolution executives inflated the revenue Revolution reported quarterly and at year-end by +counting revenue from sales much earlier than accounting rules and Revolution’s own revenue +recognition policies permitted. The Complaint alleged O’Neal inflated the revenue by improperly +accounting for “bill and hold” transactions, for which Revolution recognized revenue from the sale +of lighting products before ever delivering those products to the customer. + + 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 O’Neal’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. O’Neal is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, O’Neal may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4188.txt b/raw/aaer/2020/AAER-4188.txt new file mode 100644 index 0000000000000000000000000000000000000000..89ff5f6cd1758000c15285a1593ec5468685056f --- /dev/null +++ b/raw/aaer/2020/AAER-4188.txt @@ -0,0 +1,116 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90168 / October 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4188 / October 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20123 + +In the Matter of +ALLEN GARNER, +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 Allen +Garner (“Respondent” or “Garner”) 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 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. Garner, age 58, is a resident of Granite Bay, California. From May 2015 to +August 2016, Garner served as the Chief Financial Officer for Value Lighting, the largest division +of Revolution Lighting Technologies, Inc. (“Revolution”). Garner currently works as the Vice +President of Finance of a private company, in Roseville, CA. He has never been a licensed CPA. + + 2. Revolution is a Delaware corporation headquartered in Stamford, +Connecticut. Revolution is a manufacturer and marketer of LED lighting solutions for customers +in the industrial, multi-family housing, commercial and government markets in the United States. +Until October 14, 2019, Revolution’s common stock traded on the NASDAQ (RVLT). On June +29, 2020, the Commission temporarily suspended trading in Revolution’s securities because it was +delinquent on its periodic filings with the Commission. + + 3. On September 24, 2020, the Commission filed a complaint against Garner +in the civil action entitled SEC v. Revolution Lighting Technologies, Inc. et al, Civil Action No. +3:20-cv-01440-CSH, in the United States District Court for the District of Connecticut. On +October 9, 2020, the court entered an order permanently enjoining Garner, by consent, from future +violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(5), +13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, +13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder. Garner was also ordered to pay a $25,000 civil +money penalty. + + 4. The Commission’s complaint alleged, among other things, that from at least the +second quarter of 2015 through the second quarter of 2016, Garner as CFO of Revolution’s +largest division engaged in accounting practices that operated as a fraud and resulted in +Revolution improperly recognizing revenue and reporting materially false revenue amounts in its +financial statements filed with the Commission. The Complaint alleged that Garner along with +other Revolution executives inflated the revenue Revolution reported quarterly and at year-end +by counting revenue from sales much earlier than accounting rules and Revolution’s own +revenue recognition policies permitted. The Complaint alleged Garner inflated the revenue by +improperly accounting for “bill and hold” transactions, for which Revolution recognized revenue +from the sale of lighting products before ever delivering those products to the customer. + + + + + 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 Garner’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Garner is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Garner may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4189.txt b/raw/aaer/2020/AAER-4189.txt new file mode 100644 index 0000000000000000000000000000000000000000..36cff908bf617664f9b2d215393dc3f687f96665 --- /dev/null +++ b/raw/aaer/2020/AAER-4189.txt @@ -0,0 +1,579 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90170 / October 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4189 / October 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20124 + + +In the Matter of + +J&F INVESTIMENTOS, S.A. + JBS, S.A. + JOESLEY BATISTA + WESLEY BATISTA + +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 J&F Investimentos, S.A., (“J&F”), JBS, S.A. +(“JBS”), Joesley Batista, and Wesley Batista (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, Respondents admit the Commission’s +jurisdiction over them and the subject matter of these proceedings, and 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 Respondent s’ Offers of Settlement, the Commission finds1 +that: + +Summary + + 1. This action arises from a bribery scheme by Joesley Batista and Wesley Batista +(hereinafter “the Batistas”), their company J&F, and JBS, a company which J&F and its affiliates +control, and which is the largest meat and protein producer in the world with net revenues in 2019 +in excess of $50 billion. JBS’s shares trade on the Brazilian stock exchange and its American +Depositary Shares trade in the U.S. over-the-counter market. In 2009, the Batistas sought to +continue to expand their meat business into the United States through acquisitions of multiple U.S. +companies. From 2009 through 2015, the Batistas made illicit payments totaling approximately +$150 million for the benefit of then Brazil Finance Minister (“Minister”) and various political +parties and candidates in Brazil at the request and direction of the Minister. The Batistas made the +payments in return for the Minister’s assistance, among other things, in obtaining and maintaining +$2 billion in equity financing (“BNDES Investment”) from the Brazilian National Development +Bank and its affiliate (together “BNDES”) in order to facilitate JBS’ acquisition of U.S. issuer +Pilgrim’s Pride Corporation (“Pilgrims”). + + 2. At the time of the acquisition in December 2009, Pilgrims was under Chapter 11 +bankruptcy protection as a result of the financial crisis’ impact on its operations. The BNDES +Investment, which the bribes facilitated, and which was preserved by the bribe scheme, allowed the +Batistas to acquire Pilgrims and successfully have it exit bankruptcy and continue to operate as a +going concern under the Batista family-controlled conglomerate. Following the acquisition, +Wesley Batista served as CEO of JBS and Chairman of the board for Pilgrims, and Joesley Batista +served as CEO of J&F and a member of the board of Pilgrims. As provided for in the share +purchase and investment agreements, JBS acquired Pilgrims. After the acquisition, unbeknownst +to Pilgrim’s management, the Respondents carried out the bribery scheme and its funding using, at +times, JBS operating accounts which contained funds that were commingled with funds obtained +from Pilgrims through intercompany transfers, special dividends, and other means. The +Respondents then paid bribes at the direction of the Minister. Pilgrim’s books did not reflect this. + + 3. The Batistas, individually and through J&F and JBS, exerted significant control +over Pilgrims. Pilgrims shared office space, overlapping board members and executives, +accounting and SAP systems, and certain internal accounting controls and policy documents with +JBS and its U.S. affiliate, JBS USA. Throughout 2009 to 2015, unbeknownst to Pilgrims +management, the Batistas continued the bribery scheme using, in part, certain JBS operating +accounts which contained funds that were commingled with funds obtained from Pilgrims, through +intercompany transfers, dividend payments, and other means. To further conceal their conduct, 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. + + + 3 +Batistas did not disclose to Pilgrims’ accountants and independent public accountants during due +diligence and audits that certain funds transferred to JBS were commingled with funds used to pay +bribes in Brazil. As a result of this conduct, Joesley Batista, Wesley Batista, J&F, and JBS caused +Pilgrims’ books and records to inaccurately record the transfers and payments and caused Pilgrims’ +failure to maintain an adequate system of internal accounting controls in violation of the books and +records and internal accounting controls provisions of the Foreign Corrupt Practices Act +(“FCPA”). + +Respondents + +4. J&F Investimentos, S.A. (“J&F”) is a private investment holding company based +in Sao Paulo, Brazil. It is wholly owned by brothers Wesley Batista and Joesley Batista. J&F +owns approximately 250 companies in 30 countries worldwide. J&F is the ultimate parent +company of JBS and indirect parent of JBS USA Holdings Lux S.a.r.l. (“JBS USA”) and Pilgrims. +J&F controlled JBS during the relevant period. + +5. JBS, S.A. (“JBS”) is a global meat and protein producer incorporated and +headquartered in Sao Paulo, Brazil. JBS is the world’s largest meat and protein producer, is +publicly traded on the Brazilian stock exchange (Bovespa), and its American Depositary Shares +have been traded on the U.S. OTC markets under the symbol “JBSAY” since May 2009. JBS +through its wholly-owned subsidiary JBS USA, was the indirect parent company of Pilgrims. +During the relevant period, both Joesley and Wesley Batista held most senior executive roles at +JBS. + +6. Joesley Batista, age 48, is a Brazilian national who owned J&F and held multiple +positions in J&F entities, including the roles of CEO and board member of J&F, CEO of JBS from +2006 through 2011, Chairman of the Board of Directors for JBS between 2011 and 2017, Director +of JBS USA through 2017, and Director of Pilgrims from December 2009 through May 25, 2017. + +7. Wesley Batista, age 50, is a Brazilian national who owned J&F and held multiple +positions in J&F entities, including the roles of Director for J&F, CEO of JBS from 2011 to 2017, +CEO of JBS USA from 2007 to 2011, board member of JBS and JBS USA until 2017, and +Chairman of Pilgrims’ board of directors and compensation committee between December 2009 +and June 14, 2017. + +Other Relevant Entities + + 8. JBS USA Holdings Lux S.a.r.l (“JBS USA”) is a Luxembourg holding subsidiary +of JBS and parent company of Pilgrims and other U.S. based meat companies. JBS USA acquired +controlling shares in Pilgrims on or around December 28, 2009, one year after Pilgrims had filed +for Chapter 11 Bankruptcy protection as a result of the financial crisis’ impact on the chicken +market. JBS USA currently owns 78.5% of Pilgrims. + + 9. Pilgrim’s Pride Corporation (“Pilgrims”) is a large chicken and pork producer +and distributor headquartered in Greeley, Colorado. Its common stock trades on the Nasdaq + 4 +Exchange under the ticker symbol “PPC.” From December 2009 to December 2012, its common +stock traded on the New York Stock Exchange (“NYSE”) under the same symbol. From 1986 +until December 2008, its common stock traded on the NYSE under the ticker symbol “PGPD.” +Pilgrims was registered with the Commission under Section 12(b) of the Exchange Act during the +relevant time period. Joesley Batista and Wesley Batista served as directors for Pilgrims between +December 2009 and May 2017 and June 2017 respectively. Six out of nine total Pilgrims board +members also served on JBS’s board. Pilgrims is majority-owned by JBS through its subsidiary +JBS USA. + +10. Banco Nacional de Desenvolvimento Economico e Social and its wholly-owned +subsidiary BNDES Participações S.A. (together “BNDES”) is a Brazilian state-owned and state- +controlled bank that performed government functions, including providing financing to private +companies for endeavors that contributed to the development of Brazil. BNDES’ President and +Board of Directors are ultimately appointed by the President of Brazil. BNDES is an +“instrumentality” of a foreign government, and its officers and employees “foreign officials” as +those terms are used in the FCPA. + +11. Brazil Finance Minister (“Minister”) was a high ranking executive at BNDES +from in or about 2004 and 2006, and was a high ranking official in the executive branch of the +Brazilian government between 2006 and 2015. In those roles, Minister had significant influence +over whether BNDES would provide financing to private companies like J&F. Minister was a +“foreign official” as that term is used in the FCPA. + +FACTS + +Background + 12. In early 2009, Brazilian nationals Joesley and Wesley Batista owned and operated +J&F, a Brazilian holding company, and JBS, which is the largest meat and protein producer in the +world. JBS was publicly traded on the Brazilian stock exchange and had American Depository +Shares listed in the U.S. OTC market. The entities operated in over 30 countries. Joesley Batista +held several executive roles at the J&F entities ranging from CEO to Chairman of the Board. +Wesley Batista also held several executive roles at the J&F entities, including CEO to board +director. At the time, the Batistas were very well-known in the meat industry and associated with +the highest levels of Brazilian politicians, including several sitting Presidents of Brazil, Ministers, +and other Brazilian officials. + +Bribery Scheme to Obtain the BNDES Investment +13. In 2009, Joesley and Wesley Batista were engaged in an aggressive effort to expand +their business into the United States meat market by acquiring companies. They acquired several +U.S. meat companies, which they structured under JBS USA. At the time, Pilgrims, a U.S. issuer +based in Texas, was under Chapter 11 bankruptcy protection as a result of the financial crisis’ +impact on its operations. + + 5 +14. In September 2009, JBS acting through JBS USA entered into a stock purchase +agreement to acquire a 64% controlling interest in Pilgrims in exchange for $800 million. To +facilitate the acquisition, Joesley Batistas agreed to pay bribes at the direction of the Minister in +return for his assistance in ensuring JBS obtained and maintained a large equity investment by +BNDES. + +15. On December 22, 2009, JBS executed an investment agreement with BNDES for +$2 billion convertible debentures. The agreement included language that a portion of the proceeds +would be used to acquire Pilgrims’ shares, as well as other acquisitions. On December 28, 2009, +JBS through JBS USA, acquired 64% of Pilgrims’ shares for $800 million, which was ultimately +increased to 78.5% by 2012. + +Ownership and Control + +16. After the acquisition, Pilgrims was majority-owned and controlled by JBS through +JBS USA. Joesley Batista was the CEO and a board member of J&F, CEO and Chairman of the +Board of JBS, member of the JBS USA board of directors, and member of the Pilgrims’ board of +directors. Wesley Batista was a board member of JBS, CEO and a board member of JBS USA, +and Chairman of the Pilgrims’ board of directors and compensation committee. + +17. As directors and majority shareholders of Pilgrims, Joesley and Wesley Batista, and +their companies J&F and JBS, were able to control Pilgrims and continue to orchestrate their +bribery scheme, but did not disclose it to Pilgrims. By failing to disclose their improper +relationship with the Minister and the funding of the bribery scheme, the Batistas ensured that +Pilgrims internal accounting controls failed to detect and prevent their misconduct. Indeed, +Respondents caused Pilgrims to rely extensively on JBS management and other services, including +sharing office space with JBS USA, sharing the same senior officers and other key management +positions. In addition, six of the nine board positions at Pilgrims between 2010 and at least 2016 +were occupied by individuals associated with JBS entities. Pilgrims also shared the accounting and +SAP systems, and relied on many of JBS’ own policies and procedures and training materials, +including the JBS Code of Ethics. + +18. Pilgrims did not enact its own Code of Conduct until 2015, more than five years +after being acquired by the Respondents, and as of 2018, nearly nine years after the Respondents +acquired controlling shares, Pilgrims was still in the process of implementing a formal anti-bribery +compliance program and developing policies that covered its employees and consultants. During +this period, Pilgrims also lacked compliance personnel. Although Joesley and Wesley Batista +signed the code of conduct prohibiting bribery, neither received any anti-corruption or ethics +training. + + 6 +Bribes Paid at the Direction of the Minister + + 19. After JBS USA acquired a majority interest in Pilgrims, and Wesley and Joesley +Batista became directors of Pilgrims, Joesley Batista met multiple times with the Minister to +arrange to make numerous bribe payments at the request and direction of the Minister, including +directly to and for the benefit of various political parties and candidates in Brazil. The Batistas +made the payments for the Minister’s continued support for the BNDES Investment, among other +things. Unbeknownst to Pilgrims’ management, some of the funds used to pay bribes at the +Minister’s direction came from JBS operating accounts that contained certain funds that were +commingled with funds indirectly transferred to JBS by Pilgrims. Pilgrim’s books did not reflect +this. + +20. To facilitate the arrangement with the Minister, Joesley Batista, as per the request +of the Minister, created a series of shell companies and opened bank accounts for the shell +companies at a U.S. investment bank. Joesley Batista maintained accounts at the U.S. investment +bank in New York, in which deposits were made for the use of the Minister when needed. Joesley +Batista regularly presented the bank account statements to the Minister for his control and +evaluation. Some of the meetings with the Minister took place in the United States. After 2011, +Wesley Batista became aware that the accounts were held at the U.S. investment bank for the +Minister’s use. + +21. The Batistas funded these accounts from 2010 to 2012 and then maintained them +until ultimately making a total of $150 million in illicit payments to and for the benefit of various +political parties and candidates in Brazil in 2014 and 2015 at the Minister’s request and direction. +A J&F employee tracked the payments as they were routed into the U.S. investment bank accounts +held for the Minister’s benefit. The Respondents made these payments with funds that had come, +in part, from JBS operating accounts. In 2012, Joesley Batista also agreed to the Minister’s +demand that he make a $5 million sham loan to a company that he later learned the Minister’s son +had an equity participation in. Joesley Batista executed this transaction in 2015 with the assistance +of the U.S. investment bank, using a bank account held by a Delaware incorporated entity. + +22. From 2009 to 2015, unbeknownst to Pilgrims management, the Respondents +carried out the bribery scheme and its funding using, at times, certain JBS operating accounts +which contained funds that were commingled with funds obtained from Pilgrims through +intercompany transfers, special dividend payments, and other means. Pilgrim’s books did not +reflect this. The Respondents then paid bribes out of the operating accounts using various +mechanisms including fake invoices, official election donations, and cash. In some instances, the +Minister would direct the bribe payments to be made as official election donations. + +23. Through their control over Pilgrims and failure to disclose the improper payment +arrangements with the Minister, the Batistas caused Pilgrims’ books and records to inaccurately +record certain intercompany transfers, and also caused Pilgrims failure to maintain an adequate +system of internal accounting controls reasonably designed to detect and prevent the improper +payments recorded on its books and records. + + 7 +24. Further, Respondents Joesley and Wesley Batista knowingly caused Pilgrims’ +books, records, and accounts to be inaccurate. Respondents Joesley and Wesley Batista signed the +Form 10-Ks on behalf of Pilgrims in their capacities as directors. They did not disclose their +conduct to Pilgrims’ accountants and independent public accountants in connection with their audit +and review of Pilgrims’ financial statements from 2009 to at least May 2017 while the accountants +were performing due diligence processes and internal audits. Wesley Batista failed to disclose his +knowledge of any bribes paid when inquiries were made about the FCPA by Pilgrims’ independent +public accountants engaged in the audit and review of Pilgrims financial statements included in +reports filed by Pilgrims with the Commission. + + 25. Joesley and Wesley Batista did not disclose to Pilgrims’ management until May +2017 their role and cooperation in a widespread Brazilian corruption scheme and investigation, that +they had entered into collaboration agreements with the Brazilian PGR, and that J&F had entered +into a corporate leniency agreement with the Brazilian MPF. J&F’s leniency agreement required +Joesley Batista not to serve as an officer or board member of a publicly traded company in Brazil +for a period of five years. Following these disclosures, Joesley Batista resigned from Pilgrims’ +board on May 25, 2017, and Wesley Batista resigned from the board of Pilgrims on June 14, 2017. +Respondents indirectly received approximately $800 million in 2015 and 2016 as a result of +dividends paid by Pilgrims to JBS USA. + +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 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. + + 27. As a result of the conduct described above, Respondents caused Pilgrims’ +violations of Section 13(b)(2)(A) of the Exchange Act, which requires issuers that have a class of +securities registered pursuant to Section 12 of the Exchange Act and issuers with reporting +obligations pursuant to Section 15(d) of the Exchange Act to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and disposition +of their assets. + +28. As a result of the conduct described above Respondents caused Pilgrims’ violations +of Section 13(b)(2)(B) of the Exchange Act, which requires issuers that have a class of securities +registered pursuant to Section 12 of the Exchange Act and issuers with reporting obligations +pursuant to Section 15(d) of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in +accordance with management’s general or specific authorization; (ii) transactions are recorded as +necessary (I) to permit preparation of financial statements in conformity with generally accepted +accounting principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets; (iii) access to assets is permitted only in accordance with management’s +general or specific authorization; and (iv) the recorded accountability for assets is compared with + 8 +the existing assets at reasonable intervals and appropriate action is taken with respect to any +differences. + +29. As a result of the conduct described above, Respondents Joesley Batista and +Wesley Batista violated Section 13(b)(5) of the Exchange Act, which provides that no person shall +knowingly circumvent or knowingly fail to implement a system of internal accounting controls or +knowingly falsify any book, record or account, and Exchange Act Rule 13b2-1, which prohibits +persons from directly or indirectly falsifying or causing to be falsified any book, record, or +account. + + 30. As a result of the conduct described above, Respondents Joesley Batista and +Wesley Batista violated Exchange Act Rule 13b2-2, which prohibits persons from making or +causing to be made materially false or misleading statements or omissions to an accountant or +auditor in connection with an audit, review, or examination of financial statements or in +connection with the preparation or filing of documents and reports required to be filed with the +Commission. +Cooperation and Remediation + +31. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondents and cooperation afforded the Commission staff. +Respondents’ cooperation included providing translations of certain relevant documents, making +current or former employees available to the Commission staff, including witnesses located +overseas, and timely providing facts developed during the course of J&F’s internal investigation. +Respondents Joesley Batista and Wesley Batista also voluntarily provided the Commission staff +with documents located overseas and participated in interviews. + +32. Respondents’ remediation included creating a compliance program that employs +approximately 35 individuals at J&F and its affiliates to cover its operating entities including +Pilgrims, updating its Code of Conduct, and creating anti-bribery policies and training programs. +Respondents Wesley Batista and Joesley Batista resigned from board and management positions at +Respondents J&F and JBS and also from JBS USA. JBS also removed other executives involved +in corrupt activities in Brazil from their executive positions. In addition, Respondents hired an +independent firm in April 2018 to oversee their compliance with the obligations in the Brazilian +leniency agreement and a public accounting firm to help implement an integrity program +throughout the companies in the J&F group. J&F will also create a compliance committee, hire +auditing for due diligence of suppliers and customers and provide training to more than 120 +directors at J&F and its affiliates in the areas of conflicts of interest, money laundering prevention +and anti-corruption. + 9 +Undertakings + + 33. Respondents J&F, JBS, Joesley Batista and Wesley Batista undertake to review, +evaluate and report to the Commission staff periodically during a three-year term, the +effectiveness of the anti-corruption policies, procedures, practices, internal accounting controls, +recordkeeping, and financing reporting processes (collectively, “Policies and Procedures”) for +Respondents J&F and JBS and any U.S. issuers that are under Respondents J&F’s, JBS’s, +Joesley Batista’s and Wesley Batista’s direct or indirect control, including Pilgrims (“Controlled +Issuers”), and report on ongoing efforts to improve the effectiveness of the Policies and +Procedures. Respondent Wesley Batista and Respondent Joesley Batista also agree to undergo +enhanced ethics and FCPA training and submit annual certifications of completion. During this +period, should any of the Respondents discover credible evidence, not already reported to +Commission staff, that questionable or corrupt payments or questionable or corrupt transfers of +value may have been offered, promised, paid, or authorized by Respondents or Controlled +Issuers, or any entity or person acting on behalf of Respondents or Controlled Issuers, or that +related false books and records have been maintained, Respondents shall promptly report such +conduct to the Commission staff. During this three-year period, Respondents shall: (1) conduct +an initial review and submit an initial report and (2) conduct and prepare two follow-up reviews +and reports, as described below: + +a. Respondents 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 their +FCPA and anti-corruption related remediation efforts to date, their proposals +reasonably designed to improve the Policies and Procedures for ensuring +compliance with the Anti-corruption laws, and the parameters of the subsequent +review (the “Initial Report”). The Initial Report shall be transmitted to Tracy L. +Price, Deputy Chief, FCPA Unit, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549-5631. Respondents +may extend the time period for issuance of the Initial Report with prior written +approval of the Commission staff. + +b. Respondents shall undertake two follow-up reviews, incorporating any comments +provided by the Commission staff on the previous report, to further monitor and +assess whether the Policies and Procedures are reasonably designed to detect and +prevent violations of the Anti-corruption laws (the “Follow-Up Reports”). + +c. The Follow-up Report shall be completed by no later than 270 days after the Initial +Report. The second Follow-up Report shall be completed by no later than 450 days +after the completion of the Initial Report. Respondents 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 Respondents will likely include +proprietary, financial, confidential, and competitive business information. Public +disclosure of the reports could discourage cooperation, impede pending or potential + 10 +government investigations and thus undermine the objectives of the reporting +requirement. For these reasons, among others, the reports and the contents thereof +are intended to remain and shall remain nonpublic, except (a) pursuant to court +order, (b) as agreed by the parties in writing, (c) to the extent that the Commission +staff determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (d) is otherwise +required by law. + +e. During this three-year period of review, Respondents shall provide their external +auditors with their annual internal audit plan and reports of the results of internal +audit procedures and its assessment of its FCPA compliance policies and +procedures. + +f. During the three-year period of review, Respondents shall provide Commission +staff with any written reports or recommendations provided by Respondents’ +external auditors in response to Respondents’ annual internal audit plan, reports of +the results of internal audit procedures, and its assessment of their FCPA +compliance policies and procedures. + +34. Respondents shall each 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 Respondents agree to provide such evidence. The certification and supporting +material shall be submitted to Tracy L. Price, Deputy Chief, FCPA Unit, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5631 no later than +sixty (60) days from the date of the completion of the undertakings. + +35. Respondents undertake 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, Respondents (i) agree 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) appoint Respondents' 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 +Respondents' travel, lodging, and subsistence expenses at the then-prevailing U.S. Government per +diem rates; and (v) consents to personal jurisdiction over Respondents in any United States District +Court for purposes of enforcing any such subpoena. + +In determining whether to accept the Offers, the Commission has considered the +undertaking set forth in Paragraph 35. + + 11 +Criminal Plea Agreements + + 36. Respondent J&F has entered into a plea agreement with the United States +Department of Justice that acknowledges responsibility for criminal conduct relating to the +findings in the Order. Specifically, in United States v. J&F Investimentos, S.A., Crim. No. 20-CR- +365 (E.D.N.Y.), J&F acknowledged responsibility for one count of conspiracy to violate the anti- +bribery provisions of the Foreign Corrupt Practices Act [18 U.S.C. § 371]. + +37. In May 2017, Joesley and Wesley Batista entered into collaboration agreements +with the PGR in Brazil, and in June 2017, J&F entered into a leniency agreement with the MPF in +Brazil, in which they admitted their role in widespread bribery of Brazilian officials, including for +conduct described herein.2 + +Non-Imposition of a Civil Penalty + + 38. Respondents J&F and JBS acknowledge that the Commission is not imposing a +civil penalty based upon the imposition of a $256,497,026 criminal fine as part of J&F’s resolution +with the U.S. 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, Respondents 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, Respondents Joesley Batista and +Wesley Batista cease and desist from committing or causing any violations and any future violations +of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder. + +C. Respondents shall comply with the und ertakings enumerated in paragraphs 33-34 +above. + + +2 Respondent J&F entered into a leniency agreement with the Brazilian Ministerio Publico Federal (“MPF”), +and Respondents Joesley Batista and Wesley Batista entered into collaboration agreements with the Brazilian +Procurador-Geral da República (“PGR”) (collectively the “Brazilian Agreements”). As part of the Brazilian +Agreements, Joesley Batista, Wesley Batista, and J&F have agreed to pay collectively BRL 10,300,000,000 (the +approximate equivalent of $3.2 billion) of which $768,670,358 will be disgorged to BNDES. The facts contained in +this Order are consistent with the Brazilian Agreements. + 12 +D. Respondent JBS shall, within fourteen days of the entry of this Order, pay +disgorgement of $26,866,565 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). + +E. Respondents Joesley Batista and Wesley Batista shall each, within ten days of the +entry of this Order, pay a civil penalty of $550,000 to the Securities and Exchange Commission for +transfers to the general fund of the United States Treasury, subject to Section 21F(g)(3) of the +Exchange Act. + +F. If timely payment is not made, additional interest shall accrue pursuant to SEC Rule +of Practice 600 or 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 J&F, +JBS, Joesley Batista and Wesley Batista 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 Tracy L. +Price, FCPA Deputy Unit Chief, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-5631. + + 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 Joesley Batista and Wesley Batista +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 Joesley Batista and Wesley +Batista 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 + 13 +proceeding. For purposes of this paragraph, a "Related Investor Action" means a private damages +action brought against Respondent Joesley Batista or Wesley Batista 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. Respondents Joesley Batista and Wesley Batista acknowledge that the Commission +is not imposing a civil penalty in excess of $550,000, based upon Respondents’ cooperation in a +Commission investigation. If at any time following the entry of the Order, the Division of +Enforcement (“Division”) obtains information indicating that Respondents 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 Respondents, +petition the Commission to reopen this matter and seek an order directing that the Respondents pay +a civil money penalty or additional civil penalty. Respondents 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. + + I. 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 Wesley Batista and Joesley Batista, and further, any debt for +disgorgement, prejudgment interest, civil penalty or other amounts due by Respondents Wesley +Batista and Joesley Batista 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 Wesley Batista and Joesley Batista of the federal securities laws or any regulation or +order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4190.txt b/raw/aaer/2020/AAER-4190.txt new file mode 100644 index 0000000000000000000000000000000000000000..0f6e288b7e5a79aea7f0ccb5c83a24cb87f6e11a --- /dev/null +++ b/raw/aaer/2020/AAER-4190.txt @@ -0,0 +1,295 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90208 / October 15, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4190 / October 15, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20125 + +In the Matter of + +ANDEAVOR LLC + +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 Andeavor LLC (“Respondent”), successor by +merger to Andeavor (“Andeavor”) and a wholly owned subsidiary of Marathon Petroleum +Corporation (“Marathon”). + +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 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 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: + +SUMMARY + +1. This matter involves Andeavor’s failure to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurance that stock buyback transactions +were executed in accordance with management’s authorization. +2. In 2015 and 2016, Andeavor’s Board of Directors authorized the company to spend +$2 billion for share repurchases. This authorization required Andeavor to comply with a policy +that prohibited the company from repurchasing stock while it was in possession of material non- +public information. +3. Andeavor did not, however, have internal accounting controls sufficient to provide +reasonable assurance it was complying with this policy such that buyback transactions were +executed in accordance with management’s authorization. Specifically, Andeavor lacked an +effective process for obtaining an accurate and complete understanding of the facts and +circumstances necessary to determine whether it was in possession of material non-public +information and therefore prohibited from engaging in buyback transactions. As a consequence of +this internal accounting controls failure, Andeavor engaged in buyback transactions that were not +executed in accordance with management’s authorization. +4. On February 21, 2018, Andeavor’s then-Chairman and Chief Executive Officer +(Andeavor’s CEO) directed the company’s Chief Financial Officer to initiate a share buyback to +repurchase $250 million of shares over a period of several weeks. At the time of this direction, +Andeavor’s CEO was scheduled to meet with his counterpart at Marathon two days later to resume +the confidential discussions about Marathon’s potential acquisition of Andeavor at a significant +premium that had taken place in 2017 (but were suspended in October of that year). +5. On February 22, 2018, Andeavor’s legal department approved a Rule 10b5-1 plan +to repurchase $250 million of stock. It did so after concluding, based on a deficient understanding +of all relevant facts and circumstances regarding the two companies’ discussions, that those +discussions did not constitute material non-public information. +6. This lack of understanding was the result of Andeavor’s insufficient internal +accounting controls. Andeavor used an abbreviated and informal process to evaluate the +materiality of the acquisition discussions that did not allow for a proper analysis of the probability +that Andeavor would be acquired. Andeavor’s informal process did not require conferring with +persons reasonably likely to have potentially material information regarding significant corporate +developments prior to approval of share repurchases. As a result, for example, despite Andeavor’s +CEO’s leadership role at the company and the fact that he was the primary negotiator with + +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. + +Marathon, no one involved in Andeavor’s process discussed with him the prospects that Andeavor +and Marathon would agree to a deal. Because they did not do so, the company failed to appreciate +that the probability of Marathon’s acquisition of Andeavor was sufficiently high at that time as to +be material to investors. In short, Andeavor did not have internal accounting controls that provided +reasonable assurance that its buyback would be executed in accordance with its Board’s +authorization. +7. On February 23, 2018, Andeavor executed the Rule 10b5-1 plan that its legal +department had approved. Pursuant to that plan, Andeavor repurchased 2.6 million shares of its +stock from investors at an average of $97 per share in February and March 2018. About six weeks +after initiating the buyback, and two weeks after completing the buyback, the two companies’ +CEOs reached an agreement in principle for Marathon to acquire Andeavor. On April 30, 2018, +Andeavor publicly announced that it would be acquired by Marathon in a deal valuing Andeavor at +over $150 per share. +RESPONDENT + +8. Andeavor LLC (successor by merger to Andeavor) is a Delaware limited liability +company and a wholly owned subsidiary of Marathon. Andeavor was acquired by Marathon in +2018. Prior to the acquisition, Andeavor was an energy company headquartered in San Antonio, +Texas. Andeavor operated an oil refining system, sold refined products and operated retail stores. +When it was an independent company, Andeavor had a class of securities registered pursuant to +Section 12(b) of the Exchange Act and its shares were traded on the New York Stock Exchange. +FACTS + +A. Andeavor and Marathon Discuss a Potential Business Combination in 2017 + +9. Andeavor's CEO first discussed a potential business combination with Marathon’s +Chairman and CEO (Marathon’s CEO) in March 2017. Over the following seven months, +Andeavor and Marathon engaged in significant discussions about a potential business combination. +10. In August 2017, Andeavor and Marathon executed a confidentiality agreement and +began to share confidential financial information with each other. Each company assembled a +team of subject matter experts to assess the potential synergies that a combined company would +produce, and discussed the potential transaction with their respective investment bankers and legal +counsel. By the end of September 2017, the two companies had conducted thorough analyses of +potential synergies and concluded that if they combined their businesses into one, it would be +substantially more profitable than if they were to continue independently. The companies took +significant precautions to maintain the confidentiality of their discussions, and there was no public +speculation that they were considering a combination. By October 2017, Andeavor and Marathon +had prepared a timeline that established a schedule for publicly announcing a deal in four to six +weeks if discussions progressed favorably, and Marathon had begun drafting a merger agreement. +At that time, Marathon had expressed interest in paying a 15% premium for Andeavor shares. +Andeavor was seeking at least 20%. +B. Andeavor and Marathon Agree to Suspend their Discussions + +11. On October 27, Marathon's CEO asked Andeavor's CEO to suspend their +discussions. To fund an acquisition of Andeavor, Marathon expected to issue new shares. The +amount of shares Marathon would issue in exchange for each Andeavor share would be based on +an “exchange ratio.” This was the ratio of Marathon’s share price to Andeavor’s share price plus a +premium. At any given premium, the higher that Marathon’s share price was relative to +Andeavor’s, the fewer shares Marathon would have to issue. While a deal at either a 15% or 20% +premium would have been immediately accretive to Marathon’s earnings per share, it would have +diluted Marathon’s cash flow per share (CFPS) at that time. +12. Marathon’s CEO told Andeavor's CEO that he was concerned about the CFPS +dilution. Andeavor's CEO knew that Marathon had announced its plan to close two transactions in +the first quarter of 2018 that he believed had the potential to improve Marathon’s share price. If +Marathon’s share price were to increase relative to Andeavor’s, Marathon would have to issue +fewer shares to fund an acquisition of Andeavor. Depending on how much Marathon’s share price +were to increase relative to Andeavor’s, a deal could be less dilutive or even accretive to +Marathon’s CFPS. Andeavor's CEO agreed to suspend their discussions. He told Andeavor’s +financial advisor that he believed the discussions would likely resume in early 2018. +C. Andeavor and Marathon Resume their Discussions + +13. Following their suspension of discussions, both companies monitored the potential +exchange ratio as their share prices changed. Andeavor received weekly updates on the exchange +ratio from the company’s financial advisor. By late-January 2018, the ratio had fallen significantly +as Marathon’s share price increased. +14. On January 30, Marathon’s CEO asked Andeavor's CEO to resume their +discussions about a potential business combination, and the latter agreed. They planned their next +in-person meeting to occur on February 23. Because the companies had previously done a +significant amount of work to prepare for the acquisition in 2017, Andeavor's CEO recognized the +companies did not “have to start over” in their discussions; they could simply “refresh” the prior +work. +15. On February 11, Andeavor's CEO and Andeavor’s then-Chief Financial Officer +spoke with the company’s financial advisor to prepare for the February 23 meeting. The +discussion materials showed that changes in the two companies’ share prices since October 2017 +had resulted in such a substantial decline in the exchange ratio that a deal would likely be +immediately accretive to Marathon’s earnings and CFPS at up to a 40% premium to Andeavor’s +share price. This suggested that the CFPS dilution issue that Andeavor’s CEO believed had led +Marathon to suspend their earlier discussions would no longer be an issue. +16. Later that day, Andeavor's CEO informed Andeavor’s Board of Directors, +“Significant progress was made on Project Ocean [their code name for the discussions with +Marathon] during the second half of 2017. Although we did not achieve our desired objectives, we +are still positioned to advance this opportunity in 2018.” The “desired objectives” were for +Andeavor to form a business combination with Marathon. On February 14, Andeavor’s Board of +Directors expressed support for resuming discussions with Marathon. +D. Andeavor’s 2018 Buyback and Insufficient Internal Accounting Controls + +17. On February 21, 2018, Andeavor's CEO directed the CFO to initiate a share +buyback to repurchase $250 million of shares. +18. In 2015 and 2016, Andeavor’s Board of Directors had authorized the company to +repurchase, in the aggregate, $2 billion of shares. The company had conducted repurchases +pursuant to that authorization from time to time. Any repurchase, however, was required to +comply with Andeavor’s securities trading policy. Among other things, this policy prohibited +Andeavor from buying, or entering into a Rule 10b5-1 plan to buy, its securities while it was in +possession of material non-public information. +19. Andeavor failed to design and maintain internal accounting controls sufficient to +provide reasonable assurance that its 2018 buyback would be executed in accordance with its +Board’s authorization. +20. Andeavor’s legal department approved the company’s Rule 10b5-1 plan to +repurchase shares on February 22, 2018. It did so after concluding, based on a deficient +understanding of all relevant facts and circumstances regarding the two companies’ discussions, +that those discussions did not constitute material non-public information at that time. +21. This lack of understanding was the result of Andeavor’s insufficient internal +accounting controls. Andeavor used an abbreviated and informal process to evaluate the +materiality of the acquisition discussions that did not allow for a proper analysis of the probability +that Andeavor would be acquired. Andeavor’s informal process did not require conferring with +persons reasonably likely to have potentially material information regarding significant corporate +developments prior to approval of share repurchases. As a result, for example, despite Andeavor’s +CEO’s leadership role at the company and the fact that he was the primary negotiator with +Marathon, no one involved in Andeavor’s process discussed with him the prospects that Andeavor +and Marathon would agree to a deal. Because they did not do so, the company failed to appreciate +that the probability of Andeavor’s acquisition by Marathon was sufficiently high at that time as to +be material to investors.2 In short, Andeavor did not have internal accounting controls that +provided reasonable assurance that its buyback would be executed in accordance with its Board’s +authorization. + +2 It is well established that an acquisition need not be more-likely-than-not to occur for it to be +material. See, e.g., Basic, Inc. v. Levinson, 485 U.S. 224, 238-39 (1988) (quoting SEC v. Geon Indus., +Inc., 531 F.2d 39, 47-48 (2d Cir. 1976)) (“Since a merger in which it is bought out is the most important +event that can occur in a small corporation’s life, to wit, its death, we think that inside information, as +regards a merger of this sort, can become material at an earlier stage than would be the case as regards +lesser transactions – and this even though the mortality rate of mergers in such formative stages is +doubtless high.”). +E. Andeavor and Marathon Continue Deal Discussions During the Buyback + +22. On February 23, Andeavor’s CEO and Marathon’s CEO resumed their discussions +in-person. This was the day Andeavor entered into the Rule 10b5-1 trading plan the legal +department approved that committed the company to repurchase $250 million of its stock. +23. Between February 23 and March 28, Andeavor bought its stock in the open market +at prices ranging from about $90 to $103 per share. As it did so, Andeavor and Marathon were +discussing a deal that valued Andeavor at substantially higher amounts. About six weeks after +executing the Rule 10b5-1 plan, and two weeks after completing the buyback, the two companies’ +CEOs reached an agreement in principle for Marathon to acquire Andeavor. On April 30, 2018, +Andeavor publicly announced that it would be acquired by Marathon in a deal that valued the +company at over $150 per share. +24. As a result of the conduct described above, Andeavor 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, among other things, +transactions are executed in accordance with management’s general or specific authorizations, and +access to assets is permitted only in accordance with management’s general or specific +authorization. +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 Andeavor LLC cease and +desist from committing or causing any violations and any future violations of Exchange Act Section +13(b)(2)(B). + + B. Andeavor LLC shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $20,000,00 0 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent Andeavor LLC may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; + +(2) Respondent Andeavor LLC 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 Andeavor LLC 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 +Andeavor LLC as Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the penalty referenced in paragraph B above. Amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, it shall not argue that it is entitled to, nor +shall it benefit by, offset or reduction of any award of compensatory damages by the amount of any +part of Respondent Andeavor LLC’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 Andeavor LLC by or on behalf of one or more investors based on substantially the +same facts as alleged in the Order instituted by the Commission in this proceeding. + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4191.txt b/raw/aaer/2020/AAER-4191.txt new file mode 100644 index 0000000000000000000000000000000000000000..3d3c2a3c089567d06f386b4f2e857a5bec88ca3a --- /dev/null +++ b/raw/aaer/2020/AAER-4191.txt @@ -0,0 +1,598 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90243 / October 22, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4191 / October 22, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-20132 +In the Matter of +THE GOLDMAN SACHS +GROUP, 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 cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”), against The Goldman Sachs +Group, Inc. (“Goldman Sachs” or “Respondent” or the “Company”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set +forth below. + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter relates to a scheme perpetrated by now former senior employees of +Goldman Sachs who authorized and paid bribes and kickbacks to government officials in Malaysia +and the Emirate of Abu Dhabi (“Abu Dhabi”) in order to secure lucrative business for the +Company and benefits for themselves. Goldman Sachs violated the antibribery, books and records +and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in +connection with the scheme. + +2. 1Malaysia Development Berhad (“1MDB”) is a Malaysian state-owned and +controlled investment fund created to pursue projects for the economic benefit of Malaysia and its +people. Between approximately 2009 and 2014, as 1MDB raised capital to fund its projects, +billions of dollars were diverted from 1MDB. The diverted funds included a substantial portion of +the approximately $6.5 billion in capital that 1MDB raised in 2012 and 2013 through three bond +offerings that it executed with Goldman Sachs (the “Bond Deals”). As part of the scheme, certain +former senior employees of Goldman Sachs authorized and paid bribes to government officials in +Malaysia and in Abu Dhabi to obtain and retain lucrative business for Goldman Sachs, including +the 2012 and 2013 bond deals, from which Goldman Sachs earned approximately $600 million. + +Respondent + +3. The Goldman Sachs Group, Inc. is a U.S. based global investment banking, +securities, and investment management firm headquartered in New York, New York. The +common stock of the Company is registered pursuant to Section 12(b) of the Exchange Act and is +listed for trading on the New York Stock Exchange under the stock symbol “GS.” The Company +is and was an “issuer” within the meaning of the Foreign Corrupt Practices Act (“FCPA”) during +the relevant period. + +Related Entities and Individuals + +4. 1MDB was a strategic investment and development company wholly-owned by the +Malaysian government through the Malaysian Ministry of Finance. It was formed in 2009 when +the Malaysian government took control of a municipal entity called Terengganu Investment +Authority (“TIA”). 1MDB was created to pursue investment and development projects for the +economic benefit of Malaysia and its people, primarily relying on debt to fund these investments. +1MDB’s development projects were focused in the areas of energy, real estate, tourism and +agribusiness. 1MDB was overseen by senior Malaysian government officials, was controlled by +the Malaysian government, and performed a government function on behalf of Malaysia. + + +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. The Middle Eastern Sovereign Wealth Fund was an investment fund wholly- +owned by the government of Abu Dhabi. It was established by the government of Abu Dhabi +pursuant to an Emiri Decree in or around 1984 with a mandate to advance Abu Dhabi’s natural +petroleum wealth for the development of the emirate. The Middle Eastern Sovereign Wealth Fund +was overseen by senior Abu Dhabi government officials, was controlled by the Abu Dhabi +government, which appointed all the members of the Middle Eastern Sovereign Wealth Fund’s +board of directors, and performed a government function on behalf of Abu Dhabi. + +6. The Middle Eastern Investment Firm, a subsidiary of the Middle Eastern +Sovereign Wealth Fund, was a private joint stock company incorporated under the laws of Abu +Dhabi. + +7. Tim Leissner, age 51, was employed by Goldman Sachs between 1998 and +February 2016. Prior to his separation from Goldman Sachs, Leissner was a participating +managing director (or “partner”), vice chairman of Investment Banking in Asia Ex-Japan, and +chairman of South East Asia. Leissner was a banker with relationship management responsibility +for various clients in the Asia Ex-Japan region, including 1MDB. + +8. Jho Low, age 38, is a Malaysian national who advised on the creation of TIA, +1MDB’s predecessor entity. Jho Low has never held a formal position at 1MDB. Jho Low +nevertheless exercised significant control over 1MDB during the time period relevant to the Order. +Jho Low worked as a finder and intermediary in relation to 1MDB officials and other government +officials on a number of financial transactions and projects involving Goldman Sachs. + +9. Roger Ng, age 47, is a Malaysian national who was employed as a Managing +Director and acted as an agent of Goldman Sachs. He worked with Leissner at Goldman Sachs +from approximately 2009 to May 2014. + +10. Najib Razak, age 67, was the Prime Minister of Malaysia from 2009 to 2018 who +held a position of authority with 1MDB. + +FACTS + +Background +11. 1MDB was formed in or around 2009, when the Malaysian government asserted +federal control over TIA, which previously had been a development fund controlled by the +Malaysian state of Terengganu. + +12. 1MDB was created for the stated purpose of pursuing investment projects for the +economic benefit of Malaysia and its people, relying mainly on debt to support these projects. +1MDB was supervised by senior Malaysian government officials, controlled by the Malaysian +government, and performed a government function on behalf of Malaysia. Upon 1MDB’s +formation, Najib Razak assumed a position of authority with 1MDB. Najib Razak had the +authority to approve all appointments to, and removals from, 1MDB’s Board of Directors and +1MDB’s Senior Management Team. In addition, any financial commitments by 1MDB, including +investments, that were likely to affect a guarantee given by the government of Malaysia for the + + +4 +benefit of 1MDB or any policy of the Malaysian government, required the approval of Najib +Razak. + +Malaysian Intermediary Jho Low + +13. Low, a Malaysian national with close ties to senior Malaysian government officials, +had advised on the creation of TIA, 1MDB’s predecessor entity in 2009. Thereafter, he continued +to act as an intermediary or finder for 1MDB in relation to a number of financial transactions and +projects, including those involving Goldman Sachs. + +14. Goldman Sachs, through its participating managing director Leissner, was retained +to provide financial advice to the government of Malaysia on the same TIA project in 2009 +(“Project Tiara”). Certain senior Goldman Sachs employees, including at least Leissner and Ng, +knew that Low worked as a finder and intermediary in relation to TIA at the time of Project Tiara. +Leissner and Ng would later work to conceal Low’s involvement in Goldman-related transactions +from others at the Company. They did so knowing that Low remained close to 1MDB officials +and other government officials in Malaysia, including Najib Razak, and Abu Dhabi. + +Goldman Sachs’s Anti-Corruption Program and Deal Approval Process + +15. Goldman Sachs had a general anti-corruption policy (including both a written +Statement of Principles Regarding Anti-Bribery and related policies and procedures, collectively +the “Anti-Bribery Policy”) applicable to all employees that expressly prohibited improper +payments to government officials intended to obtain or retain business for the company. Goldman +Sachs’s Anti-Bribery Policy was overseen and enforced by its compliance function (the +“Compliance Group”) and its Business Intelligence Group (the “Intelligence Group”). + +16. In addition to the Anti-Bribery Policy aspects of Goldman Sachs’s system of +internal accounting controls, including the committee review process, were intended to help ensure +that transactions were executed in accordance with management’s wishes. The Compliance Group +and the Intelligence Group worked with, and as part of, various Goldman Sachs committees (“GS +Committees”) in reviewing transactions. + +17. Goldman Sachs’s role as underwriter for the Bond Deals meant that the firm would +be using its own capital to fund the initial purchase of the 1MDB bonds. Accordingly, the +transactions were formally reviewed and approved by multiple GS Committees including the +Firmwide Capital Committee (“GS Capital Committee”). The GS Capital Committee’s charter +states as follows: + +The Committee provides approval and oversight globally of debt -related +transactions, including principal commitments of the Firm’s capital. The +Committee aims to ensure that business, reputational and suitability standards for +underwritings and capital commitments are maintained on a global basis. + +18. The GS Committees played a critical role in the chain of management approvals +necessary for transactions such as the Bond Deals to be consummated. At the time of the Bond + + +5 +Deals, transactions could be granted conditional approval by the GS Capital Committee, provided +there was further follow-up on specified issues prior to deal execution. In terms of recordkeeping +and documentation, the principal inputs to the GS Capital Committee were the internal memoranda +prepared by deal team members under the supervision of senior employees such as Leissner, and +the principal outputs were written meeting minutes that should record the GS Capital Committee’s +decisions and set forth any prerequisite follow-up items. + +Early Attempts To Do Business With Jho Low + +19. Following the successful establishment of 1MDB in 2009, Leissner and Ng +supported at least three separate attempts to make Low a formal client of Goldman Sachs. These +efforts took place between September 2009 and March 2011. Leissner and Ng supported them +because, in part, they believed that Low would work to deliver lucrative business deals, including +from 1MDB, for the benefit of Goldman Sachs. + +20. These attempts were unsuccessful because certain personnel within Goldman +Sachs’s Compliance Group and Intelligence Group refused to approve any client relationship with +Low based, in part, on concerns that these groups had concerning the source of Low’s wealth. +Personnel within the Compliance Group and the Intelligence Group communicated the rejection of +Low’s client application to Leissner and others within Goldman Sachs. + +21. For example, in early 2011, another Goldman Sachs senior employee was aware +that Leissner and Ng attempted to advise a business controlled by Low. This proposed +engagement was declined following concerns raised by the Intelligence Group regarding Low and +his source of wealth, among other things. Thus, the other Goldman Sachs senior employee was +aware that the Intelligence Group was unlikely to approve proposed Goldman Sachs business +involving Low. + +22. Notwithstanding Leissner, Ng and the other senior employee’s knowledge of the +concerns that had been raised about Low not being a suitable client for Goldman Sachs, they +continued to work with Low based upon their belief that Low would help ensure that government +officials in Malaysia and Abu Dhabi would deliver lucrative business deals to Goldman Sachs. + +The Bond Deals + +23. Goldman Sachs was subsequently retained by 1MDB in 2012 and 2013 to assist it +with three large debt financings – “the Bond Deals.” Leissner and other employees of Goldman +Sachs knew that Low was playing a central role in these transactions, including by acting as an +intermediary between Goldman Sachs, 1MDB and other Malaysian and Abu Dhabi government +officials. Leissner and Ng also knew that Low promised to pay bribes and kickbacks to these +officials to secure 1MDB business for Goldman Sachs. + +24. Throughout 2012 and 2013, Leissner and Ng actively worked to obtain and retain +business from 1MDB for the benefit of Goldman Sachs through the promise and payment of bribes +and kickbacks to government officials in Malaysia and Abu Dhabi using, in part, misappropriated +and embezzled proceeds from the Bond Deals. During this time, through the course of the scheme, + + +6 +Leissner, Low and others paid millions of dollars in bribes and kickbacks to government officials, +and secured 1MDB business for Goldman Sachs, in particular, the three Bond Deals and related +transactions. These three bond financing transactions were referred to internally at Goldman Sachs +as “Project Magnolia,” “Project Maximus” and “Project Catalyze.” + +25. Although the purported purpose of the approximately $6.5 billion raised by the +three bond transactions was to support 1MDB projects for the benefit of the Malaysian people, +Leissner, Low and others instead planned and executed a scheme to misappropriate more than $2.7 +billion and distribute the money as bribes and kickbacks to government officials in Malaysia and +Abu Dhabi, including but not limited to Najib Razak, as well as benefits to other participants in the +scheme and their families, including Leissner. + +Goldman Sachs Obtains Project Magnolia from 1MDB + +26. On at least two occasions in early 2012, senior employees of Goldman Sachs met +with Low and 1MDB officials to discuss 1MDB’s proposed purchase of a Malaysian energy +company, Tanjong Energy Holdings Sdn Bhd, (“Tanjong”) and Goldman Sachs’s preparedness to +help obtain financing for the purchase. This financing transaction was known as “Project +Magnolia,” which ultimately closed in May 2012, earning approximately $193 million for +Goldman Sachs. + +27. During these early-2012 meetings in Malaysia and London, according to Leissner, +the attendees discussed with Low the type of financial guarantee that 1MDB needed to obtain for +the bond issuance to meet Goldman Sachs’s underwriting requirements. They ultimately agreed on +a guarantee from Abu Dhabi’s Middle Eastern Sovereign Wealth Fund. During this time and +afterward, Leissner and other senior employees of Goldman Sachs understood that Low was acting +as an intermediary between 1MDB, Najib Razak and other government officials from Abu Dhabi. + +28. During a meeting in London in February 2012, Low explained that in order to +secure the guarantee from the Middle Eastern Sovereign Wealth Fund they would have to pay +bribes and kickbacks to government officials, including to certain officials in Malaysia and Abu +Dhabi. After the February 2012 meeting, Leissner, Ng and another senior employee of Goldman +Sachs discussed this information. + +29. In March 2012, 1MDB formally engaged Goldman Sachs to be the sole underwriter +for the $1.75 billion debt financing transaction designed, in part, to pay for the acquisition of +Tanjong, which was guaranteed by the Middle Eastern Sovereign Wealth Fund. + +30. Shortly thereafter in March 2012, Leissner and other employees of Goldman Sachs +met in Abu Dhabi with Low and certain 1MDB officials and officials of the Middle Eastern +Sovereign Wealth Fund and the Middle Eastern Investment Firm to discuss the contemplated +guarantee for Project Magnolia. Throughout that time, senior employees of Goldman Sachs, +including Leissner, knew Low had arranged the meetings with the officials of the Middle Eastern +Sovereign Wealth Fund and its subsidiary, the Middle Eastern Investment Firm, and Leissner and +Ng also knew that some of these officials, among others, would be paid bribes by Low to secure +the guarantee. + + +7 + +31. Leissner, Ng and another senior employee of Goldman Sachs also knew that Low +would pay bribes and kickbacks to influence Malaysian officials to obtain the necessary approvals +to execute Project Magnolia for Goldman Sachs. During the months leading up to the issuance of +the Project Magnolia bonds, Leissner knew that Low enlisted 1MDB officials to assist him in +ensuring that all necessary approvals were obtained from 1MDB officials and others to complete +the transaction, in exchange for bribes and kickbacks to those 1MDB officials. + +32. In April 2012, before the closing of Project Magnolia, Leissner and other members +of the deal team participated in a GS Committee meeting that included many senior Goldman +Sachs executives participating from multiple locations globally, including New York City, New +York. The meeting was convened for the purpose of approving Goldman Sachs’s potential +commitment of capital in Project Magnolia. During the meeting, Leissner was directly asked +whether Low was involved in Project Magnolia. Leissner told the GS Committee that Low was +not involved in Project Magnolia, though he and other senior employees of Goldman Sachs knew +at the time that this statement was false. + +33. In late May 2012, near the closing of Project Magnolia, Leissner actively worked +with Ng and Low to divert some of the bond proceeds that Goldman Sachs raised from Project +Magnolia into the bank accounts of shell companies that Leissner, Ng and Low beneficially owned +and controlled. These individuals each understood and expected to keep some of the diverted +funds for their personal use, and that other funds would be used to pay bribes and kickbacks to +government officials in Malaysia and Abu Dhabi and elsewhere in exchange for their assistance in +obtaining and retaining business for Goldman Sachs in connection with Project Magnolia. + +34. Goldman Sachs transferred the proceeds of the Magnolia bond offering via wire to +the 1MDB entity designated to receive the payment. At the time, Leissner, Low and others knew +that a large portion of the proceeds of the bond offering would be diverted to themselves and +others, including government officials, through shell companies beneficially owned and controlled +by Low, Leissner and others. + +35. Goldman Sachs’s books and records relating to the Magnolia bond offering failed +to accurately reflect key aspects of the transaction, including the involvement of a third-party +intermediary. + +36. Within three months of the May 2012 closing of Project Magnolia, millions of +dollars of bond proceeds were transferred through shell companies beneficially owned and +controlled by Low and other participants in the scheme into a Hong Kong bank account in the +name of shell companies incorporated in the British Virgin Islands and controlled by Leissner. +Leissner used a portion of these funds for his personal use and enjoyment. Leissner also knew that +other of the bond proceeds from Project Magnolia were transferred through shell company +accounts beneficially owned and controlled by Low and other participants in the scheme and +ultimately into accounts of shell companies beneficially owned and controlled by Abu Dhabi +government officials with influence over the transaction. + + + + +8 +Goldman Sachs Obtains Project Maximus from 1MDB + +37. In May 2012, Goldman Sachs began to plan a second bond transaction, known +internally as “Project Maximus.” It was designed, in part, to raise capital for 1MDB to purchase a +second Malaysian power generation company, Genting Berhad (“Genting”). The mandate to +underwrite this bond offering was awarded by 1MDB to Goldman Sachs, and it was structured +similarly to the first bond issuance but with an indirect guarantee from the Middle Eastern +Sovereign Wealth Fund. Project Maximus ultimately closed on or about October 19, 2012, raising +approximately $1.75 billion for the designated 1MDB entity and resulting in approximately $188 +million for Goldman Sachs. This was six months after the close of Project Magnolia. All told, in +these two 2012 transactions, 1MDB issued a total of $3.5 billion in bonds that were underwritten +by Goldman and guaranteed by the Middle Eastern Sovereign Wealth Fund. + +38. Leissner and Ng understood and intended that Low and others would pay bribes +and kickbacks to influence Malaysian and Abu Dhabi officials to obtain the necessary approvals to +execute the Project Maximus bond offering. Although the Middle Eastern Sovereign Wealth Fund +did not provide a direct financial guarantee of the Project Maximus bonds as it had with Project +Magnolia, it nevertheless agreed to provide an indirect guarantee. As with Project Magnolia, +Leissner and Ng continued to work with Low to acquire this business for Goldman Sachs. + +39. Leissner and Ng knew that a large portion of the proceeds of Project Maximus +would be illegally diverted to themselves and others, including government officials, through shell +companies beneficially owned and controlled by Leissner and others. Leissner also knew at the +time that Najib Razak and government officials from Abu Dhabi and 1MDB officials would +receive money from the proceeds of Project Maximus that passed through various shell companies +beneficially owned and controlled by himself, Low and others. Moreover, along with Low and +others, it was Leissner’s intended purpose that the payments were to flow to these government +officials to influence the officials to execute the bond transaction with Goldman Sachs. A close +relative of Najib Razak and a senior official with the Middle Eastern Sovereign Wealth Fund, +among others, received some of these funds. + +40. Some of the proceeds from Project Maximus were transferred by or per Low to +Leissner in furtherance of the scheme. Thereafter, Leissner, Low and others caused some of these +funds to be transferred to the accounts of 1MDB officials or relatives of such officials, or to the +accounts of shell companies beneficially owned by 1MDB officials, in exchange for their +assistance in obtaining and retaining business for Goldman Sachs. + +41. Goldman Sachs’s books and records relating to the Maximus bond offering failed to +accurately reflect key aspects of the transaction, including the involvement of a third-party +intermediary. + +Goldman Sachs Obtains Project Catalyze from 1MDB + +42. In November 2012, despite having raised over $3 billion in the prior 11 months, +1MDB sought to raise an additional $3 billion through a bond issuance known internally at +Goldman Sachs as “Project Catalyze.” The stated purpose of this debt financing was to fund + + +9 +1MDB’s portion of a joint venture with the Middle Eastern Investment Firm. Goldman Sachs was +engaged to underwrite the project in or around early 2013. The Project Catalyze bond offering +ultimately issued on March 19, 2013, resulting in a further approximately $186 million for +Goldman Sachs from the deal. + +43. As they had with the two prior 1MDB bond issuances, Leissner and other Goldman +Sachs employees continued to work on deals where Low was an intermediary between Goldman +Sachs, 1MDB officials, Najib Razak and other Malaysian government officials. A portion of the +approximately $3 billion raised by Project Catalyze was transferred to Leissner by or at the +direction of Low. + +44. Goldman Sachs’s books and records relating to the Catalyze bond offering failed to +accurately reflect key aspects of the transaction, including the involvement of a third-party +intermediary + +Goldman Sachs Obtains Further Business from Jho Low Post-Catalyze + +45. During and after the 1MDB Bond Deals, Goldman Sachs pursued additional +business opportunities involving Low, such as the restructuring of an investment by the Middle +Eastern Investment Firm in a Malaysian bank with Low as “an advisor” to the Company’s client, +and Low’s acquisition of an oil company through a joint venture with a subsidiary of the Middle +Eastern Sovereign Wealth Fund (“Project Condor”). These transactions involved not only Low, +but also two officials from Abu Dhabi whom Low and others had recently bribed in connection +with the Bond Deals. + +46. Leissner and other Goldman Sachs employees failed to disclose Low’s involvement +in Project Condor to the firm’s Intelligence Group for approximately ten months. In October 2013, +Leissner sought internal approval for Goldman Sachs to advise Low’s business entity as a client. +Goldman Sachs Intelligence Group personnel informed Leissner that the firm could not advise +Low’s business entity. Leissner and other senior Goldman Sachs employees completed the +transaction, with Low as a minority co-investor alongside the Middle Eastern Sovereign Wealth +Fund subsidiary that was the Company’s client. When Project Condor ultimately closed in January +2014, the deal was structured with Low’s business entity contributing a minor percentage of the +necessary capital and the Middle Eastern Sovereign Wealth Fund subsidiary responsible for the +remainder. The transaction resulted in approximately $10 million for Goldman Sachs. + +Goldman Sachs’s Failure to Maintain Adequate Internal Accounting Controls + +47. Goldman Sachs failed to maintain a sufficient system of internal accounting +controls between 2012 and 2015 with respect to the process by which it reviewed and approved the +commitment of firm capital in large, significant and complex transactions, such as the Bond Deals. +This resulted in Goldman Sachs’s failing to reasonably assure adequate documentation of the GS +Capital Committee’s processes, including follow-up, oversight and documentation regarding due +diligence of concerns raised by the GS Capital Committee regarding the Bond Deals. Under the +Company’s policy, the GS Capital Committee was intended to serve a vital control function with + + +10 +regard to significant commitments in firm capital. Goldman Sachs initiated enhancements to its +processes with respect to committee documentation in 2015. + +48. Each of the three Bond Deals was submitted to the GS Capital Committee, and as +was typical practice at the firm, the GS Capital Committee transaction review took place in stages. +The Committee’s approvals were granted conditionally, meaning that further action steps were +needed – typically by the deal team – to address open items or conduct due diligence on significant +concerns raised during the GS Committee process before approval of a given transaction would +become effective. Follow-up was required on a number of items for the Bond Deals, including the +Middle Eastern Sovereign Wealth Fund guarantee on the first Bond Deal. + +49. Goldman Sachs’s Debt Underwriting Group had responsibility for confirming that +follow-up items were completed prior to a deal closing. However, due to weaknesses in the +implementation of this control, the results of this follow-up were not documented consistent with +the GS Capital Committee providing its vital control function. + +LEGAL STANDARDS AND VIOLATIONS + +50. Under Section 21C(a) of the Exchange Act, the Commission, after making certain +required findings, 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. + +Goldman Sachs Violated Exchange Act Section 30A + +51. The anti-bribery provisions of the FCPA, Section 30A of the Exchange Act, make it +unlawful for any issuer with a class of securities registered pursuant to Section 12 of the Exchange +Act, or any employee or agent of such issuer, to make use of the mails or any means or +instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to +pay, or authorization of the payment of any money, or offer, gift or promise to give anything of +value to any foreign official for purposes of influencing any act or decision of such foreign official +in his official capacity in order to assist such issuer in obtaining or retaining business for or with +any person. 15 U.S.C. § 78dd-1. As a result of the conduct described above regarding payments to +government officials, Goldman Sachs violated Exchange Act Section 30. + +Goldman Sachs Violated Exchange Act Section 13(b)(2)(A) + +52. The books and records provision of the FCPA, Section 13(b)(2)(A) of the Exchange +Act, requires every issuer with a class of securities registered pursuant to Section 12 of the +Exchange Act to make and keep books, records, and accounts, which, in reasonable detail, +accurately and fairly reflect the transactions and dispositions of the assets of the issuer. 15 U.S.C. +§ 78m(b)(2)(A). As described above, Goldman Sachs’s books and records did not accurately +reflect key aspects of the Bond Deals. By this conduct Goldman Sachs violated Exchange Act +Section 13(b)(2)(A). + + + +11 +Goldman Sachs Violated Exchange Act Section 13(b)(2)(B) + +53. Section 13(b)(2)(B) of the Exchange Act requires companies with a class of +securities registered under Section 12 of the Exchange Act to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that (i) transactions are +executed in accordance with management’s general or specific authorization; (ii) transactions are +recorded as necessary (I) to permit preparation of financial statements in conformity with generally +accepted accounting principles or any other criteria applicable to such statements, and (II) to +maintain accountability for assets; (iii) access to assets is permitted only in accordance with +management’s general or specific authorization; and (iv) the recorded accountability for assets is +compared with the existing assets at reasonable intervals and appropriate action is taken with +respect to any differences. 15 U.S.C. § 78m(b)(2)(B). As described above, Goldman Sachs failed +to implement a system of internal accounting controls sufficient to provide reasonable assurances +that transactions were executed in accordance with management’s general or specific authorization +and that access to assets was permitted only in accordance with management’s general or specific +authorization. By this conduct, Goldman Sachs violated Exchange Act Section 13(b)(2)(B). + +Criminal and Other Regulatory Dispositions + +54. Respondent has entered into a deferred prosecution agreement with the Department +of Justice that acknowledges responsibility for criminal conduct relating to certain findings in the +Order. + +55. Respondent has also entered into a parallel civil settlement with the Board of +Governors of the Federal Reserve System (the “Federal Reserve Board”) concerning some of the +findings in the 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’s Offer. + +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED +that: + +A. Respondent Goldman Sachs cease and desist from committing or causing any +violations and any future violations of Sections 30A, 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(2)(B), +and 78dd-1]; + +B. Respondent Goldman Sachs shall pay to the Commission disgorgement of +$606,300,000, which shall be deemed satisfied by the payment previously made +to the Government of Malaysia and 1MDB pursuant to a parallel Settlement +Agreement entered into by Goldman Sachs on August 18, 2020; + +C. Respondent shall, within 21 days of the entry of this Order, pay a civil money +penalty in the amount of $400,000,000 to the Securities and Exchange + + +12 +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; and + +D. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying The +Goldman Sachs Group, 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 Charles Cain, +FCPA Unit Chief, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + + + + + + + + + + + + + + + + + + + +13 +E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, it shall not argue that it is entitled to, nor shall +it benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondent’s payment of a civil penalty in this action +(“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final +order granting the Penalty Offset, notify the Commission’s counsel in this action +and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4192.txt b/raw/aaer/2020/AAER-4192.txt new file mode 100644 index 0000000000000000000000000000000000000000..89db446efc6806288dd1717e2d27406c3977d9bd --- /dev/null +++ b/raw/aaer/2020/AAER-4192.txt @@ -0,0 +1,91 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90281 / October 29, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4192 / October 29, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20140 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +Steven L. Henning, CPA : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate to issue +an order of forthwith suspension of Steven L. Henning (“Henning”) 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. Henning, age 59, maintained certified public accountant licenses from the states +of Wisconsin and New York until 2019 when his licenses expired. + +2. Henning was an auditor and managing director at an accounting firm, a former +accounting professor and a former Academic Fellow with the Commission’s Office of Chief +Accountant. He also appeared before the Commission, serving as an expert witness regarding +auditing matters in Commission proceedings. + +3. In October 2018, the United States Attorney’s Office for the Southern District of + +1 Rule 102(e)(2) provides in pertinent part: “[A]ny 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 + +New York (“USAO”) filed a complaint in United States v. Steven L. Henning, 18-cr-859 +(S.D.N.Y.), charging Henning with one count of wire fraud (18 U.S.C. § 1343). According to +the complaint, Henning defrauded certain individuals of approximately $2 million when they +invested in Henning’s private company, OpportunIP LLC (“OpportunIP”). + +4. On June 24, 2019, the USAO filed a superseding information charging Henning +with two counts of wire fraud (18 U.S.C. § 1343) for defrauding (i) two investor victims of +approximately $2 million regarding OpportunIP, and (ii) a corporate victim of approximately +$240,000 in connection with Henning’s request for advance pay. + +5. Also on June 24, 2019, Henning pled guilty to the two counts in the superseding +information. + +6. Also on January 29, 2020, judgment was entered by the Court, finding Henning +guilty of two counts of wire fraud (18 U.S.C. § 1343). Also on January 29, 2020, the Court +sentenced Henning to 51 months of imprisonment to be followed by three years of supervised +release. The Court also ordered Henning to pay $938,246 in restitution. + +III. + +In view of the foregoing, the Commission finds that Henning has been convicted of +felonies within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Steven L. Henning is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4193.txt b/raw/aaer/2020/AAER-4193.txt new file mode 100644 index 0000000000000000000000000000000000000000..482319f14548e774e9ec1683ad21b31fd6fd2848 --- /dev/null +++ b/raw/aaer/2020/AAER-4193.txt @@ -0,0 +1,127 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90369 / November 6, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4193 / November 6, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20145 + +In the Matter of +FRANK G. MUELLER, +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 (“SEC” or “Commission”) deems it appropriate +and in the public interest that public administrative proceedings be, and hereby are, instituted +against Frank G. Mueller (“Respondent” or “Mueller”) 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 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. Mueller, age 66, is a resident of Albuquerque, New Mexico. Mueller joined Santa +Fe Gold Corporation (“Santa Fe” or “the company”) as assistant controller in 2010. Mueller +obtained degrees in accounting, but is not and has not been licensed as a certified public accountant. +He served as the company’s chief financial officer (“CFO”) from May 2014 until July 2020, and +was a member of Santa Fe’s board of directors from August 2016 to July 2020. He currently serves +as Santa Fe’s manager of mining operations. As Santa Fe’s CFO, Mueller prepared and reviewed +Santa Fe’s financial statements that the company filed with the Commission, including the financial +statements included in Santa Fe’s annual report on Form 10-K for the year ended June 30, 2017, +filed with the SEC on July 5, 2018 (the “Annual Report”),2 and the corresponding management +representation letter that Santa Fe provided to its independent auditor, dated July 3, 2018 (the +“Management Representation Letter”). + +2. Santa Fe Gold Corporation, a Delaware corporation with its principal place of +business in Albuquerque, New Mexico, is a small mining company. The company filed Chapter +11 Bankruptcy in August 2015 and exited bankruptcy in June 2016. Santa Fe has a class of +securities registered under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) +and was required to file periodic reports with the Commission pursuant to Section 13 of the +Exchange Act and related rules thereunder. Santa Fe, however, was delinquent in its reporting +obligations and, on June 29, 2020, the Commission instituted public administrative proceedings +pursuant to Section 12(j) of the Exchange Act to determine if the company’s Exchange Act +registration should be suspended or revoked (the “12(j) Proceeding”). Prior to the 12(j) +Proceeding, Santa Fe’s common stock was traded on the OTC Marketplace operated by OTC +Markets Group, Inc. or “OTC Pink Sheets,” under the ticker symbol “SFEG.” + +3. On October 30, 2020, a final judgment was entered against Mueller, permanently +enjoining him from future violations of Sections 17(a)(1) and (3) of the Securities Act of 1933, +Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 +thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange +Act and Rules 12b-20 and 13a-1 thereunder in the civil action entitled Securities and Exchange +Commission v. Frank G. Mueller, Civil Action Number 1:20-cv-00984-JB-JHR, in the United + +2 Santa Fe’s 2017 fiscal year ended on June 30, 2017. Santa Fe was delinquent with respect to +the filing of its 2017 Form 10-K. + + + 3 +States District Court for the District of New Mexico. Mueller was also ordered to pay a $50,000 +civil money penalty. + +4. The Commission’s complaint arose out the misappropriation of funds from Santa +Fe by its former chief executive officer, Thomas H. Laws (“Laws”). The complaint alleged that +Mueller, Santa Fe’s CFO at the time of Laws’ misappropriation of Santa Fe funds, was reckless in +not knowing that Laws had not used at least $500,000 of Santa Fe’s funds for their intended +corporate purpose and, as such, that the Annual Report and the Management Representation Letter, +both of which Mueller signed, were materially false. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Mueller’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Mueller is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Mueller 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. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4194.txt b/raw/aaer/2020/AAER-4194.txt new file mode 100644 index 0000000000000000000000000000000000000000..ee0cc08957e9a2fa8a75e20913e611c559365b9b --- /dev/null +++ b/raw/aaer/2020/AAER-4194.txt @@ -0,0 +1,797 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10899 / December 9, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90620 / December 9, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4194 / December 9, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20165 + + +In the Matter of + +GENERAL ELECTRIC +COMPANY, + +Respondent. +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING +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 21C of the Securities Exchange Act of 1934 (“Exchange Act”) +against General Electric Company (“GE” 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 + + GE, a large publicly-traded company that operates a number of lines of business, failed to +disclose material information to investors related to two of its key reportable segments during the +period from 2015 through 2017. First, GE failed to disclose to investors information concerning +the nature of its reported profit growth in its power business and $2.5 billion in reported cash +collections. Second, from the third quarter of 2015 through the first quarter of 2017, GE failed to +disclose to investors worsening trends in its insurance business and the potential for substantial +losses. GE’s insurance business ultimately incurred a $9.5 billion pre-tax charge against GE’s +earnings for the fourth quarter of 2017 and required capital contributions by GE of approximately +$15 billion over seven years to fund expected future insurance claims. + + GE’s power business (known as GE Power) manufactures gas turbines and earns revenue, +among other ways, by selling these power turbines to power plant operators and entering +agreements to service the turbines for customers in the future. GE failed to disclose that more than +one quarter of GE Power’s reported profits in 2016 and almost half of its reported profits in the +first three quarters of 2017 resulted from reductions in estimates of the cost to complete its multi- +year agreements to provide repairs and service for customers’ power turbines. Under GE’s +accounting method, these reductions in cost estimates resulted in large revenue and earnings +increases in the period in which the estimates were changed. In public disclosures, GE misled +investors by describing its Power segment profits without explaining that more than $1.4 billion in +2016 and $1.1 billion in the first three quarters of 2017 stemmed from reductions in cost estimates. + + GE reported increased industrial cash collections commensurate with increased Power +segment profits in 2016 and 2017 by changing its practices to sell (or “factor”) longer term +receivables from its Power service multi-year agreements, principally to GE’s own subsidiary +(known as GE Capital). Selling longer term receivables to GE Capital allowed GE immediately to +report increased industrial cash flow, without disclosing that GE was depleting future cash flows +by moving them into the present. As a result of this new practice, called “deferred monetization,” +GE boosted a publicly reported cash flow measure by more than $1.4 billion in 2016 and more +than $500 million in the first three quarters of 2017. GE failed to disclose to investors its adoption +and reliance on deferred monetization which increased present industrial cash flow at the expense +of future years. + + GE’s insurance business reinsured billions of dollars’ worth of policies written by other +insurers, including a substantial number of long-term care insurance policies. Long-term care +policies cover future costs associated with growing older, such as nursing home and assisted living +expenses. Long-term care policies – including those insured by GE – were badly underpriced. By +2015 and 2016, claims by long-term care insurance policy-holders had been exceeding GE’s + +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 +original projections for years. In 2015 and 2016, despite known continuing trends of increasing +costs from long-term care insurance policies, GE’s insurance business lowered projected claims +costs for the distant future and simultaneously concluded that it did not have insurance losses. GE +failed to disclose its rising claim costs and the resulting potential for material insurance losses. + + In 2017 and 2018, GE made a series of public announcements describing disappointing +cash and earnings results in its GE Power business as well as the $9.5 billion pre-tax insurance +charge and required capital contributions of approximately $15 billion over seven years. These +issues contributed to GE’s almost 75% stock decline during those years. + +Respondent + + 1. General Electric Company is incorporated in the state of New York, and since +2016, the company has been headquartered in Boston, Massachusetts. GE describes itself as a high +technology industrial company that operates a number of lines of business, including in the power, +renewable energy, aviation, and healthcare industries. GE’s common stock is registered pursuant +to Section 12(b) of the Exchange Act, and is quoted under the ticker symbol “GE” on the New +York Stock Exchange. + +GE Promises Long-Term Growth While Facing Challenges in its Power Business + +2. At an investor conference in May 2015, GE’s CEO described the company’s plans +for future earnings growth. GE was undergoing substantial change; among other things, the +company had announced its agreement to acquire a power company in April 2014 to add to its GE +Power line of business and its planned divestiture of much of its GE Capital business in April +2015. At the May 2015 investor conference, GE’s CEO presented investors and analysts who +followed and reported on GE’s stock performance with a framework to grow GE’s non-GAAP +Industrials and Verticals Operating Earnings per Share measure from expectations of $1.25 – $1.35 +in 2015 to $2 per share in 2018.2 + +3. While GE sought to achieve this goal, GE Power faced marketplace challenges. In +internal planning documents in 2014 and 2015, GE described its power markets as “flat” and a +“challenging environment” and noted increasing price pressure and excess industry capacity. As a +result, GE Power increasingly depended on existing maintenance contracts in its GE Power +Services division to achieve operating earnings and cash targets. A significant portion of GE +Power Services’ earnings and cash came from highly profitable contractual service agreements +(“service agreements”) lasting anywhere from 15 to 30 years, through which GE shared the risk of +maintaining covered power turbines with its customers, the power plant operators. In 2016, GE +Power Services was responsible for 83% of GE Power’s segment profits and 89% of its operating + +2 GAAP (short for “generally accepted accounting principles”) is a common set of accounting principles, standards, +and procedures that public companies must follow when they compile their financial statements, and is the +accounting standard adopted by the Commission that must be followed by public companies in the U.S. Non-GAAP +measures are numerical measures of a public company’s historical or future financial performance, financial +position, or cash flows; these metrics are prepared by a company outside of GAAP and may include or exclude +amounts that would be utilized under GAAP. + 4 +cash flows. In 2017, the business was responsible for 98% of GE Power’s segment profits and all +of its operating cash flows. + +4. Internal risk assessments for the GE Power Services business completed in 2014 +and 2015 noted that it was subject to the same challenges facing all divisions within GE Power. +Indeed, GE Power Services acknowledged internally that it had increased risk that its service +agreements would need to be renegotiated due to lower than anticipated power consumption and +increasing competition from other companies that offered servicing and repair of the power +turbines after GE Power had sold them to customers. The business also faced the prospect that +customers would exercise termination clauses in the service agreements if they did not receive +price and terms concessions from GE Power, which created further risk to GE Power Services. + + 5. GE Power Services’s market challenges placed strain on its financial results. GE +Power had a $5 billion “deferred balance” of unbilled revenue reported in GE’s financial +statements as a part of the “contract assets” on its balance sheet, because under GE’s accounting +method, the company recognized revenue from service agreements when it incurred costs, +typically earlier in time than when it billed under the agreements. Were a customer to stop using a +turbine, use it less, or exercise its termination rights under a service agreement, GE Power Services +faced the potential that it would be unable to collect the “deferred balance” related to that contract. + +GE Power’s Reduced Cost Estimates Were Critical to Meeting Financial Targets + + 6. GE Power Services endeavored to meet internal operating profit targets set by +GE, in part, through reducing its costs and correspondingly reducing estimates of costs required +to perform its obligations under service agreements. GE Power Services’ financial results were +impacted by more than $1.4 billion in revenue and earnings in 2016 and more than $1.1 billion in +revenue and earnings in the first three quarters of 2017 as a result of reductions in cost estimates. +As illustrated in the chart below, these increases were more than double the amount recognized +in 2014 or 2015 and accounted for 29% and 45% of GE Power’s reported segment profit to +investors in 2016 and the first three quarters of 2017, respectively. Without GE Power Services’ +reductions in cost estimates, GE would have missed the forecast it provided to investors for its +non-GAAP industrial operating profit metric in 2016.3 + + +3 At GE, industrial operating profit was what is known as a non-GAAP measure GE reported to provide investors +with information about its industrial businesses. + 5 + + +7. GE Power Services was able to generate earnings resulting from reductions in cost +estimates because of the revenue accounting model it applied to its service agreements. Under +relevant accounting rules, GE applied a cost to cost percentage of completion approach to +estimating revenue on its service agreements. This approach relies on the use of reasonably +dependable estimates of total costs, billings, and extent of progress toward completion of the +contract. GE estimated what the margin would be for the life of the service agreement and applied +that profit margin to each dollar of cost incurred to date in order to estimate revenue earned to date +under the agreement. GE updated its margin assessment at least once a year during a scheduled +contract margin review, which assessed costs incurred to date as well as revisions to forward +looking estimates related to expected costs and revenues over the remaining life of the service +agreement. To the extent that the margin changed as a result of changes to estimates, GE applied +the new margin to costs incurred to date in order to make a new estimate of revenue earned to date. +The difference between the old and new estimates of revenue earned to date was recognized as +revenue and earnings in the period in which the margin estimate was changed. Projected cost +reductions over the life of the service agreement increased the contract profit margin and resulted +in an increase to revenue and earnings in the current period. + +8. Executives at GE Power informed GE management that a significant portion of GE +Power’s segment profits was the result of reductions in cost estimates and that these changes were +critical to meeting financial targets. Moreover, executives at GE understood that these reductions +in cost estimates necessarily increased GE’s deferred balance of unbilled revenue, since gains from +reductions in cost estimates did not increase the amount GE was entitled to bill its customers in any +given period. Nonetheless, GE executives directed GE Power Services executives to both increase +earnings and keep the deferred balance from growing further. This was described internally by one +GE Power executive as putting GE Power Services between “a rock [and] a hard place” since the +business lacked opportunities to increase earnings without increasing the deferred balance. + + + + + 6 +GE Power Increases Intercompany Factoring to Reduce its Deferred Balance and +Meet Cash Targets + +9. At the same time that GE Power recognized increased unbilled revenues and +earnings arising from reductions in cost estimates, GE was aware of investor and analyst concerns +that its cash collections were not keeping pace with revenue and that its unbilled revenue was +growing in its industrial business. Executives at GE Power and GE Power Services cited analyst +reports when they discussed internally the need to show improved cash performance. In one +presentation to GE senior management in August of 2016, a GE Power executive posited that GE’s +stock price could reach $40/share if operating cash flow performance improved. + +10. When GE reported its financial results to investors, it included an Industrial Cash +Flow from Operations (“Industrial CFOA” or “Industrial Cash Flow”) measure designed to +highlight the company’s ability to generate cash flow without its GE Capital operations, since GE +Capital had been substantially downsized by 2015.4 GE also provided investors with an annual +forecast for the Industrial Cash Flow measure. + +11. GE’s Industrial Cash Flow measure had always been influenced by sales of current +receivables (also referred to as “factoring”) between GE’s industrial businesses and its GE Capital +business, but GE significantly expanded factoring in 2016 and 2017 without disclosing this change +to investors. During those years, GE engaged in a practice it referred to as “deferred monetization” +to increase Industrial Cash Flow and decrease the growing deferred balance. Deferred +monetization was different from GE’s past factoring practices in two key respects: (1) GE +previously sold receivables due in one year or less, but deferred monetization involved the sale of +unbilled receivables with due dates up to five years out; and (2) in order to engage in deferred +monetization, GE renegotiated a number of service agreements and provided pricing and/or other +concessions to entice customers to agree to the changes to the agreements that were required to +permit factoring to GE Capital. + +12. Executives at GE Power Services understood that GE’s new deferred monetization +practice pulled forward future years’ cash collections into the present year, decreasing cash flows +in later periods. Deferred monetization was described internally as a “drug” because the company +needed to continue to do more deferred monetization to achieve equivalent effects period after +period. The practice was also costly for the business, as it involved offering discounts to customers +and paying interest expense on factored receivables to GE Capital. GE’s senior executives, and +those at GE Power and GE Power Services not only agreed to engage in the practice, but expanded +it in part to meet internal cash flow targets set by GE’s leadership. By May 2017, GE Power +Services and GE Power executives referred to deferred monetization in internal documents as “not +sustainable” and questioned whether the GE Power Services business model was economically +viable. + + +4 Industrial CFOA is a non-GAAP measure which GE described as a “useful measure[] to compare the capacity of +our industrial operations to generate operating cash flow with the operating cash flow of other non-financial +businesses and companies[.]” + 7 +13. By the end of 2017, GE Power Services had monetized more than $2.7 billion in +long-term receivables through the new deferred monetization practice, which increased its +Industrial Cash Flow by more than $1.4 billion in 2016 and more than $500 million in the first +three quarters in 2017. The chart below details the significant impact of GE’s deferred +monetization practice during 2016 and 2017. + + + +14. Indeed, deferred monetization accounted for approximately 12% of total reported +Industrial Cash Flow at 2016 year end and approximately 33% of Industrial Cash Flow after the +first three quarters of 2017. The practice enabled GE to achieve its public Industrial Cash Flow +forecast for 2016. At the end of 2016, GE Power Services executives estimated that the practice +had created a $500 million reduction in Industrial Cash Flow for 2017 alone. When the practice +was discontinued in 2017, GE Power Services had pulled forward $878 million in cash from 2018, +$585 million from 2019, $407 million from 2020, and $400 million from later years. The chart +below details the reduction in GE’s reported Industrial Cash Flow results since 2017 that resulted +from deferred monetization in earlier years. + + + 8 + + +GE’s Power Disclosure Failures in 2016 and 2017 + +15. Between May 2016 and October 2017, GE’s disclosures regarding its GE Power +business omitted material information regarding its reductions in cost estimates and reliance on its +new deferred monetization practice, causing GE’s disclosures to be incomplete and misleading. As +a result of the conduct above, GE omitted material information in: (1) its annual report filed with +the Commission on Form 10-K for fiscal year 2016; (2) its quarterly reports filed with the +Commission on Forms 10-Q for the first, second, and third quarters of 2016 and 2017; (3) its +earnings press releases filed with the Commission on Forms 8-K for the first, second, and third +quarters of 2016 and 2017 and the fiscal year 2016; (4) quarterly earnings calls with investors and +analysts during the time period; and (5) investor conferences in March and December 2016 and in +March 2017. + +16. GE commentary on earnings calls, at investor conferences, and in its quarterly and +annual reports during this period was materially misleading in light of the manner in which it +described its earnings results. GE described changes in profit in its Power business as arising from +items other than reductions in cost estimates in its service agreement portfolio despite recognition +internally that these changes were critical to GE’s reported results. For example, in the company’s +2016 Form 10-K, GE stated that increase in Power segment profit for the year was “mainly driven +by the effects of the acquisition [of a competitor power business], as well as material deflation, +partially offset by lower cost productivity and an unfavorable business mix, driven by [turbine] +shipments in the current year.” In fact, the GE Power Services’ reduction in cost estimates on +service agreements resulted in the reported GE Power segment profit. + +17. GE’s disclosure of its Industrial Cash Flow non-GAAP measure in earnings +releases and on earnings calls, at investor conferences, and in its quarterly and annual reports was +misleading in light of its failure to disclose the extent to which the reported measure relied on + + 9 +changes in practice expanding intercompany factoring in its GE Power business and pulling +forward cash from future periods. GE’s own description of the measure asserted that it “provides +management and investors with useful measures to compare the capacity of our industrial +operations to generate operating cash flow with the operating cash flow of other non-financial +businesses and companies.” Yet GE’s deferred monetization practice marked increasing reliance +on factoring with GE Capital, its internal financial business, in part to meet Industrial Cash Flow +targets. GE’s disclosure of intercompany factoring in its quarterly and annual reports suggested +that the company only factored “current assets,” and it did not modify this disclosure to reveal the +impact of deferred monetization after it began the practice. In addition, until the second quarter of +2017, GE did not disclose its deferred monetization practice in earnings calls and investor +conferences even in response to analyst questions about cash flow. + +18. In addition, the failure to disclose GE’s deferred monetization practice misled GE’s +investors about the company’s earnings quality by making it appear as if GE Power was converting +earnings to cash in the present period, when in fact GE Power was pulling forward cash from +future periods to offset current period growth in unbilled revenue and earnings. + +19. In a November 2017 investor conference, GE explained to investors for the first +time that changes in service agreement cost estimates were offsetting lower transactional volume +during the 2014 through 2016 time frame. By the end of 2017, GE had discontinued its deferred +monetization. Since then, the company has provided investors with detail regarding the decrease in +Industrial Cash Flow that has been generated by the practice. + +GE’s Insurance Portfolio Gains Importance As the Company Divests its Capital Business + + 20. GE has been in the insurance business since at least the 1980s, insuring billions of +dollars’ worth of policies primarily written by other companies – a practice known as +“reinsurance.” Beginning in or about 2004, GE explored exiting the insurance business. Between +2004 and 2007, GE divested large portions of its insurance portfolio, but it was unable to +completely exit the business. GE’s remaining insurance portfolio contained, among other things, +billions of dollars’ worth of long-term care insurance policies that GE would be unable to sell +without incurring billions in losses. GE stopped reinsuring new insurance policies in or around +2008. + +21. The long-term care insurance policies reinsured by GE were underpriced, meaning +that long-term care insurance companies had not set premium rates to be paid by customers at a +high enough level to pay the costs to be covered by the policies. By the 2010’s, long-term care +insurance was understood to be a troubled product industry-wide because many companies had, +from the beginning, underestimated the number, duration, and severity of claims that would be +submitted under the policies, while overestimating the likely returns on investments made with +premiums. Moreover, far fewer customers let policies lapse than the industry had expected. As a +result, GE had to pay more for nursing home and other medical costs than originally forecast, +because policyholders were living longer and requiring more expensive care while GE was earning +less than expected on invested premiums. + + 10 + 22. By 2015, GE’s insurance holdings were consolidated in a management entity in the +company’s GE Capital business referred to as North American Life and Health (“NALH”). +Executives at NALH were tasked with the administration of the insurance portfolio as well as +financial analysis of the expected claims and premiums. When GE announced in April 2015 that it +would divest much of its GE Capital business, it determined that its insurance operations would +remain with the company because they were effectively unsellable without large losses. + + 23. Executives at NALH and at GE Capital acknowledged internally during 2015 and +2016 that NALH’s continuing and expected losses posed a growing risk to GE’s financial +statements. GE had not publicly disclosed this risk to investors. In connection with its plan to +divest much of GE Capital, GE had introduced a non-GAAP measure referred to as “Verticals,” +which GE’s CEO described to investors as “the way we think about GE going forward.” Verticals +was designed to measure the performance of the anticipated remaining operations in GE Capital, +including healthcare, energy, and aviation financing businesses as well as insurance operations. +NALH was a part of the remaining operations in Verticals, and its financial results had the +potential to be a larger influence on the smaller GE Capital entity covered by the Verticals +measure. NALH and GE Capital executives discussed how to minimize losses at NALH, +particularly “shock losses” – large, unforecasted losses in any period. + +NALH Offsets Deteriorating Claims Experience By Assuming Fewer Claims in the Future + + 24. Under relevant accounting rules, each year NALH engaged in an impairment test, +referred to by NALH as a “loss recognition test” to evaluate whether the reserves GE held for +future insurance claims were adequate. As part of loss recognition testing, each year actuaries +(business professionals who are routinely employed by insurance companies to determine premium +rates and to evaluate liabilities) evaluated actual claims experience, set current best estimate +assumptions, used the best estimate assumptions to project out NALH’s insurance liabilities, and +compared those projections to the insurance reserves on NALH’s financial statements. + +25. As part of the annual loss recognition testing, NALH collected and analyzed an +additional year’s worth of claims data. This process – referred to by NALH as an “experience +study” – typically occurred in or around the fourth quarter of the year, and was used by NALH to +perform the annual loss recognition testing in the third quarter of the following year. Using this +analysis, which was based on data received up through December 31 of the prior year, as well as +other information, NALH actuaries proposed a revised set of assumptions. The loss recognition +testing resulted in a “margin” calculation. If the margin was positive, there was no change to GE’s +financial statements. If the margin was negative, GE would have to record an income statement +charge in the period in which the loss recognition test was performed of at least the amount of +negative margin. A negative margin could also prompt NALH to perform a more detailed review +of its reserves, which could lead to recognizing significantly larger losses. + + 26. NALH experienced higher claims experience than anticipated on its long-term care +insurance portfolio. This higher experience stressed NALH’s loss recognition testing margin. +Feeling pressure from GE Capital to avoid losses that would negatively impact GE’s financial + 11 +statements, NALH leadership used lower future claims cost assumptions in loss recognition testing +and changed the testing process to achieve positive loss recognition testing margins. + +27. In 2015, NALH changed assumptions used in the testing process after preliminary +analysis indicated a loss recognition testing margin that was negative. Most notably, NALH +increased its morbidity improvement assumption, a key assumption that projected lower claims +over time due to general and unspecified improvements in medical care and other developments +that would improve people’s health. By using altered assumptions which anticipated lower future +claims costs and higher future premiums, NALH produced a positive margin in 2015. + +28. In early 2016, as claims experience for GE’s long-term care policies continued to +deteriorate, NALH executives began briefing GE Capital executives on the possibility of +significant losses during the year. In May, one GE Capital executive responded to the potential for +an additional $40 million to $130 million in losses by noting that such a result “could derail +Verticals income target for the year.” At a subsequent meeting that same month, NALH +executives advised GE Capital executives of the potential for an additional $200 million in losses, +which prompted one GE Capital executive to respond that such a result would be a “train wreck.” +Following that meeting, an NALH executive summarized GE’s insurance problems as follows: + +The essence is that NALH is now a large piece of the GE Capital[’s remaining] +operations and the NALH poor experience and P&L volatility are likely going to +cause issues over time. [We] work the issues as they arise but this business is going +to have major challenges due to the nature of the portfolio itself, current market +conditions and continued deterioration from long term care business. + + 29. During the summer of 2016, NALH management and actuaries had internal +discussions about whether the assumptions of improved claims experience in the future were +realistic. By August 2016, however, NALH considered but decided not to make certain +assumptions less aggressive because the change would have had too great a negative impact on the +margin. Further, NALH failed to follow up on its lead long-term care actuary’s observation that he +did not believe certain assumptions about future claims were supportable in light of recent +experience. + +30. In early August 2016, NALH’s actuaries concluded their work on the annual loss +recognition test. The actuaries presented a loss recognition testing margin of negative $178 +million, a result that, if used, would have required GE to take a $178 million loss to earnings. + + 31. In response to the negative $178 million loss recognition testing result, NALH +executives employed a new approach, referred to as the “rollforward,” which eliminated the loss +recognition testing deficiency. The rollforward, which changed the “valuation date” for certain +assumptions used in the loss recognition testing, changed the margin from negative $178 million to +a positive $86 million, avoiding any losses on GE’s financial statements. + + 32. NALH executives justified the rollforward as a means to provide a “more current” +estimate for loss recognition testing. But the rollforward did not reassess all actuarial assumptions + 12 +in light of deteriorating claims experience during 2016. In fact, it did not include claims cost data +received during 2016. Instead, those performing the rollforward process took actuarial +assumptions based on claims data and assumptions from the end of 2015 and projected them +forward nine months. Because NALH’s loss recognition testing model used assumptions that +resulted in projections that the margin would improve over time, “aging” the model nine months +improved the margin by $300 million, and caused the margin to turn positive. + + 33. The rollforward raised questions from internal auditors, who questioned changing +the loss recognition testing methodology midstream and stated in a January 2017 assessment that +“[i]t is not a common practice to make such a change to a vital GAAP metric without a formalized +oversight and approval process.” NALH had failed to adequately document the rationale +employed in its roll-forward assumption setting process. + +34. By the end of 2016, an NALH executive warned a GE Capital executive that long- +term care experience had continued to deteriorate during the year. He further posited that key +assumptions regarding future claims improvement had not been realized in recent actual +experience. + +35. During 2017, NALH actuaries completed analyses which indicated that NALH +might need to substantially increase its insurance reserves. In July 2017, GE publicly disclosed a +review of its insurance portfolio, which ultimately led to GE’s $9.5 billion pre-tax charge against +earnings in January 2018 and required capital contributions of approximately $15 billion over +seven years. In GE’s quarterly report on Form 10-Q for the third quarter of 2017, the company +began to provide detailed information regarding its long-term care insurance exposure and, later, +additional detail about the assumptions used in its loss recognition testing process. + +GE’s Insurance Disclosure Failures from 2015 to 2017 + +36. From the third quarter of 2015 through the first quarter of 2017, GE’s disclosures +about its insurance business omitted material known trends of increasing costs in its historical +claims experience and uncertainties, inherent in increasingly optimistic assumptions of lower +future claims costs, that material insurance losses were reasonably likely in the future. As a result +of the conduct described above, GE omitted material information in: (1) its annual report on Form +10-K for fiscal years 2015 and 2016; and (2) its quarterly reports on Forms 10-Q for the third +quarter of 2015; the first, second, and third quarters of 2016; and the first quarter of 2017. + + 37. Pursuant to Item 303 of Regulation S-K, 17 C.F.R. § 229.303, companies with an +obligation to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act are required +to disclose in Item 7 of Management’s Discussion and Analysis of Financial Condition and Results +of Operations of Form 10-K, among other things, information that the registrant believes to be +necessary to an understanding of the company’s “financial condition, changes in financial +condition and results of operations.” + + 38. Item 303(a)(3)(ii) of Regulation S-K, 17 C.F.R. § 229.303(a), requires such +companies to describe, among other things, “any known trends or uncertainties that have had or + 13 +that the registrant reasonably expects will have a material favorable or unfavorable impact on net +sales or revenues or income from continuing operations” in its annual report on Form 10-K. +Instruction 3 to Item 303(a) of Regulation S-K requires that the “discussion and analysis shall +focus specifically on material events and uncertainties known to management that would cause +reported financial information not to be necessarily indicative of future operating results or of +future financial condition.” Item 303(b) of Regulation S-K requires discussion of material changes +in such known trends or uncertainties in quarterly reports on Form 10-Q. + + 39. In its Forms 10-K and Forms 10-Q from the third quarter of 2015 through the first +quarter of 2017, GE failed to disclose known trends and uncertainties regarding increasing costs +and reasonably likely losses in its insurance business. Despite known trends of increasing costs +from long-term care insurance policies, NALH lowered projected claims costs for the distant future +and simultaneously concluded that it did not have insurance losses. Because GE had a large and +risky long-term care insurance block, and because NALH was depending on increasingly +optimistic projections on future claims while experiencing known trends of increasing historical +claims, GE understood that there were known uncertainties inherent in their estimates that were +reasonably likely to come to fruition and had the potential for material insurance losses in the +future. Nonetheless, during those years, NALH offset increasing historical claims experience by +assuming projected claims costs would significantly decrease in the distant future. NALH and GE +Capital executives were informed that this approach rendered material losses reasonably likely in +the future. In addition, NALH executives and actuaries questioned whether future claims +assumptions were appropriate in light of recent experience. The failure to disclose these known +trends and uncertainties caused GE’s Forms 10-K and Forms 10-Q from the third quarter of 2015 +through the first quarter of 2017 to be materially misleading. + +GE’s Internal Accounting Control Failures + + 40. GE did not design and maintain sufficient internal accounting controls governing: +(1) management’s process for determining, reporting, and recording its loss recognition testing for +its insurance business, and (2) the supporting documentation that must be maintained to evidence +management’s process in determining its loss recognition testing estimate. As evidenced by GE’s +internal audit report, the company’s rollforward process lacked formal oversight and approval, and +the company failed to adequately document the rationale for the rollforward process it employed in +its estimate. As a result, GE failed to keep books and records that in reasonable detail accurately +and fairly reflected its transactions as required under Section 13(b)(2)(A) of the Exchange Act and +failed to devise and maintain a sufficient system of internal accounting controls as required under +Section 13(b)(2)(B) of the Exchange Act. + +GE’s Disclosure Control and Procedures Failures + +41. GE lacked sufficient disclosure controls and procedures to ensure that known trends +and uncertainties regarding its insurance liabilities were accumulated and communicated to the GE +executives responsible for the company’s disclosure in a timely manner as required by Rule 13a- +15(a). In particular, GE executives were not informed until the second quarter of 2017 of NALH’s + 14 +increasingly optimistic projections of future liabilities despite higher than expected claims. In +addition, GE was not informed of GE Capital’s and NALH’s use of the roll-forward in 2016. + +Offer and Sale of Securities + + 42. During the relevant period, GE offered and sold bonds as part of an 8.7 billion Euro +bond offering in May 2017 and engaged in tender offers involving GE preferred and common +stock. Also during the relevant period, GE employees exercised GE stock options issued pursuant +to the company’s employee compensation plan. + +Violations + + 43. As a result of the conduct described above, GE violated Section 17(a)(2) and (3) of +the Securities Act, which prohibit any person from directly or indirectly obtaining money or +property by means of any untrue statement of a material fact or any omission to state a material +fact necessary in order to make the statements made, in light of the circumstances under which +they were made, not misleading, or engaging in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser, in the offer or sales of +securities. Negligence is sufficient to establish violations of Sections 17(a)(2) and 17(a)(3). Aaron +v. SEC, 446 U.S. 680, 697 (1980). + + 44. In addition, GE violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a- +11, and 13a-13 thereunder, which require reporting companies to file with the Commission +complete and accurate annual and quarterly reports and reports of material events such as earnings +announcements. GE also violated Exchange Act Rule 12b-20, which requires an issuer to include +in a statement or report filed with the Commission any information necessary to make the required +statements in the filing not materially misleading. + + 45. In addition, GE violated Exchange Act Rule 13a-15(a), which requires issuers +required to file reports pursuant to Exchange Act Section 13(a) or 15(d) to maintain disclosure +controls and procedures as defined in Exchange Act Rule 13a-15(e). + +46. In addition, GE 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. + + 47. In addition, GE 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 or any other criteria applicable to such +statements. + + 48. In addition, GE violated Rule 100(b) of Regulation G, which prohibits a registrant, +or person acting on its behalf, from making public a non-GAAP financial measure that, taken +together with the information accompanying that measure and any other accompanying discussion + 15 +of that measure, contains an untrue statement of a material fact or omits to state a material fact +necessary in order to make the presentation of the non-GAAP financial measure, in light of the +circumstances under which it is presented, not misleading. + +GE’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by GE. Among other things, GE has replaced management at its insurance and +power subsidiaries, revised investor disclosures to address insurance and power trends and risks, +added internal controls on its insurance loss recognition testing process, and added disclosure +controls and procedures concerning its insurance liabilities. +Undertakings + +Respondent has undertaken to: + +1. Report to the Commission staff during a one-year term, as set forth herein, GE’s +compliance with Commission regulations and GAAP regarding its financial reporting and the +status of any remediation, implementation, auditing and testing of its internal accounting controls +and compliance measures related to its insurance and Power businesses. During this period, should +GE discover credible evidence, not already reported to the Commission staff, of insufficiencies in +the design or operation of its internal accounting controls related to its insurance loss recognition +testing process or in the design or operation of its disclosure controls and procedures related to its +insurance and Power businesses, GE shall report such insufficiencies to the Commission staff and +state either that all such insufficiencies have been remediated or that it cannot certify compliance. +During this one-year period, GE shall: (1) conduct an initial review and submit an initial report, +and (2) conduct and prepare a final follow-up report, as described below: + +a. GE 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 related to its insurance loss recognition +testing process as well as a complete description of its disclosure controls and procedures +related to its Insurance and Power businesses (the “Initial Report”). The Initial Report shall +also include GE’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 internal accounting controls, policies and procedures and +disclosure controls and procedures of GE for ensuring compliance with Commission +regulations and GAAP, and the parameters of the subsequent reviews. + +b. GE shall undertake a follow-up review, incorporating any comments +provided by the Commission staff on the Initial Report, to further test, monitor and assess +as necessary whether its internal accounting controls, policies and procedures and +disclosure controls and procedures are reasonably designed to: (1) provide reasonable +assurance of compliance with Commission regulations and GAAP; (2) detect and prevent +insufficiencies in the design or operation of its internal accounting controls, policies, and + 16 +procedures relating to its insurance loss recognition testing; and (3) detect and prevent +insufficiencies in the design or operation of its disclosure controls and procedures related to +its insurance and Power businesses. GE shall submit to the Commission staff its final +follow-up report within 365 calendar days of the entry of this Order (the “Final Report”). + +c. The Initial and Final Reports shall be transmitted to Celia Moore, Assistant +Director, Boston Regional Office, Division of Enforcement, Securities and Exchange +Commission, 33 Arch Street, 24th Floor, Boston, MA 02110. GE may extend the time +period for issuance of the Initial and Final Reports with prior written approval of the +Commission staff. GE shall provide its external auditors with copies of the Initial and Final +Reports and shall provide staff with any written reports or recommendations produced by +the external auditors in response to those Reports. + +d. The Initial and Final Reports submitted by GE 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 and thus undermine the objectives of the reporting requirement. +For these reasons, among others, the Initial and Final Reports and the contents thereof are +intended to remain and shall remain nonpublic, except (1) pursuant to court order, (2) as +agreed by the parties in writing, (3) to the extent that the Commission 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. + +e. GE 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 GE agrees to provide such evidence. The certification and +supporting materials shall be submitted to Celia Moore, Assistant Director, Boston +Regional Office, Division of Enforcement, Securities and Exchange Commission, 33 Arch +Street, 24th Floor, Boston, MA 02110, no later than 60 days from the date of the completion +of the undertakings + +f. Within one year of the entry of this Order, should GE discover credible +evidence, not already reported to the Commission staff, that its disclosure controls and +procedures are not free from material weakness, GE shall provide a detailed report to the +Commission staff. + +2. GE shall preserve and retain all documentation regarding all certifications and +reports for seven (7) years and shall make it available to the Commission staff upon request. + +3. In determining whether to accept GE’s Offer, the Commission has considered these +undertakings. GE agrees that if the Division of Enforcement believes that GE has not satisfied +these undertakings, it may petition the Commission to reopen the matter to determine whether + 17 +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. GE (including its officers, directors, and employees, and third-party consultants +within GE’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. GE 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, GE (including its officers, directors, and employees, and +third-party consultants within GE’s control) shall truthfully and completely disclose all +information in its possession requested by the Commission staff in connection with the +Commission’s investigation, litigation or other related proceedings; + +b. Production of Documents: at the Commission’s request, upon reasonable +notice, and without subpoena, GE (including its officers, directors, and employees, and +third-party consultants within GE’s control) shall provide any document, record or other +tangible evidence in its possession requested by the Commission staff in connection with +the Commission’s investigation, litigation or other related proceedings; and + +c. Production of Cooperative Personnel: at the Commission’s request, upon +reasonable notice, and without subpoena, GE (including its officers, directors, and +employees, and third-party consultants within GE’s control) shall secure the attendance and +truthful statements, deposition, or testimony of any GE officer, director, or employee or +third-party consultant within GE’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 GE’s reservation of rights: (i) to claim that +documents or information requested is subject to attorney-client privilege, attorney-work- +product protection, or bank examiner privilege; and (ii) to seek entry of a confidentiality +order as to: sensitive business documents or information; sensitive personnel documents or +information; or confidential information pertaining to parties other than GE. + +d. Service and Personal Jurisdiction Consents: GE 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 GE’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 GE’s travel, lodging, and subsistence + 18 +expenses at the then-prevailing U.S. Government per diem rates; and (iv) consent to +personal jurisdiction over GE 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 Respondent GE’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + A. Respondent GE cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and (3) of the Securities Act, Section 13(a) of the Exchange +Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13a-15(a), and Rule 100(b) of Regulation G +thereunder, and Section 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +B. Respondent shall, within 60 days of the entry of this Order, pay a civil money +penalty in the amount of $200,000,000.00 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying GE +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to John Dugan, Associate Director, Boston +Regional Office, Division of Enforcement, Securities and Exchange Commission, 33 Arch Street, +24th Floor, Boston, MA 02110. + + 19 + C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is +created to be administered by a third party for the penalties referenced in paragraph B above, the +costs of which shall be paid by the Fair Fund. Amounts ordered to be paid as civil money penalties +pursuant to this Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, it shall not argue that it is entitled to, nor shall it benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that it shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +D. Respondent shall comply with the undertakings enumerated in Section III above. + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4195.txt b/raw/aaer/2020/AAER-4195.txt new file mode 100644 index 0000000000000000000000000000000000000000..84757e92ceb041a4eb2f33a6006020d58c7942e6 --- /dev/null +++ b/raw/aaer/2020/AAER-4195.txt @@ -0,0 +1,207 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90630 / December 10, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4195 / December 10, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20167 + + +In the Matter of + +MARK E. WATSON III, + +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 E. Watson III (“Watson” 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. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + 2 +Summary +1. This matter arises from Mark E. Watson III’s role in Argo Group International +Holding, Ltd.’s failure to disclose in its definitive proxy statements that, from 2014 through 2018, +it paid Watson, while he was Chief Executive Officer, President, and a director of Argo, over $5.3 +million in perquisites and personal benefits. In connection with this conduct, Watson violated +Section 14(a) of the Exchange Act and Rules 13b2-1, 14a-3, and 14a-9 thereunder, and caused +Argo to violate Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-1 +thereunder. In late 2019, Watson resigned and agreed to reimburse Argo for certain personal +expenses. +Res pondent and Relevant Entity + 2. Respondent Mark E. Watson III was the Chief Executive Officer, President and a +director of Argo from 2000 until late 2019. His resignation as Argo’s Chief Executive Officer and +President became effective on November 5, 2019, and his resignation as a member of Argo’s +Board of Directors became effective on December 30, 2019. + 3. Argo Group International Holdings, Ltd. is organized under the laws of, and +headquartered in, Bermuda. Argo is an international underwriter of specialty insurance and +reinsurance products in the property and casualty market, with significant operations in the United +States. The company’s common stock is registered under Section 12(b) of the Exchange Act and +trades on the New York Stock Exchange under the ticker symbol “ARGO.” +Facts + 4. In definitive proxy statements disclosing executive compensation paid for 2014 +through 2018, which were filed in 2015 through 2019, Argo disclosed a total of approximately +$1.22 million worth of perquisites and personal benefits provided to Watson, with an annual +average of approximately $244,000. The disclosed perquisites and personal benefits consisted +predominately of 401(k) and retirement contributions, the imputed value of insurance coverage, +supplemental executive retirement plan benefits, housing and home leave allowances, medical +premiums and financial planning services. +5. However, these same definitive proxy statements failed to disclose over $5.3 +million worth of additional perquisites and personal benefits provided to Watson, thereby +understating the perquisites and personal benefits portion of Watson’s compensation by an annual +average of over $1 million, or 400%. Items that Argo paid for on Watson’s behalf, but that were +not disclosed, include, but are not limited to, expenses associated with use of corporate aircraft, +rent and other housing costs, use of corporate automobiles, helicopter trips, other travel costs, use +of a car service by family members, club and concierge service memberships, tickets and +transportation to sporting, fashion or other entertainment events, services provided by Argo +employees, and watercraft-related costs. +6. Watson solicited proxies for his election as a director and approval of his +compensation by using materials that included these deficient executive compensation disclosures. +On certain occasions, Watson did not complete director and officer questionnaires, which were + 3 +designed to assist with the company’s disclosure process and sought information from him +regarding perquisites and personal benefits. + 7. In February 2019, an Argo shareholder issued a press release in which it alleged, +among other things, Watson’s misuse of Argo assets, including undisclosed personal usage of +corporate aircraft. On April 12, 2019, during a proxy contest with this shareholder in connection +with Argo’s May 2019 annual shareholders meeting, Argo filed a definitive proxy statement that +failed to disclose over $1 million worth of perquisites provided to Watson in 2018, including over +$230,000 related to Watson’s use of corporate aircraft. + 8. From 2015 through 2019, Argo incorporated its definitive proxy statements into its +annual reports by reference. Watson signed these annual reports. + 9. From 2014 through 2018, Argo incorrectly recorded payments for the benefit of, +and reimbursements to, Watson as business expenses, and not compensation, based in part on +Watson’s submission of certain requests for expense reimbursement and approval of certain +company payments to vendors. As a result, Argo’s books, records, and accounts did not, in +reasonable detail, accurately and fairly reflect its disposition of assets. + 10. In June 2019, Argo launched an internal investigation after receipt of a subpoena +from the Commission staff. In late November 2019, Watson resigned and agreed to reimburse +Argo for certain personal expenses pursuant to a confidential arbitration process that has since +been resolved. +Violations + 11. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +Act in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits the solicitation of 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. No showing of scienter is required to +establish a violation of Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder. +See, e.g. , Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1299-1300 (2d Cir. 1973). As a result +of the conduct described above, Watson violated Section 14(a) of the Exchange Act and Rules 14a- +3 and 14a-9 thereunder. + 12. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require every issuer +of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. As a result of its incorporation + 4 +of deficient proxy statements by reference in its annual reports, Argo violated Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder. As a result of the conduct described above, Watson +caused these violations. + 13. As a result of the conduct described above, Watson caused Argo 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. + 14. As a result of the conduct described above, Watson caused Argo 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. + 15. As a result of the conduct described above, Watson 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 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 Watson’s Offer. + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 21C of the Exchange Act, Respondent Watson cease and desist +from committing or causing any violations and any future violations Sections 13(a), 13(b)(2)(A), +and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13b2-1, 14a-3, and 14a-9 thereunder. + B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $450,000 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: + + 5 +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 Mark E. +Watson III 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, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4196.txt b/raw/aaer/2020/AAER-4196.txt new file mode 100644 index 0000000000000000000000000000000000000000..f688561e868dbb9284ce32c6f3e27eaff49383c4 --- /dev/null +++ b/raw/aaer/2020/AAER-4196.txt @@ -0,0 +1,507 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES ACT OF 1933 +Release No. 10903 / December 14, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90664 / December 14, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4196 / December 14, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20169 +In the Matter of + +BELDEN INC. AND +DENNIS WISER, CPA + +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 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 Belden Inc. (“Belden”) and Dennis Wiser (“Wiser” and, together +with Belden, “Respondents”); and that public administrative proceedings be, and hereby are, + + +2 + + +instituted against Wiser pursuant to Exchange Act Section 4C +1 + 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 with respect +to Respondent Wiser, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act +of 1933 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 (“Order”), as set forth below. +III. +On the basis of this Order and Respondents’ Offers, the Commission finds that: +Summary +1. In 2017, Belden Inc., a signal transmission solutions company, improperly +accelerated revenue at its subsidiary Grass V alley. Belden was informed of the risk of sales +acceleration at Grass V alley when acquiring Grass V alley in 2014, but failed to devise and +maintain sufficient internal accounting controls to prevent repeated acceleration of revenue at +Grass V alley—on a small scale in 2015 and on a widespread basis in 2017. Grass V alley’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 . . . (1) not to possess the requisite qualifications to represent others; (2) to +be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. +2 + Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found by the Commission . . . 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 + + +financial results were consolidated in Belden’s books and records and reported in Belden’s +financial statements. +2. Dennis Wiser, a Senior Vice President of Finance at Belden, was responsible for +structuring and accounting for transactions at Grass V alley in 2017, which he knew or should +have known resulted in Belden improperly recording and reporting revenue. +3. Beginning in the first quarter of 2017, Wiser participated in and approved a +practice where Grass V alley shipped goods to warehouses that it paid for and controlled and +improperly recognized revenue before the end of quarters when customers were not ready or +unwilling to take possession of the goods they had ordered by quarter end. +4. In addition, in late 2017, Wiser arranged for Grass V alley to make purported sales +totaling approximately $4.5 million to a former employee who would act as a distributor to lease +or resell the goods. The former employee, however, had no experience as a distributor, no +warehouse, no customers, and was unable to pay for the goods he purchased. Nevertheless, +Belden, with Wiser’s authorization, improperly recorded the revenue in connection with these +sales. The former employee never re-sold or leased any goods, and the products were returned to +Belden after Belden decided to unwind the transactions. +5. In total, more than 140 transactions, totaling more than $62 million in sales, were +prematurely recorded in Belden’s books and records through the end of 2017. As a result, +Belden’s reported revenue was overstated by more than $29 million for the first three quarters of +2017. Most of the revenue recorded in connection with these transactions was ultimately +reversed in the fourth quarter of 2017. +6. Wiser provided false representation letters that failed to disclose he was aware of +unusual transactions and created a false internal memo to justify how transactions with the +former employee were accounted for. +7. As a result of the improper revenue recognition, Belden filed materially misstated +financial statements with the Commission in its quarterly reports on Forms 10-Q, and earnings +press releases in current reports on Forms 8-K, for each of the first three quarters of 2017. +Belden violated certain antifraud, reporting, books and records, and internal accounting controls +provisions of the federal securities laws. Wiser violated certain antifraud and books and records +provisions and caused Belden’s reporting, books and records and internal accounting controls +violations. +Respondents +8. Belden Inc. is a signal transmission solutions company, incorporated in Delaware +with its principal place of business in St. Louis, Missouri. Belden’s securities are registered +pursuant to Section 12(b) of the Exchange Act. During 2017, the company had four business +platforms (each a reportable segment)—Broadcast Solutions, Enterprise Solutions, Industrial +Solutions, and Network Solutions. Belden offered and sold securities during the relevant period. +9. Dennis Wiser, 57, is a resident of London, Ohio. Wiser has held various +positions with Belden from 2007 through the present. During the relevant time period, Wiser + + +4 + + +was the Senior Vice President of Finance for Belden. He is currently Belden’s Senior Vice +President of Business Development and Sales Operations. Wiser holds an MBA degree in +finance and accounting. He is a Certified Public Accountant (“CPA”), licensed in Wisconsin. +Facts +Belden Acquires Grass Valley and Identifies Revenue Recognition Problems +10. Belden purchased Grass V alley, a manufacturer of technologies for the broadcast +industry, in 2014. Following the acquisition, Grass V alley’s financial results were reported as +part of Belden’s Broadcast segment in Belden’s consolidated financial statements. +11. As part of the due diligence process in connection with the acquisition, Belden +was notified of several potential revenue recognition problems at Grass V alley, including that +Grass V alley’s “[m]anagement does not appear to be able to effectively control or monitor any +channel stuffing or sales acceleration by the sales organization.” A due diligence report that +Belden commissioned further concluded that “controls are likely not adequate for Belden’s SOX +reporting requirements.” Although Belden took steps to devise certain internal accounting +controls with respect to Grass V alley, these controls were insufficient to provide reasonable +assurance that that all revenue recognition criteria were satisfied prior to the recognition of +revenue. +12. In 2015, approximately one year after the acquisition, an internal Belden +accountant discovered that Grass V alley had improperly accelerated the recognition and reporting +of a relatively small amount of revenue upon shipment of goods to warehouses controlled by +Grass V alley, rather than waiting until the goods were delivered to the customers. +13. After the issue was identified, in mid-2015, Belden instructed finance personnel, +including Wiser, that “if we ship the inventory to a third party warehouse, we can’t recognize +revenue until the customer picks up the inventory from that third party warehouse. This assumes +we pay for the cost of the third party warehouse.” Belden, however, again failed to devise and +maintain sufficient internal accounting controls sufficient to identify and prevent improper +revenue recognition upon shipment to warehouses and to provide reasonable assurance that +Grass V alley recognized revenue in accordance with generally accepted accounting principles +(“GAAP”). +In 2017, Grass Valley Ships Products to Warehouses and Improperly Accelerates Revenue +Recognition +14. In 2017, Grass V alley, with Wiser’s approval, engaged in a systemic practice of +sending goods to third-party warehouses, when its end customers were not ready or willing to +accept the goods at their own facilities, in order to improperly accelerate revenue recognition. +Under GAAP, the revenue for these transactions should not have been recorded at the time they +were shipped to warehouses as Belden had not substantially completed its obligations for the +revenue to have been earned. +15. At the end of the first quarter of 2017, Wiser received, from Belden’s Chief +Accounting Officer, accounting guidance for recognizing revenue for bill-and-hold transactions + + +5 + + +(i.e., transactions where an issuer recognizes revenue but the goods remain at the issuer’s +warehouse or a warehouse controlled by the issuer). The guidance stated, among other things, +that the buyer, not the seller, must request that the transaction be on a bill-and-hold basis and that +there must be a fixed schedule for delivery of the goods. A member of Belden’s external audit +team who initially sent the guidance warned in the cover email that he had “never seen [the bill +and hold requirements] met.” +16. Several days later, Wiser approved of a transaction whereby Grass V alley sent +goods to a warehouse paid for by Grass V alley because the customer was not prepared to accept +the goods at its own premises by quarter end. The transaction resulted in more than $6 million in +revenue and represented a large sale for Grass V alley at the time. Belden recognized the revenue +on the sale upon shipment to the warehouse although the requirements to recognize revenue +under GAAP had not been satisfied. +17. The following quarter, Wiser approved the widespread practice of shipping of +products to third-party warehouses paid for by Grass V alley, resulting in the improper +acceleration of revenue recognition. These warehouses were located in Montreal, the United +Kingdom, and Australia—often thousands of miles from Grass V alley’s customers who had +ordered the goods. In nearly all of the instances, the goods were stored at the warehouses based +on Grass V alley’s preference, without consideration of whether there was a substantial customer- +related business purpose to do so. In light of the guidance Wiser had received in 2015 and early +2017, Wiser knew or should have known revenue was improperly recognized for these +transactions. +In the Third Quarter of 2017, Belden Recognized Revenue on a Grass Valley Transaction +that Never Left Grass Valley’s Warehouse +18. Wiser also assisted in structuring a transaction with a customer at the end of the +third quarter of 2017, where Grass V alley recognized almost $470,000 in revenue in connection +with goods that never left Grass Valley’s own warehouse. +19. Wiser received an email making it clear that Grass V alley—and not the +customer—had proposed that Grass V alley invoice the customer while holding the goods at its +own warehouse while it continued to perform work on the goods. Specifically, an employee +asked Wiser, “Can we sell this [structure] to” the customer. With Wiser’s approval, Belden +invoiced the customer without shipping the goods and prematurely recorded and reported the +nearly $470,000 in revenue in connection with the transaction. +20. Wiser signed an internal representation letter for the third quarter of 2017 falsely +certifying that “[t]here were no unusual or non-ordinary course transactions during the period +covered by this representation letter that have not been reported and disclosed.” Under Belden’s +policy, the transaction detailed above, where revenue was recorded although the goods never left +Grass V alley’s warehouse, would constitute an “unusual or non-ordinary course” transaction, +which Wiser was required to disclose in the representation letter. Wiser also falsely represented +in a January 31, 2018 letter to Belden’s external auditor that “[w]e have not recognized revenue +for any transactions that have not shipped from a Belden location or any other `bill and hold’ + + +6 + + +transactions as of December 31, 2017.” This representation was false in light of this same +transaction, which Wiser authorized and helped structure. +Grass V alley’s Sales to an Ex-Employee +21. On Friday September 29, 2017, in connection with a budget meeting that included +Wiser and Belden executives, it became clear that Grass V alley would not meet its budgeted +revenue for the third quarter of 2017. +22. Later that day, Wiser reached out to a former Grass V alley employee (“Ex- +Employee”) to discuss his becoming a distributor for Grass V alley. Ex-Employee had no prior +experience as a distributor, no warehouse, no customers, and was unable to pay for the goods he +had purchased. +23. During the course of the weekend, Wiser initiated the sale of approximately $4 +million of goods from Grass V alley to Ex-Employee. About $3 million of the goods was +software that was put on a dongle and shipped to a third party warehouse in Montreal near Grass +V alley (that Grass V alley paid for). +24. Grass V alley sold another $1 million in goods to the Ex-Employee that were to be +leased to a customer who already had possession of the goods. Specifically, the customer wanted +to enter into an operating lease for the goods. Under the accounting rules governing operating +leases, however, Grass V alley would recognize the revenue on this type of lease over the term of +the lease. Grass V alley, with Wiser’s authorization, improperly recognized the revenue on the +date of the transactions. +25. Wiser approved granting Ex-Employee credit of $5.5 million and payment terms +of 120 days. Belden’s policy concerning the extension of credit stated that “[c]redit limits should +be based on the customer’s ability to pay, financial stability, character, and expected purchases +from Belden.” It listed a number of tools available to determine the amount of the credit limit, +including the new account application, Dun and Bradstreet reports, trade references and the +credit review Score Card. Wiser, who had the authority to grant the credit and payment terms, did +so without consulting any of these tools. +26. Spreadsheets exchanged between Wiser and Ex-Employee made clear that Ex- +Employee would only pay for the goods upon selling them to end-users. +27. Ex-Employee did not take steps to resell the products he purchased at the end of +the third quarter of 2017. He did not contact or speak with any prospective customers, he did not +speak to anyone in Grass V alley’s sales group, and he did not enter into any leases with end- +users. +28. Nevertheless, Wiser continued to try to facilitate additional sales from Grass +V alley to Ex-Employee during the fourth quarter of 2017 in order to increase Grass V alley’s +revenue. When asked by a coworker, Wiser confirmed that Grass V alley communications with +Ex-Employee should continue to go through Wiser. At least one approximately $510,000 sale +was recorded in Belden’s books and records in early December 2017, and Wiser was involved in + + +7 + + +structuring a proposed sale of more than $2.2 million of goods to Ex-Employee in late December +2017. +29. In late 2017, Belden’s Chief Accounting Officer challenged and ultimately +disallowed recognition of revenue with respect to the Ex-Employee transactions after being +alerted to them, and provided accounting guidance to Wiser. In response to these developments, +Wiser drafted a false internal accounting memo to justify his decision to recognize revenue upon +the sale of goods to Ex-Employee. Wiser’s memo concluded that “collectability was reasonably +assured”—one of the requirements that must be satisfied for revenue to be realizable and +recognized under GAAP (and Belden’s revenue recognition policy)—based on Ex-Employee’s +net worth. Wiser, however, overstated Ex-Employee’s net worth, which was less than the value +of the sales. Moreover, much of that net worth was tied up in illiquid assets such as retirement +accounts, cars and real estate. Wiser’s memorandum also misstated the amount of credit that had +been extended to Ex-Employee as $4 million when the total, in fact, was $5.5 million. +30. Under GAAP, the transactions with the Ex-Employee should not have been +recognized as revenue because the amounts were not realized or realizable. +Belden’s Financial Statements Were Materially Misstated During the First Three Quarters of +2017 +31. As a result of the practices described above, from the first through the fourth +quarters of 2017, Grass V alley entered into a total of more than 140 transactions where revenue +totaling more than $62 million was improperly recorded in Belden’s books and records. More +than $29 million of the revenue was reported in Belden’s financial statements for the first three +quarters of 2017. Belden’s Internal Audit Department discovered the improper revenue +recognition in connection with the warehouse and Ex-Employee transactions during its annual +audit process. Belden reversed the revenue recorded in the fourth quarter before issuing its 2017 +Form 10-K. +32. Due to the improper revenue recognition described above, Belden materially +misstated its financial statements included in quarterly reports filed with the Commission on +Forms 10-Q and in current reports furnished to the Commission on Forms 8-K with respect to the +first three quarters of 2017. For instance, Belden overstated consolidated income before taxes by +14.3%, 4.4% and 7.9% and net income by 11.7%, 3.5% and 5.4% for the first three quarters of +2017, respectively. These quantitative impacts are even greater when analyzed solely on the +basis of Broadcast segment results (of which Grass V alley was a part), which represented 30% of +Belden’s 2017 revenue. In the fourth quarter of 2017, Belden discovered the errors and reversed +most of the improperly recorded and reported revenue. +33. Belden made a disclosure of its revenue recognition errors to investors in early +2018. Specifically, in its earnings release, attached to a Form 8-K furnished on February 1, +2018, Belden disclosed “[w]e had expected to recognize revenue on $36 million of product that +was shipped in 2017, but we were unable to do so as a result of technical U.S. GAAP revenue +recognition requirements identified by our team during the year-end closing process.” Following +this earnings release, Belden’s stock dropped approximately 11% on the day of the +announcement. Belden did not publicly disclose it had sent goods to warehouses to accelerate + + +8 + + +revenue recognition and had improperly recognized revenue by selling approximately $4.5 +million of goods to a purported distributor. +34. In its 2017 Form 10-K filed approximately two weeks later, Belden quantified the +impact that the errors had on its financial results for the first three quarters of 2017. At the time, +Belden failed to reverse, or report the effects of, three additional Grass V alley transactions +relating to 2017 (including the transaction referenced in paragraphs 18-19), which resulted in +Belden prematurely recognizing approximately $1.4 million in revenue. +Belden Reports a Material Weakness in its Internal Control over Financial Reporting +35. In the 2017 Form 10-K, Belden disclosed that it “did not maintain internal +controls that were sufficiently designed and operating effectively to ensure that all revenue +recognition criteria were satisfied prior to the recognition of revenue” in its Grass V alley unit. It +further concluded that the “control deficiency created a reasonable possibility that a material +misstatement to the consolidated financial statements would not be prevented or detected on a +timely basis and, therefore, we concluded that the deficiency represents a material weakness in +the Company’s internal control over financial reporting as of December 31, 2017.” +36. During the Commission staff’s investigation, Belden met with the staff on +multiple occasions and voluntarily provided information likely to be of interest to the staff, both +on its own initiative and at the staff’s request. +Violations +37. Securities Act 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. Negligence is +sufficient for liability under Section 17(a)(2). +38. Securities Act 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 securities. Negligence is sufficient for +liability under Section 17(a)(3). +39. Exchange Act Section 13(a) and Rules 12b-20, 13a-11 and 13a-13 thereunder +require issuers to file accurate current and quarterly reports, which include such further +information as may be necessary to make the required statements not misleading. +40. 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. +41. Exchange Act Section 13(b)(2)(B) requires reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + + +9 + + +42. 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). +43. 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). +44. As a result of the conduct described above, Belden violated Sections 17(a)(2) and +(3) of the Securities Act and Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act +and Rules 12b-20, 13a-11 and 13a-13 thereunder. +45. As a result of the conduct described above, Wiser willfully +3 + violated Securities +Act Section 17(a)(3) and Exchange Act Section 13(b)(5) and Rule 13b2-1 and caused Belden’s +violations of Securities Act Section 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) and Rules 12b-20, 13a-11 and 13a-13 thereunder. Negligence is sufficient for +causing a primary violation that does not require scienter. See KPMG, LLP v. SEC, 289 F.3d +109, 120 (D.C. Cir. 2002). +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. Respondent Belden shall cease and desist from committing or causing any +violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, and +13a-13, thereunder. +B. Respondent Wiser shall cease and desist from committing or causing any +violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and +Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 12b-20, +13a-11, and 13a-13, thereunder. +C. Respondent Wiser is denied the privilege of appearing or practicing before the +Commission as an accountant. + + +3 + “Willfully,” for purposes of imposing relief under Exchange Act Section 4C(a)(3) and +Rule 102(e)(1)(iii) “means no more than that the person charged with the duty knows what he is +doing.” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 +F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “also be aware that he is +violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). + + +10 + + +D. After three years from the date of this order, Respondent Wiser 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 Wiser’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 +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) Respondent Wiser, 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 Wiser, 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 Respondent Wiser +will not receive appropriate supervision; +(c) Respondent Wiser 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 Wiser acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, +but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards. +E. The Commission will consider an application by Respondent Wiser to resume +appearing or practicing before the Commission provided that his state CPA license is current and + + +11 + + +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 Wiser’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates good +cause will be considered on a facts and circumstances basis with due regard for protecting the +integrity of the Commission’s processes. +F. Within 30 days of the entry of this Order, Belden shall pay a civil money penalty +in the amount of $650,000.00 and Wiser shall pay a civil money penalty of $50,000.00 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Belden 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 Jennifer Leete, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction +of any award of compensatory damages by the amount of any part of 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 + + +12 + + +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 Respondent Wiser, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondent Wiser 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 Wiser of the federal securities laws or any regulation or +order issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 +U.S.C. §523(a)(19). +By the Commission. + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4197.txt b/raw/aaer/2020/AAER-4197.txt new file mode 100644 index 0000000000000000000000000000000000000000..a4240b6b7c94e56027f2287276c3c96676267990 --- /dev/null +++ b/raw/aaer/2020/AAER-4197.txt @@ -0,0 +1,161 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90696 / December 17, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4197 / December 17, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20172 + +In the Matter of +Laksha Bohra, +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 Laksha +Bohra (“Respondent” or “Bohra”) 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 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 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. Laksha Bohra, age 36, resides in Bothell, in King County, Washington. +Bohra served as a Transfer Pricing Manager in the Tax Department of Amazon.com, Inc. +(“Amazon”) from December 2012 to May 2018, and as a Senior Manager from May 2018 to +October 2018. Bohra does not hold a CPA license, but she was a member of the Institute of +Chartered Accountants in India. + +2. Amazon was at all relevant times, and currently is, a publicly-traded +technology and retail company incorporated in Delaware and headquartered in Seattle, WA. +Amazon’s common stock was at all relevant times, and currently is, registered with the +Commission under Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and +listed on the NASDAQ Global Select Market under the ticker “AMZN.” + +3. On October 16, 2020, a final judgment was entered by consent against +Respondent permanently enjoining her from future violations of Section 10(b) of the Securities +Exchange Act of 1934 and Rule 10b-5 thereunder in a civil action entitled Securities and Exchange +Commission v. Laksha Bohra, et al. (Civil Action No. 20-cv-1434-JCC), in the United States +District Court for the Western District of Washington. + +4. The complaint in the District Court action alleged, inter alia, that, from +January 2016 through July 2018, Bohra participated in insider trading with her husband and father- +in-law. The complaint further alleged that Bohra had access to Amazon’s financial reporting +databases, and her responsibilities included assisting Amazon’s Accounting Department in +calculating and reviewing transfer pricing for intercompany transactions ahead of earnings +announcements and throughout the year. Throughout her employment, Bohra had access to highly +confidential Amazon financial information before the figures were released to the public in +Amazon’s quarterly earnings reports. During the time period set forth in the complaint, on certain +occasions, Bohra provided her husband with material, nonpublic earnings information. Bohra or +her husband then provided this same information to Bohra’s father-in-law. Ahead of each earnings +announcement between January 2016 and July 2018, Bohra’s husband, and, in some instances her +father-in-law, traded Amazon stock and options, at least in part, on the basis of the material +nonpublic information that Bohra provided. The family together profited by approximately $1.4 +million from these Amazon trades. + 3 +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Bohra’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Bohra is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five (5) years from the date of this order, Bohra may request that the Commission +consider her reinstatement by submitting an application (attention: Office of the Chief Accountant) to +resume appearing or practicing before t he 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 Bohra’s work in her practice +before the Commission as an accountant will be reviewed either by the independent audit committee +of the public comp any for which she works or in some other acceptable manner, as long as she +practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statem ents 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 Comm ission that: + +(a) Bohra, 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) Bohra, 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 Bohra’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + +(c) Bohra 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 +(d) Bohra 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 re gistration, +inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Bohra to resume appearing or +practicing before the Commission provided that her Chartered Accountant 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 Bohra’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission as an accountant. +Whether an application demonstrates good cause will be considered on a facts and circumstances +basis with due regard for protecting the integrity of the Commission’s processes. + +By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4198.txt b/raw/aaer/2020/AAER-4198.txt new file mode 100644 index 0000000000000000000000000000000000000000..66ac01c4a376e31aed0d589decec1bb7acba3027 --- /dev/null +++ b/raw/aaer/2020/AAER-4198.txt @@ -0,0 +1,1082 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90699 / December 17, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4198 / December 17, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20173 + + + +In the Matter of + +MANCERA, S.C., + +ALEJANDRO VALDEZ +MENDOZA, C.P., + +and + +ANGEL RADAMES +CORRAL NIEBLAS, C.P. + +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 Mancera, +S.C. (“Mancera”), Alejandro Valdez Mendoza, C.P. (“Valdez”), and Angel Radames Corral +Nieblas, C.P. (“Corral”) (collectively, “Respondents”), pursuant to Sections 4C1 and 21C 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 +2 +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over 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 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 matter involves violations of the federal securities laws and improper +professional conduct by Mancera (the Mexican member firm of Ernst & Young Global), and two +members of Mancera’s engagement team – then-partner Valdez, and then-senior manager Corral – +during Mancera’s audits of the 2010, 2011 and 2012 financial statements of Desarrolladora +Homex, SAB de CV (“Homex”), a homebuilder headquartered in Sinaloa, Mexico. + +2. Throughout the period of these audits, Homex’s common stock was listed on the +New York Stock Exchange. Also throughout all three fiscal years covered by these audits, Homex +engaged in a multi-billion dollar financial fraud by overstating both its number of homes sold and +its revenues, in the aggregate of 106,000 units, or 317%, and of $3.3 billion (MXN $44 billion), or +355%, respectively. + + +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + +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 +3. In their Homex audits, Respondents failed to comply with Public Company +Accounting Oversight Board (“PCAOB”) auditing standards. These lapses included failures (i) to +exercise due professional care and skepticism, (ii) to adequately plan the audits, (iii) to adequately +train and supervise the engagement team, (iv) to prepare audit documentation in sufficient detail, +(v) to obtain sufficient competent or appropriate audit evidence to support the audit opinions, and +(vi) to properly evaluate audit results; and Mancera’s policies and procedures with respect to these +failures failed to comply with PCAOB quality control standards. +B. RESPONDENTS +4. Mancera, S.C. (“Mancera”) is a Mexican civil company (sociedad civil or “S.C.”) +and a PCAOB-registered public accounting firm with headquarters in Mexico City, Mexico. +Mancera is a member firm of Ernst & Young Global. Mancera served as Homex’s independent +auditor for at least the years ended 2010 to 2012. Mancera directed its services for Homex from its +Culiacán, Sinaloa, office. + +5. Alejandro Valdez Mendoza (“Valdez”), C.P., age 46, a Mexican national who +currently resides in Culiacán, Sinaloa, Mexico, is a Contador Público, the Mexican equivalent of a +certified public accountant (“CPA”). Valdez was the Mancera engagement partner on, and had +final audit responsibility over, the 2010 to 2012 year-end audits of Homex. + +6. Angel Radames Corral Nieblas (“Corral”), C.P., age 46, a Mexican national +who currently resides in Mexico City, Mexico, is a Contador Público. Corral was the Mancera +senior manager on the Homex audits for the years ended 2010 to 2012. He was responsible for +supervising the audit managers and the significant audit areas, including the audit areas that are the +subject of this Order. In approximately July 2015, Corral was promoted to his current position as a +partner at Mancera. +C. OTHER RELEVANT ENTITIES +7. Desarrolladora Homex, S.A.B. de C.V. (“Homex”), CIK 1293153, a foreign +private issuer, is a Mexican corporation founded in 1989 in Culiacán, Sinaloa, Mexico, which is its +principal place of business. At all relevant times, Homex has been engaged in the development, +construction and sale of affordable and middle-income housing in Mexico. From its initial public +offering (“IPO”) on June 29, 2004 through May 2014, Homex’s common stock was registered +pursuant to Section 12(b) of the Exchange Act, and its securities were dually listed on the Mexican +Stock Exchange and the New York Stock Exchange (“NYSE”), with the NYSE-listed securities +being in the form of sponsored American Depository Shares (“ADSs”). On May 2, 2014 (in the +wake of its April 30, 2014 filing for Mexico’s equivalent to bankruptcy reorganization), Homex’s +stock was suspended from trading on (and, soon thereafter, delisted from) the NYSE. Thereafter, it +was quoted on the OTC Link operated by OTC Markets Group. On December 9, 2016, the U.S. +based facility for Homex’s ADSs was terminated. On March 3, 2017, the Commission: (i) filed a +civil action in federal court against Homex, with Homex consenting to the entry of a final +judgment that included injunctive relief and an agreement to be prohibited from offering securities +4 +in the U.S. markets for at least five years, and (ii) simultaneously issued an Order of Suspension of +Trading suspending trading in Homex stock. +D. MANCERA’S AUDITS OF HOMEX + +1. The Fraud at Homex +8. Homex engaged in a massive fraudulent accounting scheme over at least a three +year period. In particular, the Company inflated its number of homes sold during the years 2010 to +2012 by 106,000 units, or 317%, and overstated its revenues by USD $3.3 billion (MXN $44 +billion), or 355%. Homex’s fraud consisted of, among other things, (i) manually entering both +false revenue and corresponding false cost-of-sales and inventory information; and (ii) entering +into and falsely accounting for with-recourse factoring agreements with at least 13 Mexican banks, +which Homex was able to repay only by additional bank borrowing, in check-kiting fashion. The +chart below illustrates the materiality of the fraud to Homex’s financial statements: + +2. Mancera’s Deficient Homex Audits + +Background +9. Homex was the largest client for Mancera’s Sinaloa office and, at the time of +Mancera’s 2010-2012 audits, purported to be the largest homebuilder in Mexico. + +10. The Respondents were aware, during Mancera’s 2010 to 2012 audits, (i) that +Homex claimed to have between 150 and 250 projects under construction across Mexico; (ii) that +these projects’ sizes greatly varied, with each project ranging from 100 to 2,500 housing units, i.e., +either single-family homes or multi-unit buildings; (iii) that multiple projects could be further +organized into larger housing developments (e.g., during the 2011 audit, the Chulavista housing +development in Cabo San Lucas was comprised of six projects (#820, #849, and #919-#922) for a +total of 6,391 planned housing units); and (iv) that typically, it took years for all of the homes in a +project to be built and sold. The Respondents also knew that, in order to track the construction and +sale of homes, Homex utilized an internal data system called the “Sistema Integral de + +OVERSTATED REVENUES AND UNITS SOLD, FISCAL YEARS 2010-2012 +(Revenue Figures in Millions of MXN $) + FY 2010 FY 2011 FY 2012 TOTAL 2010- +2012 + Revenue Unit +Sales Revenue Unit +Sales Revenue Unit +Sales Revenue Unit +Sales +As Reported on +Form 20-F $18,465 44,347 $20,210 52,486 $18,809 42,945 $57,484 139,778 +Actual Results $6,456 16,977 $3,981 11,006 $2,200 5,536 $12,637 33,519 +Revenue/Units +Overstated $12,009 27,370 $16,229 41,480 $16,609 37,409 $44,847 106,259 +% Overstatement 186% 161% 408% 377% 755% 676% 355% 317% +5 +Administración” (the “SIA” system), which identified each individual home by project, block, and +lot number. + +11. At the time of the 2010-2012 audits, the Respondents were likewise aware of the +following: prior to construction, Homex prepared for each housing development a financial budget +and development blueprint. These documents included various data and images reflecting the +geographical location of the development, layout of all homes and projects within the +development, and the total number of units to be built. As construction progressed, Homex +maintained for each project a “sembrado de viviendas” report (“Sembrado Report”). Each +Sembrado Report listed housing units by their block and lot numbers, the housing unit’s +construction percentage, and in many instances its status as either “operada ” or “no operada”.4 +Awareness of Fraud Risks +12. In planning the 2010-2012 Homex audits, the Mancera engagement team, including +Valdez and Corral, identified fraud as a potential source of risk of material misstatement over three +financial statement accounts: titled-home revenues,5 accounts receivables on homes sold, and +construction-in-process. In addition, during the planning stages of the 2012 Homex audit, and as +early as August 2012, the Mancera engagement team, including Valdez and Corral, became aware +that Homex was under SEC investigation. The foregoing, and other known factors including +Homex’s overall liquidity and financial position that led to its bankruptcy the following year, led +Mancera to re-evaluate and increase its rating of risk for Homex as an audit client from moderate +to “close monitoring” (i.e., a category of audit client subject to a significant audit risk that required +review of work papers by senior engagement team members and heightened due care and +scrutiny). Despite the “close monitoring” risk designation in place during the 2012 audit, +Respondents did not obtain sufficient appropriate audit evidence to support Mancera’s audit +opinion. +The Respondents’ Improper Professional Conduct +13. The Respondents failed to meet professional standards and violated and/or caused +violations of securities laws in a number of respects throughout the Homex 2010 to 2012 audits. As +detailed below, these audits were flawed in their planning, supervision and execution. As an initial +matter, the Mancera engagement team’s audit approach failed to take into account the nature of +Homex’s operations and the planned audit procedures did not adequately address the identified +fraud risks. For example, the planned audit procedures over revenues and construction-in-process +balances were designed in isolation, without calling for corroborating information across work +papers for consistency and accuracy. As discussed below, the Respondents each engaged in +improper professional conduct by failing in one or more aspects of the Homex audits to: (i) + +4 Although the literal meaning of operada is “operational,” the term had a more specialized meaning (with which +Respondents were familiar at all relevant times) when used in documents and communications covered by Homex’s +accounting policies, i.e., that revenue had been recognized by Homex, and that the pre-requisites for such +recognition had been met (which, in the case of home sales, meant that, inter alia, the home had been at least 95% +constructed). +5 “Titled-home revenues” are revenues derived from the construction of homes on Homex-owned land, representing +the substantial majority of Homex’s revenues. +6 +exercise due professional care and skepticism; (ii) adequately plan the audits; (iii) adequately train +and supervise the engagement team; (iv) prepare audit documentation in sufficient detail; (v) +obtain sufficient competent or appropriate audit evidence to support the audit opinions; and (vi) +properly evaluate audit results. +Failures Relating to Construction-in-Process (“CIP”) for Years 2010 - 2012 +14. For each of the 2010-2012 audits, CIP was a material component of Homex’s +balance sheet, representing between 41% and 46% of Homex’s total assets. + +15. The Mancera engagement team documented in its Fraud Considerations Forms (EY +Form U104) that CIP had a risk of material misstatement due to fraud for “the improper +capitalization of expenses.” The CIP balance was comprised of construction costs (i.e. land, labor, +direct materials, and relevant indirect costs) incurred in housing development. Per the company’s +policy, CIP for each house remained on Homex’s balance sheet until the house was built and sold. +One of the Mancera engagement team’s procedures to audit CIP was to conduct site visits. As +explained below, this audit step was not appropriately designed and executed, and, as a result, +failed to generate sufficient competent or appropriate audit evidence over the CIP balance. +a. Failure to Adequately Audit Homex’s Housing Developments +16. According to site visit instructions, Mancera visited selected projects to confirm the +existence of houses under construction and to compare the progress of work at the project against +the CIP recorded on the books. As a result of inadequate training, supervision and review, as well +as failure by Mancera’s audit team members to follow internal written site visit instructions, these +visits did not yield sufficient competent or appropriate audit evidence to support Homex’s CIP +year-end balances. +1. Inadequate Site Visit Training and Supervision +17. Valdez and Corral failed to adequately train and supervise audit team members in +the performance of site visits. The engagement team conducting the site visits, some of whom +were drawn from other Mancera offices due to personnel limitations, attended an optional training +session that lasted approximately one hour. While this training covered basic matters such as a +review of standard written site visit instructions – which an engagement team manager who took +the training viewed as suggestions rather than requirements – it failed to address important topics +including fraud risks associated with Homex’s home construction. Furthermore, these engagement +team members were not provided with, for example, any other context for their site visit, including +reported construction progress at the site to be visited, the number of home sales, or the site’s +location. + +18. This lack of training and supervision resulted in a failure by engagement team +members in several cases to locate correctly the sites selected by Mancera for review. In order to +locate the sites to be visited, the engagement team members relied on directions provided by +Homex and site maps provided on arrival by Homex project managers. The engagement team +7 +members never independently verified that the directions to the selected sites or the site maps +thereof provided by Homex were accurate. 6 As a result, in at least 29 of the 84 site visits +conducted during the 2010 to 2012 Homex audits, engagement team members visited either the +wrong project within the correct housing development, or the wrong housing development entirely. + +19. Corral and Valdez failed to supervise properly the site visit process and to +appropriately review the site visit work papers prepared by other members of the engagement +team. There is no indication in the site visit work papers that Valdez reviewed them or asked any +questions. For his part, Corral did review and sign off on the cover page of certain site visit work +paper packets, but did not review any of the detailed work papers therein. Instead, Corral’s review +consisted of asking a manager: (i) who performed a detail review of the work papers; (ii) general +questions about the procedures performed; (iii) if the manager had noted or observed something; +and (iv) whether supporting documentation was complete. + +20. As detailed immediately below, the failure to properly train and supervise +engagement team members performing site visits resulted in repeated instances of engagement +team members (i) not following instructions, and (ii) not identifying inconsistencies in project +documents provided by Homex. +2. Engagement Team Members Did Not Follow Written Site Visit +Instructions +21. An engagement team member brought to the site visit a copy of the site visit +instructions. Those site visit instructions required that the engagement team member, among other +things (i) interview the Homex project site manager to determine the percentage completion of the +project, (ii) collect specific documents from the visited site, including a Sembrado Report, and +from Homex headquarters for inclusion in the audit work papers, and (iii) use the collected +documents to assist in a physical inspection of each section of the site, to be summarized and +supported by photographs in a site visit memorandum. + +22. Engagement team members that performed the site visits failed both to obtain +documents and to use the documents obtained as set forth in the site visit instructions. As a result, +engagement team members did not have an adequate understanding of the projects that they visited +and, in several instances, failed to visit the correct project site. For example, instead of obtaining +detailed development blueprints for the project to be visited from Homex’s corporate office, as +required by the site visit instructions, prior to visiting a project site in order to gain an +understanding of that development’s location and layout, the engagement team relied on site maps +obtained from Homex’s on-site project managers. Several of these site maps were incorrectly +labeled. As a result, engagement team members visited the incorrect project during at least 29 of +the approximately 84 site visits conducted in connection with the 2010 to 2012 Homex audits. The +audit evidence obtained for these 29 site visits therefore could not reasonably support the +conclusions reached by the engagement team, which in each instance was that the physical +inspection of the project site corroborated the CIP recorded by Homex. + +6 For example, the engagement team did not use publicly available mapping resources such as Google Maps, which +was used by engagement team members in planning site visits to test land acquired for future housing developments. +8 + +23. The engagement team also failed to conduct a physical inspection of each section of +the visited project, as set forth in the site visit instructions. Rather, the standard practice, as +reflected in site visit work papers, was for the engagement team member to identify and +specifically document the construction progress of only two to three housing units. The +engagement team members did not document their rationale or support for selecting the visited +homes. The audit sampling and testing approach – i.e., using at most three homes to provide +evidential audit matter for a Homex project potentially comprised of thousands of homes – did not +provide sufficient competent or appropriate audit evidence to support the engagement team +members’ conclusion that the physical inspection of these homes corroborated the CIP balance. +Audit Failures Relating to Home Revenues for Years 2010-2012 +24. For each of the 2010 to 2012 audits, the engagement team identified in its Fraud +Considerations Forms titled-home revenues and accounts receivables on home sales as being +subject to a risk of material misstatement due to fraud. Specifically, the Mancera engagement team +identified the risk that revenues (and related accounts receivable) “might be recognized for services +not yet provided.” Although the Mancera engagement team performed audit procedures relating to +revenue recognition, the team failed (i) to address the aforementioned risk, (ii) to obtain sufficient +competent or appropriate audit evidence regarding titled-home revenues, and (iii) to properly +analyze documents that it did obtain which raised red flags about potential revenue recognition +issues. +a. Notary Confirmations for the 2010 and 2011 audits +25. Multiple failures pertained to Mancera’s procedures for confirming home sales +through the use of confirmations from notaries public. During the 2010 and 2011 audits,7 Mancera +sent confirmations to notaries public for those homes identified by Homex as “operada sin +entregada ” (i.e., sold-but-not-delivered). This designation meant that, according to Homex, each +home so designated had been substantially (at least 95%) constructed, received a certificate of +habitability, gone to closing, and its title had passed – and hence Homex had recognized revenue +from its sale – but, nonetheless, the home’s purchaser had not taken possession of the home. The +confirmation replies were on the notaries’ letterhead and confirmed only the name of the individual +who purportedly purchased the home and either the date of closing or merely that the closing +occurred sometime during the audit period. These confirmation replies did not confirm the specific +locations (project, block and lot number) of the housing units purportedly purchased, the closing +dates (for those homes in which the notary merely said the close happened during the audit year), +nor the purchase prices, even though all of the foregoing information was purportedly requested by +the engagement team’s confirmations and appeared in the title document signed at closing. The +work papers do not identify any instance in which the engagement team followed-up with a notary +to obtain and verify the accuracy of this omitted information, or performed alternative procedures. + +7 This procedure was performed to test revenue and to obtain reasonable assurance as to the accuracy of a footnote +disclosure in Homex’s financial statements that reconciled application of Mexican and U.S. GAAP. Mancera did +not send confirmations to notaries public for the 2012 audit because Homex had adopted IFRS and thus no longer +included in its financial statements any reconciliation of Mexican and U.S. GAAP. +9 +Furthermore, the engagement team did not retain in the work papers for the 2010 and 2011 audits +any copies of the confirmation requests sent to the notaries. The work papers instead contained a +confirmation log and the confirmations received from the notaries. Ultimately, the engagement +team did not obtain sufficient competent or appropriate evidence through the confirmation process +to confirm specific location of homes designated as sold-but-not-delivered (“operada sin +entregada ”). + +26. In addition, because the confirmations from the notaries public confirmed only the +name of the buyer and the year of the sale, and the engagement team did not perform alternative +procedures related to the omitted information, Mancera’s notary-confirmations procedure failed to +detect situations in which Homex supplied the wrong project, block and lot number for home sales +it had genuinely made, because Homex had already used those coordinates in prior periods for +fictitious sales that it had recorded while the home sites in question had no homes built on them. +During the course of Homex’s fraud, such sales occurred often. For example, a certain purchaser +(“Purchaser A”) genuinely did buy from Homex a home having a certain project, block and lot +number (“Location X”) on a certain date in December 2011; but because Homex had previously +fraudulently recognized revenue from a fictitious sale of an as-yet-unbuilt home at Location X, +Homex falsely recorded the location of the home it sold to Purchaser A as a different home site, on +which, in fact, no home had yet been built. Homex designated this sale as “operada sin +entregada ”; Mancera performed its notary confirmation procedure; the notary confirmed that +Purchaser A had indeed purchased a home in 2011; the Mancera engagement team did not perform +alternative procedures and was, without sufficient cause, satisfied. +b. Failure to Perform Procedures to Resolve Inconsistencies Regarding the +“Casas Operadas” Issue +27. During the 2012 audit, the Respondents learned, no later than February 2013, that +several Homex Sembrado Reports obtained during engagement team site visits marked hundreds of +homes as being both “operada ” (see n.4 above) and less than 95% constructed. Mancera +performed a frequency analysis containing all data across all Sembrado Reports collected during +the 2012 audit site visits showing that the bulk of these homes (“casas operadas”) were identified +as under 16% completed. Of the 630 homes identified in the analysis, 576, or 91.4%, came from a +single project, Chulavista (Project #921). + +28. During its 2012 audit, Mancera included, in an open audit issues email from Corral +to Homex management, the inconsistency in Sembrado Reports discovered during the engagement +team’s site inspections that simultaneously recorded homes as “operada” and significantly less than +95% constructed. Despite this, the engagement team failed to document in its work papers: (1) +this inconsistency presenting a potential improper revenue recognition issue, (2) the +communications it had with Homex management; (3) whether any audit procedures were +specifically undertaken to analyze the issue; or (4) how the issue was resolved. In response to this +open audit issue, Homex management represented to Valdez that management had investigated the +issue and that there was nothing for the engagement team members to act on; that the Sembrado +Reports were incorrect, and that revenue had not been recognized on any unbuilt units marked as +“operada .” Relying upon these representations, Valdez deemed the issue resolved. Although +10 +Respondents performed other revenue recognition procedures unrelated to the Sembrado Reports, +they did not obtain sufficient appropriate audit evidence, including proper evaluation of +inconsistent information identified and verification of management’s representations to address the +inconsistency presenting a potential improper revenue recognition issue, referenced above. + +29. If the Respondents had sufficiently evaluated the completeness and accuracy of the +Sembrado Reports, including through examination of the relevant documents in their possession, +they might have identified additional inconsistencies related to Homex’s fraud. For example, +comparing the project, block and lot numbers of the homes identified in the frequency analysis +referenced in ¶ 27 above to the revenue schedules in their work papers would have reflected that +revenue was recognized on 21 of those homes, with revenue on 13 of them being recognized in +2012, and on 8 more in earlier years. None of those 21 homes, however, was located in Project +#921, which, as noted in ¶ 27 above, alone accounted for 91.4% of the homes identified in the +frequency analysis. Had Respondents examined relevant documents in their possession regarding +Project #921, they would have learned that, according to Mancera’s 2011 revenue work papers, +94% (or 1,491) of the 1,592 budgeted homes for Project #921 were reported as sold in 2011. Yet, +as noted above, almost 600 homes were still marked in the 2012 Sembrado Report for Project #921 +as being under 95% complete, and therefore could not have been sold. Further, none of the block +and lot numbers for any of the homes reported as sold in 2011 agreed to the block and lot numbers +in the 2012 Sembrado Report for Project #921. +2. Failure to Properly Evaluate the Responses to the Bank A Confirmations for the +2010 and 2012 Audits +30. Each year, the engagement team confirmed the cash balances in Homex’s bank +accounts. These included cash balances at one particular Mexican bank (“Bank A”). During the +2010 and 2012 audits, Mancera sent standard Ernst & Young bank confirmations to Bank A for all +the accounts held by Homex (including Homex affiliates such as the construction and sales +subsidiaries known by their acronyms “PICSA” and “BCEN”). As part of that confirmation +process, Mancera also asked Bank A about any financial arrangements, including trust agreements +and debts, involving Homex. With respect to five Homex bank accounts – three in 2010 and two +in 2012 – that each had year-end cash balances in excess of MXN $998 million (approximately +USD $80.6 and USD $76.8 million in 2010 and 2012, respectively), Bank A responded to +Mancera’s request by sending its own form showing that Bank A held these accounts in trust for +Homex subsidiaries PICSA or BCEN. Furthermore, Bank A’s responses to Mancera showed that +the three signatories to each of the aforementioned bank accounts were not Homex, PICSA or +BCEN officers, like other confirmation replies showed, but rather Bank A employees, indicating +that Homex did not have control of these accounts. In the section of Bank A’s response to +Mancera related to information about debt accounts, Bank A responded, “none.” + +31. Despite being told that the accounts’ holders were Bank A trusts and that none of +the accounts’ signatories were identified as Homex employees, Mancera engagement team +members did not follow up to learn more details about the trust arrangements. The engagement +team members did not inquire into the nature of these bank accounts, to determine whether there +were any associated agreements, and, if so, to obtain a copy of the terms of those agreements. +11 +They also failed to follow up on the signatories who potentially had authorization on Homex +accounts each amounting to nearly MXN $1 billion but who were not Homex employees. + +32. In fact, the trust agreements corresponding to each of the accounts in the Bank A +confirms referenced in ¶ 30 above pertained to “with-recourse” factoring agreements that, as +described at ¶ 8 above, were a key component of Homex’s fraud. Homex improperly recorded the +amounts received under these agreements: rather than recording these with-recourse factored +amounts as loans, collateralized by the related accounts receivable, Homex recorded the amounts +as collections of accounts receivable. Many of the factored accounts receivable balances in the +agreement were fictitious since they pertained to fraudulent sales on unbuilt homes. The +Respondents therefore failed to obtain sufficient competent or appropriate audit evidence from the +bank confirmation audit procedure, which might have led them to detect the undisclosed factoring +arrangements. +3. Failure to Properly Test and Document the Review of Journal Entries for the +2010 Audit. +33. During its 2010 audit, the engagement team performed a test of journal entries in +certain Homex entities to identify material misstatements due to fraud. For Homex’s PICSA +entity, the engagement team selected 26 journal entries, including a MXN $998,045,000 journal +entry to a Bank A bank account (“Account A”) dated December 27, 2010 with a description of +“different movements of the day.” The journal entry recorded was eight lines of MXN +$998,045,000 being moved in and out of five Bank A bank accounts, including Account A, and +pertained to cash from one of Homex’s with-recourse factoring agreements. While the work +papers indicated that the engagement team reviewed support for the entry, the supporting +documentation is not in the work papers nor is there a description of the evidence the engagement +team member reviewed. In fact, for 19 of the 26 journal entries tested, the work papers lacked +either any purportedly reviewed documentation, or any detailed explanation concerning the same. +Furthermore, for five of the 26 journal entries, the work papers term supporting documentation as +“not applicable” without explanation; and the remaining two entries do not appear to have been +tested because none of the audit steps are checked off. There is no persuasive evidence that the +engagement team performed the procedures or obtained sufficient competent evidential matter. +E. VIOLATIONS + +RULE 102(e) AND SECTION 4C OF THE EXCHANGE ACT +34. Mancera’s 2010, 2011, and 2012 audits of Homex were deficient and not performed +in accordance with PCAOB standards.8 Section 4C(b)(2) and Rule 102(e)(1)(iv) define improper +professional conduct to include 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 + +8 References to auditing standards in this Order are to PCAOB standards in effect at the time the audit work was +performed. For example, the PCAOB risk assessment standards (AS 8-15) became effective for audits of fiscal +years beginning on or after December 15, 2010 (i.e., the 2011 audit of Homex) and superseded AU § 311, among +others. +12 +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. + +35. Section 4C(a)(2) of the Exchange Act and CRP 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. + +36. As set forth in more detail below, Respondents engaged in repeated violations of +PCAOB standards including in areas that, for reasons stated in, e.g., ¶¶ 12 and 14 above, warranted +heightened scrutiny. As such, Respondents’ conduct constituted “improper professional conduct” +within the meaning of Exchange Act Section 4C(a)(2) and CRP Rule 102(e)(1)(ii). +Respondents failed to demonstrate due professional care and professional skepticism during the +2010 to 2012 Homex audits (AU §§ 230, 316, and 330 and AS 13) +37. AU § 230, Due Professional Care in the Performance of Work, requires that “due +professional care … be exercised in the planning and performance of the audit and the preparation +of the report” (¶ .01). Due professional care requires the auditor to exercise professional +skepticism, which is “an attitude that includes a questioning mind and critical assessment of audit +evidence” (¶ .07). AU § 230 further requires that “in exercising professional skepticism, the +auditor should not be satisfied with less than persuasive evidence because of a belief that +management is honest” (¶ 9). Separately, AU § 316, Consideration of fraud in a Financial +Statement Audit, requires that “because of the characteristics of fraud, the auditor’s exercise of +professional skepticism is important when considering the fraud risks.9 The auditor should conduct +the engagement with the mindset that recognizes the possibility that a material misstatement due to +fraud could be present, regardless of any past experience with the entity and regardless of the +auditor’s belief about management’s honesty and integrity. Furthermore, professional skepticism +requires an ongoing questioning of whether the information and evidence obtained suggests that a +material misstatement due to fraud has occurred” (¶ .13). Finally, AU § 330, The Confirmation +Process, provides that “the auditor should exercise an appropriate level of professional skepticism +throughout the confirmation process” and professional skepticism is important in, among other +things, “evaluating the results of the confirmation procedures” (¶ .15). + +38. In addition, AS 13, The Auditor’s Response to the Risks of Material Misstatement, +also applies to the 2011 and 2012 audits and provides that once an auditor has assessed risks of a +material misstatement, particularly fraud risks, they must exercise professional skepticism in +gathering and evaluating audit evidence, including “obtaining sufficient appropriate evidence to +corroborate management explanations or representations concerning important matters” (¶ .07). + + +9 This reference to AU § 316 incorporated an amendment as part of the PCAOB risk assessment standards and is +applicable to the 2011 and 2012 Homex audits. For the 2010 Homex audit, AU § 316 ¶ .13 is identical other than +replacing “the fraud risks” with “the risk of material misstatement due to fraud”. +13 +39. As a result of Respondents’ conduct described above, each failed to exercise due +professional care and professional skepticism in Mancera’s 2010, 2011 and 2012 audits of Homex. +Respondents failed to adequately plan the 2010 to 2012 Homex audits (AU §§ 311 and 316, AS 9 +and 12) +40. AU §311, Planning and Supervision, applies to the 2010 Homex audit and requires +that “planning and supervision continue[] throughout the audit” (¶ .01) and that “the auditor should +obtain a level of knowledge of the entity’s business that will enable him” to “obtain an +understanding of the events, transactions and practices” that may have a “significant effect on the +financial statements” (¶ .06). Knowledge of the entity’s business helps the auditor in “identifying +areas that may need special consideration” (¶ .06a). In addition, AU § 316, Consideration of +Fraud in a Financial Statement Audit, which applies to the 2010 through 2012 audits, states that +“the auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about +whether the financial statements are free of material misstatement, whether caused by error or +fraud” (¶ .01). + +41. AS 9, Audit Planning, applies to the 2011 and 2012 Homex audits and requires that +“when developing the audit strategy and audit plan” the auditor should evaluate whether certain +matters are “important to the company’s financial statements and internal control over financial +reporting,” including “matters relating to the company’s business,” including its “operating +characteristics”, and the “relative complexity of the company’s operations” (¶ 7). In addition, AS +12, Identifying and Assessing Risks of Material Misstatement, requires that “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” (¶ 7). AS 12 further requires that “obtaining an +understanding of the nature of the company includes understanding… the company’s operating +characteristics, including its size and complexity” (¶ 10). + +42. As a result of Respondents’ conduct described above, each failed to properly plan +Mancera’s 2010, 2011 and 2012 audits of Homex. +Respondents failed to adequately supervise and train the engagement team during the 2010 to +2012 audits (AU § 311 and AS 10) +43. AU § 311, Planning and Supervision, which applies to the 2010 Homex audit, +states that “planning and supervision continues throughout the audit” (¶ .01) and that “supervision +involves directing the efforts of assistants who are involved in accomplishing the objectives of the +audit and determining whether those objectives were accomplished.” Among other things, +“elements of supervision include instructing assistants” and “reviewing the work performed” (¶ +.11). Finally, AU § 311 states that “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” (¶ .13). + +14 +44. AS 10, Supervision of the Audit Engagement, which applies to the 2011 and 2012 +Homex audits, states, “the engagement partner is responsible for the proper supervision of the work +of engagement team members and for compliance with PCAOB standards” (¶ 3). In addition, ”the +engagement partner may seek assistance from appropriate team members in fulfilling his or her +responsibilities pursuant to this standard” and these team members “should comply with the +requirements of this standard with respect to supervisory responsibilities assigned to them” (¶ 4). +Those performing supervisory activities should “review the work of engagement team members to +evaluate whether: (1) the work was performed and documented; (2) objectives of the procedures +were achieved; and (3) the results of the work support the conclusion reached” (¶ 5.c). Finally, ”to +determine the extent of supervision necessary for engagement team members to perform their work +as directed and form appropriate conclusions, the engagement partner and other engagement team +members performing supervisory activities should take into account: (a) the nature of the company, +including its size and complexity; (b) the nature of the assigned work for each engagement team +member; (c) the risks of material misstatement; and (d) the knowledge, skill and ability of each +engagement team member” (¶ 6). + +45. As a result of Respondents’ conduct described above, each failed to properly +supervise and train the engagement team for the 2010, 2011 and 2012 Homex audits. +Respondents did not prepare required documentation during the 2010 to 2012 audits (AS 3) +46. AS 3, Audit Documentation, requires that “audit documentation must contain +sufficient information to enable an experienced auditor, having no previous connection to the +engagement: (1) to understand the nature, timing, extent, and results of procedures performed, +evidence obtained, and conclusions reached, and (2) to determine who performed the work and the +date such work was completed as well as who reviewed the work and the date of such review” (¶ +6). It also states that “the auditor must identify all significant findings or issues in an engagement +completion document” (¶ 13). Lastly, “documentation of auditing procedures related to the +inspection of significant contracts or agreements should include abstracts or copies of the +documents” (¶ 10). + +47. As a result of Respondents’ conduct described above, each failed to prepare +required audit documentation on Mancera’s 2010, 2011 and 2012 Homex audits. +Respondents failed to obtain sufficient competent or appropriate audit evidence to support the +audit opinions for the 2010 to 2012 audits (AU § 326 and AS 15) +48. AU § 326, Evidential Matter , applies to the 2010 audit and requires that auditors +obtain sufficient competent evidential matter “through inspection, observation, inquiries and +confirmations to afford a reasonable basis for an opinion regarding the financial statements under +audit” (¶ .01). In addition, “to be competent, evidence, regardless of its form, must be both valid +and relevant” (¶ .21). + +49. AS 15, Audit Evidence, applies to the 2011 and 2012 audits and states that “audit +evidence is all the information, whether obtained from audit procedures or other sources that is +15 +used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit +evidence consists of both information that supports and corroborates management’s assertions +regarding the financial statements or internal control over financial reporting and information that +contradicts such assertions” (¶ 2). “To be appropriate, audit evidence must be both relevant and +reliable in providing support for the conclusions on which the auditor’s opinion is based” (¶ 6). +“When using information produced by the company as audit evidence, the auditor should evaluate +whether the information is sufficient and appropriate for purposes of the audit by performing +procedures to test the accuracy and completeness of the information, or test the controls over the +accuracy and completeness of that information” (¶ 10). “If 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). + +50. As a result of Respondents’ conduct describe above, each failed to obtain sufficient +competent/appropriate audit evidence to support Mancera’s audit opinions for the 2010, 2011, and +2012 Homex audits. +Respondents failed to properly evaluate audit results (AU § 316 and AS 14) +51. AU § 316, Consideration of Fraud in a Financial Statement Audit, as it applies to +the 2010 audit, requires that “the auditor's response to the assessment of the risks of material +misstatement due to fraud involves the application of professional skepticism in gathering and +evaluating audit evidence” (¶ .46). In addition, “[a]t or near the completion of fieldwork, the +auditor should evaluate whether the accumulated results of auditing procedures and other +observations… 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.” (¶ .74). + +52. AS 14, Evaluating Audit Results, which applies to the 2011 and 2012 audits, +requires that in the audit of financial statements, the auditor’s evaluation of audit results should +include evaluation of the “conditions identified during the audit that relate to the assessment of the +risk of material misstatement due to fraud” (¶ 4.d.) and “the sufficiency and appropriateness of the +audit evidence obtained” (¶ 4.f.). “The auditor should obtain corroboration for management’s +explanations regarding significant unusual or unexpected transactions, events, amounts, or +relationships” (¶ 8). Finally, “factors that are relevant to the conclusion on whether sufficient +appropriate audit evidence has been obtained” include, among others, “the results of audit +procedures performed in the audit of financial statements, including whether the evidence obtained +supports or contradicts management’s assertions” and “whether such audit procedures identified +specific instances of fraud” (¶ 34.b). + +53. As a result of Respondents’ conduct described above, each failed to properly +evaluate audit results for the 2010, 2011 and 2012 Homex audits. +16 +Mancera’s applicable policies and procedures were deficient (QC 20, QC 30 and QC 40) +54. PCAOB Quality Control Section 20, System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice, (“QC Section 20”) states that, “[p]olicies 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” (¶ 17). QC Section 20 also states that a firm should communicate +these policies and procedures to its personnel in a manner that provides reasonable assurance that +these policies and procedures are understood and complied with (¶ 23). In addition, PCAOB +Quality Control Section 30, Monitoring a CPA Firm’s Accounting and Auditing Practice, (“QC +Section 30”) states, “[m]onitoring procedures taken as a whole should enable the firm to obtain +reasonable assurance that its system of quality control is effective” (¶ 3). Finally, PCAOB Quality +Control 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, (“QC Section 40”) +states that a firm’s policies and procedures should be designed to provide a firm with reasonable +assurance that “work is assigned to personnel having the degree of technical training and +proficiency required in the circumstances” (¶ 2) and “such individuals possess the kinds of +competencies that are appropriate given the circumstances of individual client engagements” (¶ 3). + +55. As a result of Mancera’s conduct described above, Mancera’s policies and +procedures with respect to (i) exercising due professional care and skepticism; (ii) adequately +planning the audits; (iii) adequately training and supervising the engagement team; (iv) preparing +audit documentation in sufficient detail; (v) obtaining sufficient competent or appropriate audit +evidence to support the audit opinions; and (vi) properly evaluating audit results, failed to comply +with QC Sections 20, 30 and 40. +SECTION 10A(a)(1) OF THE EXCHANGE ACT +56. Section 10A(a)(1) of the Exchange Act requires that the audit of the financial +statements of an issuer 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, 10 (S.D.N.Y. 2002) (rejecting defendant’s attempt to read +into the plan language of Section 10A a scienter requirement that does not exist” (citation +omitted)). + +57. As a result of the Respondents’ conduct, Mancera violated, and Valdez and Corral +caused Mancera to violate, Section 10A(a)(1) of the Exchange Act. + +RULE 2-02(b)(1) OF REGULATION S-X + +58. Rule 2-02(b) of Regulation S-X requires each accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance 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- +17 +49708 (May 14, 2004). An audit firm violates Rule 2-02(b)(1) of Regulation S-X if it issues a +report stating that it has conducted its audit in accordance with PCAOB standards when it has not. +See In re Andrew Sims, CPA, Exchange Act Rel. No. 34-59584, (Mar. 17, 2009) (settled order); +KPMG Australia, Admin. No. 3-14276 (Feb. 28, 2011) (settled order). + +59. As a result of the conduct discussed above, Mancera violated Regulation S-X Rule +2-02(b)(1) when it issued audit reports stating that it had conducted its audits in accordance with +PCAOB standards when Mancera had not, and Valdez and Corral, as the audits’ engagement +partner and senior manager, respectively, caused Mancera’s violations of that rule. + +SECTION 13(a) OF THE EXCHANGE ACT AND RULE 13a-1 THEREUNDER + +60. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require that every +issuer of a security registered pursuant to Section 12 of the Exchange Act file with the Commission +annual reports as the Commission may require. The obligation to file such reports embodies the +requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., 587 F.2d 1149, 1165 +(D.C. Cir. 1978). An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information. SEC v. Falstaff Brewing Corp., 629 F.2d 62, 72 (D.C. Cir. 1980). +Scienter is not required for a violation of Section 13(a). SEC v. McNulty, 137 F.3d 732, 741 (2d +Cir. 1998). + +61. Homex’s 2010, 2011 and 2012 Forms 20-F were materially false and incorrect +because they contained audit reports falsely stating that Mancera audits of Homex were conducted +in accordance with PCAOB standards. Through their conduct, as described above, the +Respondents were a cause of Homex’s violations of these provisions in Homex’s 2010-2012 +Forms 20-F. +F. FINDINGS +62. Based on the foregoing, the Commission finds that: (a) Mancera, Valdez, and +Corral 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) Mancera committed, and Valdez +and Corral caused, violations of Section 10A(a)(1) of the Exchange Act and Rule 2-02(b)(1) of +Regulation S-X; and (c) Mancera, Corral, and Valdez caused violations by Homex of Section 13(a) +of the Exchange Act and Rule 13a-1 promulgated thereunder. +G. REMEDIAL ACTIONS +63. Since the Homex audits, Mancera, alone and in coordination with the global +organization of the member firms of Ernst & Young, took a series of steps intended to enhance the +relevant quality controls. In determining to accept Mancera’s Offer, the Commission considered +the remedial actions undertaken. +18 +H. UNDERTAKINGS +Mancera has undertaken to complete the following actions: + +1. Notification. Mancera shall provide all of its audit professionals both Spanish and +English-language versions of this Order within ten (10) business days after entry of the Order. + +2. Mancera Policies Report and Validation Plan. Within one hundred fifty (150) +days after the entry of this Order, Mancera shall submit to the Commission staff a report (the +“Mancera 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 Mancera’s quality controls and its SEC issuer audit and interim review +procedures regarding the audit subject areas specified below (hereinafter referred to as “Specified +Mancera Policies”). The Mancera Policies Report shall also describe in reasonable detail +Mancera’s methodology and work plan, including the internal quality inspection processes +administered by Mancera, to review, test, and assess whether the Specified Mancera Policies are +designed to provide reasonable assurance of compliance with Commission regulations and +PCAOB standards and rules in the performance of SEC issuer audit and interim reviews (the +“Validation Plan”). The Commission staff may make reasonable requests for further evidence of +the quality controls and validation plan set forth in the Mancera Policies Report and Validation +Plan, and Mancera agrees to provide such evidence. The Validation Plan, not unacceptable to the +Commission staff, shall describe Mancera’s review, testing, and assessment of Specified Mancera +Policies regarding the following audit subject areas: +a. exercising due professional care and professional skepticism in the planning and +performance of the audit; +b. consideration of fraud in a financial statement audit (including the risk of fraud +involving the circumvention of controls), and appropriately responding to identified +fraud risks; +c. evaluation of policies related to the acceptance and continuance of client +relationships; +d. obtaining sufficient appropriate audit evidence; +e. supervision of the audit engagement; and +f. audit documentation and retention. +3. Initial Validation Report and Certification. +a. Initial Validation Report. Within two hundred seventy (270) days after the +issuance of the Mancera Policies Report and Validation Plan, Mancera shall submit +to the Commission staff a written report setting forth a description of the testing, +analysis, and results of its Validation Plan (“Validation Report”). In particular, the +19 +Validation Report shall describe (i) the results of the processes identified in +Paragraph 2, above, as they relate to the Specified Mancera Policies identified in +the Mancera Policies Report, (ii) any deficiencies involving the Specified Mancera +Policies identified as a result of such processes, and (iii) any remedial actions taken +in response thereto. +b. Initial Validation Certification. The Initial Validation Report shall include a +certification executed by the Managing Partner for Mancera (“MP”) that the +Specified Mancera Policies are designed to provide reasonable assurance of +compliance with Commission regulations and PCAOB standards and rules in the +performance of SEC issuer audits and interim reviews, and if deficiencies in the +design or operation of the Specified Mancera 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 Mancera agrees to provide such +evidence. If substantial deficiencies are identified, Mancera 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, Mancera 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 +Mancera Policies are designed to provide reasonable assurance of compliance with Commission +regulations and PCAOB standards and rules in the performance of SEC issuer audits and interim +reviews; and (b) a remediation plan that contains a description of any deficiencies identified, and a +schedule of remedial measures to correct substantial 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, Mancera 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”). +b. Second Validation Certification. The Second Validation Report shall include a +certification executed by the MP that the Specified Mancera Policies are designed +to provide reasonable assurance of compliance with Commission regulations and +PCAOB standards and rules in the performance of SEC issuer audits and interim +reviews, and if deficiencies in the design or operation of the Specified Mancera +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 +Mancera agrees to provide such evidence. If substantial deficiencies are identified, +Mancera shall report such deficiencies to Commission staff and state that it cannot +certify compliance. +20 +6. Subseque nt Plans, Reports, and Certifications. If Mancera identifies substantial +deficiencies in the design or operation of the Specified Mancera Policies in the Second Validation +Report, Mancera shall repeat the undertakings described in Paragraphs 4 and 5 annually until such +time that no substantial deficiencies are identified. At that time, Mancera shall issue a Final +Validation Report that includes a certification executed by the MP that Mancera executed the Final +Validation Plan, that the Specified Mancera Policies are operating as designed and provide +reasonable assurance of compliance with all Commission regulations and PCAOB standards and +rules in the performance of SEC issuer audits and interim reviews, and that Mancera has complied +with the undertakings described in Paragraphs 8 and 9, below (“Final Validation Certification”). +7. Internal Team Leader. Mancera shall appoint an Internal Team Leader (“ITL”) +knowledgeable and experienced in U.S. GAAP, Commission regulations, and PCAOB standards +and rules, and not unacceptable to Commission staff, to oversee these undertakings. If for any +reason any vacancy occurs in the ITL position, Mancera shall promptly appoint a successor ITL, +who shall likewise be knowledgeable and experienced in U.S. GAAP, Commission regulations, +and PCAOB standards and rules, and likewise be not unacceptable to Commission staff, to oversee +these undertakings. By so doing, Mancera shall maintain an ITL until all undertakings have been +deemed satisfied by the Commission staff, per the terms of Paragraph 11, below. 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 Mancera controls +subject to review not unacceptable to Commission staff. The methodology used to select Mancera +controls subject to review shall be designed to include the operation of these controls on the audits +of SEC Registrant clients, including those designated as clients subject to expanded monitoring +procedures (“Close Monitoring Clients”). 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 Mancera +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. Mancera shall provide the ITL with staffing and other resources as +necessary to accomplish these undertakings in a timely manner. Mancera 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. Mancera Auditor Training. Within two hundred seventy (270) days of the date +of this Order, Mancera shall require each audit professional working on any SEC registrant client +audit to complete successfully a minimum of 32 hours of audit-related training. This audit-related +training shall cover the audit subject areas specified in Paragraph 2 above, with the following +topics being accorded at least the following minimum number of training hours: +a. At least 8 hours relating to the exercise of due care and professional skepticism in +evaluating audit evidence, including in corroborating management’s explanations +and representations; +b. At least 8 hours related to fraud-detection training. This training shall include +techniques for detecting and responding, in the course of SEC registrant audits, to +21 +possible fraud by audit clients, or audit client employees, officers or directors. This +training will focus particular attention on the auditor’s consideration of the impact +of audit findings on the assessment of fraud risks as discussed in AS 2810 (Par. 28- +29), as well as the documentation requirements outlined in AS § 2401.83. This +training will also detail the auditor’s responsibilities under Section 10A of the +Exchange Act; +c. At least 3 hours related to the auditor’s responsibilities with respect to audit +documentation, including evidence obtained, significant findings and resulting +actions, work paper sign-off, archiving, dating, and the retention of the foregoing, +including the auditor’s responsibilities with respect to AS 1215 and Rule 2-06 of +Regulation S-X; and +d. For engagement partners, senior managers and managers, at least 8 hours relating to +supervision, including the review of work performed by the engagement team (as +set forth in AS 1201). +9. Recordkeeping. Mancera 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. +10. Submissions to the Commission Staff. The Commission staff may request access +to documents, internal review and PCAOB inspection materials, training materials, Mancera +personnel, and/or meetings with Mancera, 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 Mancera any questions regarding the Reports, Plans, or +Certifications, and Mancera agrees to address all such questions within fifteen (15) days of receipt. +Unless otherwise directed by the Commission staff, all Reports, Plans and Certifications mentioned +in these undertakings shall be submitted to Melissa Hodgman, Associate Director, Division of +Enforcement, Mail Stop 5553, Securities and Exchange Commission, 100 F Street, NE, +Washington, DC 20549, or such other person as the Commission staff may request, with a copy to +the Office of Chief Counsel of the Enforcement Division (the “Designees”). Mancera 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. +11. Satisfaction. Unless otherwise notified by the Division of Enforcement, these +undertakings are deemed satisfied upon the later of: (a) three years after the entry of this Order; or +22 +(b) written confirmation by the Designees that they have received a Final Validation Certification +free from substantial deficiencies. +12. Deadlines. 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. +13. Cooperation. Mancera shall cooperate fully with the Commission with respect to +this proceeding and any related judicial or administrative proceeding or investigation commenced +by the Commission or to which the Commission is a party. Mancera’s cooperation shall include, +but is not limited to: (i) using reasonable efforts to secure the attendance and truthful statements or +testimony of any current partner, agent, or employee of Mancera at such times and places as the +staff requests upon reasonable notice; (ii) promptly and fully cooperating by taking any steps +necessary to render documents or records produced by Mancera admissible in any U.S. court +proceedings, which may include, without limitation, providing business-records certifications +requested by the Commission; (iii) accepting service by mail or facsimile transmission of notices +or subpoenas issued by the Commission for documents or testimony at depositions, hearings, or +trials, or in connection with any related investigation by Commission staff; (iv) appointing George +Canellos, Esq., Partner at Milbank LLP, 55 Hudson Yards, New York, NY US 10001-2163, as +agent to receive service of such notices and subpoenas; (v) with respect to such notices and +subpoenas, waiving 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 Mancera’s travel, lodging, and subsistence expenses at the then-prevailing U.S. +Government per diem rates; and (vi) consenting to personal jurisdiction over Mancera in any +United States District Court for purposes of enforcing any such subpoena. +14. Petition to Reopen Matter. Mancera agrees that if the Division of Enforcement +believes that Mancera has not satisfied these undertakings, it may petition the Commission to +reopen the matter to determine whether additional sanctions are appropriate. +15. In determining whether to accept Mancera’s Offer, the Commission has considered +the undertakings in Paragraphs 1, 13 and 14, above. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Sections 10A(a)(1), and 13(a) of the Exchange Act and Rule 13a-1 +promulgated thereunder, and Rule 2-02(b)(1) of Regulation S-X. + + B. Mancera is hereby censured. +23 + + C. Mancera shall comply with the undertakings enumerated in Paragraphs 2 through 12 +of Section III.H., above. + + D. Mancera shall, within 14 days of the entry of this Order, pay disgorgement of +$950,000.00, prejudgment interest of $139,926.43, and a civil money penalty in the amount of +$500,000.00 to the Securities and Exchange Commission. If timely payment of disgorgement and +prejudgment interest is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600 and if timely payment of a civil money penalty is not made, additional interest shall accrue +pursuant to 31 U.S.C. § 3717. + +E. Payment ordered in Paragraph D above must be made in one of the following ways: + +(1) Mancera may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Mancera 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) Mancera 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 +Mancera as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + F. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is created +for the disgorgement, prejudgment interest and penalties referenced in paragraph D above. The Fair +Fund may be added to or combined with any other fund created in a related action arising out of the +same investigative matter that is the basis of this action. 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, Mancera +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 +Mancera’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related +Investor Action grants such a Penalty Offset, Mancera agrees that it shall, within 30 days after +24 +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 Mancera 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. Valdez and Corral are denied the privilege of appearing or practicing before the +Commission as an accountant. + + H. After five years from the date of this order for Valdez, and after two years +from the date of this order for Corral, Valdez and Corral 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 (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 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 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; + +25 + (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 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 he appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +I. The Commission will consider an application by Valdez or Corral separately to +resume appearing or practicing before the Commission provided that their respective contador +público license is current and Valdez or Corral has resolved all other disciplinary issues with the +applicable boards of accountancy. However, if such 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 Valdez’s or Corral’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis with +due regard for protecting the integrity of the Commission’s processes. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4199.txt b/raw/aaer/2020/AAER-4199.txt new file mode 100644 index 0000000000000000000000000000000000000000..a95162f604bffdaf6071645f63fb3254bf393f77 --- /dev/null +++ b/raw/aaer/2020/AAER-4199.txt @@ -0,0 +1,367 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10907 / December 17, 2020 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90714 / December 17, 2020 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4199 / December 17, 2020 + +ADMINISTRATIVE PROCEEDING +File No. 3-20175 + + +In the Matter of + +Apex Global Brands Inc., FKA +Cherokee 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 Respondent, Apex Global Brands Inc., formerly known as Cherokee 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- + + 2 +and-Desist Proceedings, Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. This proceeding concerns material misstatements by Apex Global Brands Inc.2 +(“Apex” or “the Company”) regarding its primary asset and only revenue source, trademarks +held by the company. From at least January 2017 to April 2018 Apex materially overstated its +financial statement by failing to timely recognize impairments of its trademarks. During the time +of overstatement, Apex’s trademarks provided the company’s sole source of revenue of +approximately $29 million to $35 million. By January 2017, three of Apex’s trademarks were +impaired, but impairment charges were not recognized until February 3, 2018 when it impaired +these three trademarks for a total of $34.5 million. + +2. Apex’s misstatements were due to inappropriate quarterly and annual impairment +assessment of the trademarks, while the Company was experiencing a series of significant +setbacks in its business and industry environment, licensing business, and market valuation. +Apex performed only limited qualitative impairment assessments that failed to appropriately take +into account negative information indicating that the trademarks were more likely than not +impaired. Such an indication would have required a quantitative assessment of value, which +Apex did not perform. Apex was also aware as early as August 2016 that the values of certain of +Apex’s trademarks were more likely than not materially lower than the carrying values on the +Company’s books. + +3. In Apex’s fiscal year 2017 annual report and three subsequent quarterly reports, the +Company misreported to investors, including in an offering, significantly inflated values for its +trademarks. This information was material. Investors would reasonably expect to know if a +company’s major asset and revenue source was materially impaired. As a result, Apex violated the +antifraud Sections 17(a)(2) and 17(a)(3) of the Securities Act. In addition, Apex violated the +reporting, internal accounting controls and books and records provisions of the Exchange Act. + +Respondent + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +2 For clarity, the Order refers to Apex throughout. However, Apex was called Cherokee Inc. during the +relevant period. Cherokee changed its name to Apex Global Brands Inc. as of June 27, 2019. + + 3 +4. Apex Global Brands Inc., formerly known as Cherokee Inc., is a Delaware +corporation established in 1973 and headquartered in Sherman Oaks, California. As Cherokee, the +common stock was registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”) and initially traded on the Nasdaq Global Select Market under the symbol +"CHKE." Cherokee rebranded as Apex Global Brands effective June 27, 2019, and until it was +delisted on November 5, 2020, traded on NASDAQ Capital Markets under the ticker symbol +“APEX.” Apex files periodic reports, including Forms 10-K and 10-Q, pursuant to Section 13(a) +of the Exchange Act and related rules thereunder. Apex’s fiscal year ends in January. + +Facts + +Apex’s Trademarks Performed Poorly + +5. In September 2012, Apex acquired the Liz Lange trademark for $14 million. It +followed this purchase with the acquisition of the Tony Hawk (“Hawk”) trademark for $19 +million in January 2014, and the acquisition of the Flip Flop Shops (“FFS”) business for $12 +million in October 2015. Along with a fourth trademark, these trademarks formed the core of +Apex’s business. At fiscal yearend 2016 (January 2016), the carrying values of the trademarks +were as follows: + + +Trademark +Carrying +Value (in +$ +millions) +Liz Lange 14.0 +Hawk 19.0 +FFS 11.5 + +6. Both Liz Lange and Hawk trademarks were booked on Apex’s balance sheet at +values that equaled their purchase prices, determined on the basis of earnings expectations that +were dependent on the continuation and success of their respective contracts with two large retail +chains (Retail Chain A and B.) Subsequently, however, neither Liz Lange nor Hawk performed +in accordance with purchase expectations and both eventually lost their primary licensees. +Similarly, the 2015 FFS acquisition performed poorly from the time it was acquired, never +achieving the income and expansion assumptions that formed the basis of its acquisition cost and +carrying value. +Apex Failed to Perform Adequate Impairment Assessments of its Trademarks +7. Throughout the relevant period, Apex was required to perform annual impairment +assessments of its trademarks. These assessments also were required more frequently on an +interim basis if events or changes in circumstances indicated it was more likely than not that the +asset was impaired, pursuant to ASC 350-30-35. The Company was permitted to first perform a +qualitative assessment to determine whether it was necessary to perform a quantitative impairment + + 4 +test. In a qualitative assessment, an entity assesses qualitative factors, sometimes referred to as +“triggers,” to determine whether it is more likely than not that an indefinite-lived intangible asset is +impaired. If it is found that the indefinite-lived intangible asset is more likely than not impaired, +the required quantified assessment determines the fair value of the asset. If the carrying amount of +the indefinite-lived asset exceeds the fair value, an impairment is recognized in an amount equal to +that excess. + +8. Throughout the relevant period, Apex’s annual and quarterly impairment +assessments consisted only of updating a memo that outlined a list of potential impairment +triggers. Company personnel without firsthand knowledge of many of the events impacting the +individual trademarks and with no prior experience or training related to the relevant area of +accounting devised and performed the assessments. Apex had no written policies and procedures +to ensure relevant information was collected and considered during the assessments, and there +was little or no supervision of the process. + +9. Moreover, Apex’s quarterly impairment assessment memos did not address all the +relevant considerations laid out in the applicable accounting standard and included several items +which did not comport with those accounting standards. The Company’s annual assessment +memos did list the potential impairment triggers laid out in the applicable accounting literature. +However, the memos either did not address triggering events affecting specific trademarks or +dismissed them with brief explanations that did not address critical issues. Further, the Company +did not consistently follow the internal procedures it had for documenting impairment +assessments. For example, contrary to Company procedures, the impairment memos from +several periods did not include the initials of all the relevant executives, making it unclear +whether they had reviewed and agreed with the assessments. Moreover the executives were +unclear about what their roles were in the impairment process and what their initialing the memo +signified. +Liz Lange, Hawk, and FFS were Impaired by Fiscal Year End 2017 + +10. By fiscal year end 2017 there were multiple clear indicators of impairment of the +Liz Lange, Hawk and FFS trademarks. + +Loss of Major Contracts + +11. Liz Lange’s $14 million purchase price (and carrying value) was based on a +multiple of projected earnings with an expected 10% annual growth in revenue. Nearly all of the +projected revenue was based on a continuing license relationship with Retail Chain A. +Throughout the relevant period, Retail Chain A was by far Apex’s primary licensee for the Liz +Lange trademark, providing nearly 88% of the Company’s annual revenue from that trademark. +In November 2016, Retail Chain A told the Company that it would not renew its license for the +Liz Lange brand when it expired in January 2018. + +12. Similar to Liz Lange, Hawk’s $19 million purchase price (and carrying value) +was also based on projected earnings, nearly all of which was dependent on a licensing + + 5 +relationship with Retail Chain B. The Retail Chain B licensing relationship comprised more than +90% of Apex’s revenue related to the Hawk brand. However, the Hawk brand did not perform +well for Retail Chain B. Retail Chain B retail sales of Hawk branded products were below +expectations, and Retail Chain B was paying $4.8 million in royalties that was based purely on a +contractual annual minimum amount it was required to pay Apex throughout the relationship. In +October 2016, Retail Chain B served notice that it would not renew the license. + +13. As described below, replacing even a portion of the revenue from Retail Chain A +and B proved difficult. Apex had no historical experience in replacing licensing revenue on this +scale, and there was not a reasonable basis to believe that the revenue could be replaced after +these licenses terminated. + +14. The financial circumstances surrounding Retail Chain A’s and Retail Chain B’s +license for the Liz Lange and Hawk trademark represented potential indicators of impairment, +especially given the size of the license relationships. However, Apex did not fully consider them +in its impairment analysis of either trademark at fiscal yearend 2017, or in the first three quarters of +fiscal 2018. + +Declining Financial Performance +15. With Retail Chain A’s pivot away from the Liz Lange brand, Apex’s revenue +from the trademark shrank. As a result, Apex consistently showed declining revenues and missed +budgeted revenue targets for this trademark. Apex had budgeted approximately a 7% increase in +revenue for 2017. In fact, there was not an increase in revenue year over year, but a decline and +Liz Lange missed its budgeted revenue by 26%. This trend was reflective of “declining financial +performance metrics” referenced in the accounting standards. For Hawk, the steady decline in +retail sales precipitated the non-renewal of the Retail Chain B contract. Apex tracked retail sales +of its licensees and knew at fiscal yearend 2017 that sales of Hawk merchandise at Retail Chain +B had declined 29% from the prior year. Yet, Apex did not consider whether the declining +financial performance of these trademarks impacted the value of the trademarks or affected the +likelihood of impairment. + +16. Apex also experienced clearly declining financial performance metrics with respect +to FFS. Apex purchased the FFS business in October 2015 for $12 million based on projected +earnings. At the time of purchase, FFS had slightly over 90 stores. Yet, Apex’s financial model for +the acquisition assumed there would be 141 stores a mere fifteen months later, by fiscal year end +2017 (January 2017). However, Apex never realized these expectations. Instead the FFS business +experienced significant setbacks, including delayed store openings, multiple store closings due to +poor performance, and litigation initiated against a number of store operators for breach of contract +and failure to pay franchise fees. Consequently, the number of FFS stores, instead of increasing to +141, fell from approximately 93 when acquired to 72 at the end of fiscal 2017. + +17. During the course of Apex’s ownership, FFS related revenue fell by 26%, never +approaching the numbers assumed in the Company’s pre-purchase valuation, and related losses + + 6 +more than tripled. FFS never produced net income for any period it was held by Apex. And, by +September 2017, Apex had begun discussing the sale of the FFS business and trademark and +finally disposed of both in June 2018 for slightly more than $4 million; a loss of nearly $8 million +from the purchase price. + +18. These significant departures from the planned financial performance of FFS, as +well as management’s evolving strategic views vis-à-vis the desirability of owning the +trademark, provided strong indicia of impairment of FFS by fiscal year end 2017. While Apex +acknowledged the slipping financial performance in its fiscal year end 2017 analysis, it +dismissed the losses as related to one time advertising expenses and legal expenses and failed to +address the fact that the primary metric on which the carrying value was based-- growth in store +numbers—was in significant decline. + +Deterioration of Business Environment + +19. Like all Apex’s trademarks, Liz Lange, Hawk and FFS were impacted by an +industry environment where retailers were increasingly turning away from licensing +arrangements in favor of in-house brands. During the relevant period, Apex encountered +significant difficulty in its attempts to sell licenses for trademarks domestically and abroad. Both +in the case of Liz Lange and Hawk, Apex proved incapable of signing more than one licensee +able to generate even 10% of the revenue the Company earned from the Retail Chain A Liz +Lange license relationship and Retail Chain B Hawk license relationship on an annual basis. +Deterioration of the business environment is a potential trigger of impairment. Although the +Company acknowledged the difficult business environment, it did not consider it in assessing +impairment. +Change in Business Strategy + +20. The difficulty Apex experienced signing new licensees during fiscal 2017 +precipitated a shift in its licensing strategy from a direct-to-retail to a wholesale model. +Whereas Apex’s direct-to-retail model involves licensed agreements directly with retailers for +the sale of trademarked merchandise, the wholesale model involves signing license agreements +with wholesalers who are free to market and sell trademarked merchandise to a wide assortment +of retailers. However, Apex’s wholesale licensing arrangements are generally subject to lower +royalty rates and lower predictable or minimum guaranteed royalties. Overall, these factors +further increased the uncertainty surrounding Apex’s ability to recover from the loss of Retail +Chain B and Retail Chain A relationships in connection with Hawk and Liz Lange, respectively. +The Company, however, did not consider its change in strategy in assessing impairment. +Third-Party Firm Valuation Report + + + 7 +21. In the second half of 2016, Apex engaged Third-Party Firm to perform a market +valuation of each of its trademarks in connection with the Company’s ongoing efforts to obtain +financing for a major trademark acquisition. The Third-Party Firm valuations were based on +Apex’s own data and optimistic projections. The report released by Third-Party Firm on August +22, 2016 indicated that Liz Lange and Hawk, two of Apex’s four major trademarks, were more +likely than not materially impaired by $3.3 million (Liz Lange) and $2.8 million (Hawk). + +22. The fact that the Third-Party Firm valuations, which were based on Apex’s own +current projections, reflected values below carrying values for these trademarks was a strong +indicator that the trademarks were more likely than not impaired. Nonetheless, Apex did not +perform a quantitative assessment of the value of any of its trademarks and continued to look +only at qualitative factors which it dismissed as not indicative of impairment. + +Impairment Recognized Fiscal Year End 2018 + +23. Apex changed its external auditor just prior to the filing of the 10-Q for the +second quarter of Apex’s fiscal 2018 (the quarter-ended July 2017). Apex engaged a different +third party firm (“Subsequent Third Party Firm”) to perform a quantitative impairment +assessment of its trademarks and goodwill as of November 15, 2017. The quantitative +assessment found Apex’s trademarks, including the three at issue, were impaired by a total of +approximately $35.5 million. Specifically, the Subsequent Third-Party Firm assessment found +the Liz Lange, Hawk and the FFS trademarks were impaired by $12.2, $14, and $8.3 million, +respectively. + +24. In light of all the indicators of impairment described above, Apex should have +conducted a quantitative impairment assessment by at least January 2017 for its 2017 fiscal year +end. Had it done so, Apex would have found the trademarks were materially impaired. Apex +ultimately reported a $35.5 million impairment charge in its 10-K for its 2018 fiscal year ended +February 3, 2018, $34.5 million related to the three trademarks discussed. + +25. By failing to recognize the impairments in the appropriate period, Apex +materially understated its net loss before taxes and the carrying values of its trademarks as +reported in its 10-K for fiscal year 2017, and continued to materially overstate the carrying +values of its trademarks as reported in its quarterly 10-Qs in the first three quarters of its fiscal +2018. + +26. In determining whether to accept Apex’s Offer, the Commission has considered +the Company’s current financial condition. + +Violations + +27. As a result of the conduct described above, Apex violated: + + + 8 +a. Section 17(a)(2) of the Securities Act, which makes it unlawful for “any person in +the offer or sale of securities . . . directly or indirectly . . . to obtain money or property by means of +any untrue statement of a material fact or any omission of a material fact necessary in order to +make the statements made, in light of the circumstances under which they were made, not +misleading.” + +b. Section 17(a)(3) of the Securities Act, which makes it unlawful for “any person in +the offer or sale of any securities . . . to engage in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser.” + +c. 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 and quarterly +reports as the Commission may require, and mandate that periodic reports contain such further +material information as may be necessary to make the required statements not misleading. + +d. Section 13(b)(2)(A) of the Exchange Act, which requires all reporting 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. + +e. Section 13(b)(2)(B) of the Exchange Act thereunder, 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. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Apex’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + + A. Respondent Apex 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) +and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + + By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2020/AAER-4200.txt b/raw/aaer/2020/AAER-4200.txt new file mode 100644 index 0000000000000000000000000000000000000000..96919d4863f6d3813e7556a89032a7e0bfee23b6 --- /dev/null +++ b/raw/aaer/2020/AAER-4200.txt @@ -0,0 +1,288 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 90716 / December 17, 2020 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4200 / December 17, 2020 +ADMINISTRATIVE PROCEEDING +File No. 3-20176 + +In the Matter of +Jason Boling, +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 Respondent, Jason Boling. +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. From at least January 2017 to December 2017, Jason W. Boling the Chief +Financial Officer (“CFO”) of Apex Global Brands Inc.2 (“Apex” or “the Company”), failed to +ensure the accuracy of Apex’s books and records regarding its primary asset and only revenue +source, trademarks held by the company. By January 2017, three of Apex’s trademarks were +impaired, but impairment charges were not recognized until February 3, 2018 (Apex’s 2018 +fiscal year end) when it impaired these three trademarks for a total of $34.5 million. +2. Apex’s inaccurate books and records were due to its failure to timely recognize +impairment of certain trademarks, while the Company was experiencing a series of significant +setbacks in its business and industry environment, licensing business, and market valuation. +Apex performed only limited qualitative impairment assessments that failed to appropriately take +into account negative information indicating that the trademarks were more likely than not +impaired. Such an indication would have required a quantitative assessment of value, which +Apex did not perform. As early as August 2016, there were indications that the values of certain +of Apex’s trademarks were more likely than not materially lower than the carrying values on the +Company’s books. +3. Boling was Apex’s CFO from March 2013 to December 2017 and oversaw +Apex’s impairment assessments of trademarks. Boling was aware during this period of +information indicating that certain of Apex’s trademarks were more likely than not impaired and, +as a consequence, should have known that Apex’s books and records did not accurately reflect +the value of those trademarks. +4. As a result of the conduct described in this Order, Boling caused Apex’s +violations of Section 13(b)(2)(A) of the Exchange Act. +Respondent +5. Jason W. Boling, 50, is a CPA licensed in California and served as CFO of Apex +from March 2013 until he resigned effective December 2017. +Relevant Entity +6. Apex Global Brands Inc., formerly known as Cherokee Inc., is a Delaware +corporation established in 1973 and headquartered in Sherman Oaks, California. Apex owns and +licenses various fashion and lifestyle brands. As Cherokee, the common stock was registered +pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and initially + +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 For clarity, the Order refers to Apex throughout. However, Apex was called Cherokee Inc. during the relevant +period. Cherokee changed its name to Apex Global Brands Inc. as of June 27, 2019. + +3 +traded on the Nasdaq Global Select Market under the symbol “CHKE.” Cherokee rebranded as +Apex Global Brands effective June 27, 2019, and until it was delisted on November 5, 2020, +traded on NASDAQ Capital Markets under the ticker symbol “APEX.” Apex files periodic +reports, including Forms 10-K and 10-Q, pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. Apex’s fiscal year comprises a 52 or 53 week period ending on the +Saturday nearest to January 31. +Facts +Apex’s Trademarks Performed Poorly +7. In September 2012, Apex acquired the Liz Lange trademark for $14 million. It +followed this purchase with the acquisition of the Tony Hawk (“Hawk”) trademark for $19 +million in January 2014, and the acquisition of the Flip Flop Shops (“FFS”) business for $12 +million in October 2015. Along with a fourth trademark, these trademarks formed the core of +Apex’s business. +8. During the relevant period, Apex’s Liz Lange and Tony Hawk (“Hawk”) +trademarks were booked on Apex’s balance sheet at values that equaled their purchase prices, +determined on the basis of earnings expectations that were dependent on the continuation and +success of their respective contracts with two large retail chains (Retail Chain A and B.) +Subsequently, however, neither Liz Lange nor Hawk performed in accordance with purchase +expectations. By fiscal year end 2017, Boling should have been aware that both Retail Chains +would terminate their respective licenses. Similarly, the 2015 Flip Flop Shops (“FFS”) +acquisition performed poorly from the time it was acquired, never achieving the income and +expansion assumptions that formed the basis of its acquisition cost and carrying value. +Boling Oversaw Impairment Assessments of Apex’s Trademarks +9. Throughout the relevant period, Apex was required to and did perform annual +impairment assessments of its trademarks. These assessments also were required more +frequently on an interim basis if events or changes in circumstances indicated it was more likely +than not that the asset was impaired, pursuant to ASC 350-30-35. Boling oversaw these +assessments. The Company was permitted to first perform a qualitative assessment to determine +whether it was necessary to perform a quantitative impairment test. In a qualitative assessment, +an entity assesses qualitative factors, sometimes referred to as “triggers,” to determine whether it +is more likely than not that an indefinite-lived intangible asset is impaired. If it is found that the +indefinite-lived intangible asset is more likely than not impaired, the required quantified +assessment determines the fair value of the asset. If the carrying amount of the indefinite-lived +asset exceeds the fair value, an impairment is recognized in an amount equal to that excess. +Liz Lange, Hawk, and FFS were Impaired by Fiscal Year End 2017 +By fiscal year end 2017 there were multiple indicators of impairment of the Liz Lange, Hawk +and FFS trademarks. Boling was aware of the relevant facts and developments discussed below. +Boling regularly presented financial performance numbers at Apex Board meetings, including +the performance of each trademark against budget. Although he was not responsible for + +4 +preparation of sales forecasts included in budgets, Boling was also present for the presentations +to the Board that included information related to the unfavorable developments related to each of +the trademarks. +Loss of Major Contracts +10. Liz Lange’s $14 million purchase price (and carrying value) was based on a +multiple of projected earnings with an expected 10% annual growth in revenue. Nearly all of the +projected revenue was based on a continuing license relationship with Retail Chain A. +Throughout the relevant period, Retail Chain A was by far Apex’s primary licensee for the Liz +Lange trademark, providing nearly 88% of the Company’s annual revenue from that trademark. +In November 2016, Retail Chain A told the Company that it would not renew its license for the +Liz Lange brand when it expired in January 2018. +11. Similar to Liz Lange, Hawk’s $19 million purchase price (and carrying value) +was also based on projected earnings, nearly all of which was dependent on a licensing +relationship with Retail Chain B. The Retail Chain B licensing relationship comprised more than +90% of Apex’s revenue related to the Hawk brand. However, the Hawk brand did not perform +well for Retail Chain B. Retail Chain B retail sales of Hawk branded products were below +expectations, and Retail Chain B was paying $4.8 million in royalties that was based purely on a +contractual annual minimum amount it was required to pay Apex throughout the relationship. In +October 2016, Retail Chain B served notice that it would not renew the license. +12. As described below, replacing even a portion of the revenue from Retail Chain A +and B proved difficult. Apex had no historical experience in replacing licensing revenue on this +scale, and there was not a reasonable basis to believe that the revenue could be replaced after +these licenses terminated. +13. The financial circumstances surrounding Retail Chain A’s and Retail Chain B’s +license for the Liz Lange and Hawk trademark represented potential indicators of impairment, +especially given the size of the license relationships. +Declining Financial Performance +14. With Retail Chain A’s pivot away from the Liz Lange brand, Apex’s revenue +from the trademark shrank. As a result, Apex consistently showed declining revenues and +missed budgeted revenue targets for this trademark. Apex had budgeted approximately a 7% +increase in revenue for 2017. In fact, there was not an increase in revenue year over year, but a +decline and Liz Lange missed its budgeted revenue by 26%. This trend was reflective of +“declining financial performance metrics” referenced in the relevant accounting standards. For +Hawk, the steady decline in retail sales precipitated the non-renewal of the Retail Chain B +contract. Apex tracked retail sales of its licensees and knew at fiscal yearend 2017 that sales of +Hawk merchandise at Retail Chain B had declined 29% from the prior year. Yet, Apex did not +consider whether the declining financial performance of these trademarks impacted the value of +the trademarks or affected the likelihood of impairment. +15. Apex also experienced clearly declining financial performance metrics with +respect to FFS. Apex purchased the FFS business in October 2015 for $12 million based on + +5 +projected earnings. At the time of purchase, FFS had slightly over 90 stores. Yet, Apex’s +financial model for the acquisition assumed there would be 141 stores a mere fifteen months +later, by fiscal year end 2017 (January 2017). However, Apex never realized these expectations. +Instead the FFS business experienced significant setbacks, including delayed store openings, +multiple store closings due to poor performance, and litigation initiated against a number of store +operators for breach of contract and failure to pay franchise fees. Consequently, the number of +FFS stores, instead of increasing to 141, fell from approximately 93 when acquired to 72 at the +end of fiscal 2017. +16. During the course of Apex’s ownership, FFS related revenue fell by 26%, never +approaching the numbers assumed in the Company’s pre-purchase valuation, and related losses +more than tripled. FFS never produced net income for any period it was held by Apex. And, in +June 2018, after Boling’s departure from the company, Apex sold the FFS business and +trademark for slightly more than $4 million; a loss of nearly $8 million from the purchase price. +These significant departures from the planned financial performance of FFS, provided strong +indicia of impairment of FFS by fiscal year end 2017. +Deterioration of Business Environment +17. Like all Apex’s trademarks, Liz Lange, Hawk and FFS were impacted by an +industry environment where retailers were increasingly turning away from licensing +arrangements in favor of in-house brands. During the relevant period, Apex encountered +significant difficulty in its attempts to sell licenses for trademarks domestically and abroad. Both +in the case of Liz Lange and Hawk, Apex proved incapable of signing more than one licensee +able to generate even 10% of the revenue the Company earned from the Retail Chain A Liz +Lange license relationship and Retail Chain B Hawk license relationship on an annual basis. +Deterioration of the business environment is a potential trigger of impairment. +Change in Business Strategy +18. The difficulty Apex experienced signing new licensees during fiscal 2017 +precipitated a shift in its licensing strategy from a direct-to-retail to a wholesale model. Whereas +Apex’s direct-to-retail model involves licensed agreements directly with retailers for the sale of +trademarked merchandise, the wholesale model involves signing license agreements with +wholesalers who are free to market and sell trademarked merchandise to a wide assortment of +retailers. However, Apex’s wholesale licensing arrangements are generally subject to lower +royalty rates and lower predictable or minimum guaranteed royalties. Overall, these factors +further increased the uncertainty surrounding Apex’s ability to recover from the loss of Retail +Chain B and Retail Chain A relationships in connection with Hawk and Liz Lange, respectively. +Third-Party Firm Valuation Report +19. In the second half of 2016, Apex engaged Third-Party Firm to perform a market +valuation of each of its trademarks in connection with the Company’s ongoing efforts to obtain +financing for a major trademark acquisition. The Third-Party Firm valuations were based on +Apex’s own data and optimistic projections. The report released by Third-Party Firm on August + +6 +22, 2016 indicated that Liz Lange and Hawk, two of Apex’s four major trademarks, were more +likely than not materially impaired by $3.3 million (Liz Lange) and $2.8 million (Hawk). +20. The fact that some of the Third-Party Firm valuations, which were based on +Apex’s own current projections, reflected values below carrying values for these trademarks was +a strong indicator that the trademarks were more likely than not impaired. +21. In light of all the indicators of impairment described above, Apex should have +conducted a quantitative impairment assessment by at least January 2017 for its 2017 fiscal year +end. Had it done so, Apex would have found the trademarks were materially impaired. Apex +ultimately reported a $35.5 million impairment charge in its 10-K for its 2018 fiscal year ended +February 3, 2018, $34.5 million related to the three trademarks discussed. +22. In his role as CFO, Boling was responsible for the accuracy of Apex’s books and +records. Boling was aware of the facts discussed in paragraphs 10 -21 above which should have +alerted him that certain of the trademarks were more likely than not impaired and, as a +consequence, should have known that Apex’s books and records did not accurately reflect the +value of those trademarks. +Violations +As a result of the conduct described above, Boling caused Apex’s violation of Section +13(b)(2)(A) of the Exchange Act, which requires all reporting 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. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Boling’s Offer. +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: +A. Respondent Boling cease and desist from committing or causing any violations +and any future violations of Section 13(b)(2)(A) of the Exchange Act. +B. Respondent Boling shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount 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 must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +7 +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying Jason +Boling as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Carolyn Welshhans, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5010A. +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, + + +8 +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). +By the Commission. +Vanessa A. Countryman +Secretary \ No newline at end of file