diff --git a/raw/aaer/2013/AAER-3435.pdf b/raw/aaer/2013/AAER-3435.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4e6f1219b33c64aca3f5124d9d6b3295d1795b97 Binary files /dev/null and b/raw/aaer/2013/AAER-3435.pdf differ diff --git a/raw/aaer/2013/AAER-3435.txt b/raw/aaer/2013/AAER-3435.txt new file mode 100644 index 0000000000000000000000000000000000000000..df8567a49f1240201eb2ac2e07a2e1c5058e6347 --- /dev/null +++ b/raw/aaer/2013/AAER-3435.txt @@ -0,0 +1,108 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68591 / January 4, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3435 / January 4, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-13977 + +In the Matter of +Kenneth J. Abod, 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 July 23, 2010, Kenneth J. Abod, CPA (“Abod”) 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 Abod pursuant to Rule +102(e)(1)(iii) of the Commission's Rules of Practice. +1 This order is issued in response to Abod’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 Abod failed to comply with Generally Accepted Accounting +Principles (“GAAP”) while serving as Sunrise Senior Living, Inc.’s (“Sunrise” or the +“Company”) treasurer for the year-end 2004 and the first fiscal quarter of 2005. Abod helped +determine the amount of Sunrise’s 2004 year-end bonus accrual and was aware that the company +was planning to pay $1 million in 2004 bonuses in 2005 but had failed to accrue for them at 2004 +fiscal year-end. Abod also instructed Sunrise employees to make an adjustment to eliminate the +corporate bonus accrual account for the first quarter of 2005, ended on March 31, 2005. Sunrise +would not have met previously issued earnings per share forecasts if it had properly accrued for +bonuses at year end 2004 and the first fiscal quarter of 2005. The accounting for the corporate +bonus accrual account failed to comply with GAAP, because it was probable that Sunrise would +pay bonuses and could reasonably estimate the bonus payment amounts. Consequently, Abod +caused Sunrise to issue an annual report for fiscal year 2004 and a quarterly report for the first + +1 See Accounting and Auditing Enforcement Release No. 3158 dated July 23, 2010. Abod was permitted, pursuant +to the order, to apply for reinstatement after one year upon making certain showings. + + 2 +quarter of 2005 that failed to comply with GAAP. As a result of this conduct, the Commission +found that Abod willfully violated Section 13(b)(5) of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 13b2-1 thereunder and caused and willfully aided and abetted +Sunrise’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rule 12b- +20, 13a-1, and 13a-13 thereunder. +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, Abod +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. Abod 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, Abod’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 Abod, it appears that he has complied with the terms of the July 23, 2010 order suspending +him from appearing or practicing before the Commission as an accountant, that no information +has come to the attention of the Commission relating to his character, integrity, professional +conduct, or qualifications to practice before the Commission that would be a basis for adverse +action against him pursuant to Rule 102(e) of the Commission’s Rules of Practice, and that +Abod, by undertaking to have his work reviewed by the independent audit committee of any +company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the 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 +Kenneth J. Abod, 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. + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3436.txt b/raw/aaer/2013/AAER-3436.txt new file mode 100644 index 0000000000000000000000000000000000000000..20a43b1020efc646f329321bcff9e42970a66ef1 --- /dev/null +++ b/raw/aaer/2013/AAER-3436.txt @@ -0,0 +1,900 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68605 / January 9, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3436 / January 9, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15168 + +_____________________________________ + +In the Matter of + +JOHN J. AESOPH, CPA, and +DARREN M. BENNETT, 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 + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest that public administrative proceedings be, and hereby are, instituted against +John J. Aesoph, CPA (“Aesoph”) and Darren M. Bennett, CPA (“Bennett”) pursuant to Section +4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice to determine whether Aesoph and Bennett engaged in improper +professional conduct. + +II. + After an investigation, the Division of Enforcement and the Office of the Chief +Accountant allege that: +A. Summary + 1. Aesoph and Bennett (collectively, “the auditors”) repeatedly engaged in improper +professional conduct during their year-end 2008 audit of TierOne Corporation, a holding +company for TierOne Bank (collectively “TierOne”). They did so by failing to subject TierOne’s +loan loss estimates – one of the highest risk areas of the audit – to appropriate scrutiny. Aesoph +served as the audit partner and Bennett served as the senior manager on the engagement; they +each had significant responsibility for the audit decisions, the inadequately designed and + +2 + +implemented audit programs, the review of audit work papers, and the failures to follow audit +standards that are the subject of this proceeding. + 2. TierOne’s loan losses were a critical audit area that warranted heightened +scrutiny. Up to and during 2008, as a result of the financial crisis and related real estate market +crash, TierOne had been experiencing a dramatic increase in the number of its troubled real +estate loans. TierOne estimated its loan losses for a key component of its troubled loan portfolio +– large, unique loans accounted for under Financial Accounting Standards Board’s Statement of +Financial Accounting Standards No. 114 (“FAS 114”) – by using the value of the collateral +underlying these loans. Rather than get updated appraisals to value the collateral of the loans that +TierOne evaluated for impairment under FAS 114 (called here “the bank’s FAS 114 loans” 1), +TierOne frequently relied on stale, dated appraisals to which the bank’s management sometimes +applied a discount. TierOne’s determination of the discount amounts, and its decisions not to +apply a discount, were not documented, nor were they supported by reliable facts or evidence. + 3. Aesoph and Bennett violated numerous Public Company Accounting Oversight +Board (“PCAOB”) audit standards in both their audit of internal control over financial reporting +and their audit of the financial statements. The auditors correctly identified TierOne’s loan losses +as presenting a fraud risk and a significant risk of material misstatement. The actual audit test +work in this area, however, was inadequate considering the associated audit risk and materiality. +For example, the internal controls identified and tested by the audit engagement team relating to +the allowance for loan and lease losses (“ALLL”) did not effectively address one of the most +important and riskiest components of the bank’s loan loss calculations: management’s use of +stale and inadequate appraisals to value the collateral underlying the bank’s FAS 114 loans. +Based on this test work, Aesoph and Bennett had no reasonable basis to conclude that TierOne +maintained, in all material respects, effective internal control over financial reporting. Moreover, +the auditors failed to adequately identify and evaluate defects in the design and operating +effectiveness of controls over collateral valuation that would have been important to the auditors’ +conclusion about whether TierOne’s controls sufficiently addressed the assessed risk of +misstatement. The auditors violated PCAOB standards, including specifically Auditing Standard +No. 5 (“AS No. 5”), in their audit of internal control over financial reporting. + 4. Compounding these flaws in the audit of internal control over financial reporting +were Aesoph and Bennett’s failures to comply with PCAOB standards in their substantive audit +procedures over the bank’s FAS 114 loans. The relevant audit work on these loans consisted of +checking management’s basic math, confirming that appraisals (no matter how stale) existed, +reviewing a sample of appraisals, and relying on management’s uncorroborated representations +concerning property-specific issues, including whether stale appraisals required adjustment. +These procedures fell short of the requirements of a number of PCAOB standards, including +specifically AU Sections 328 and 342, which address auditing fair value and accounting +estimates, respectively. In short, the auditors failed to subject management’s estimates to +appropriate scrutiny. + +1 The specific loans at issue in this proceeding are listed on 2008 audit work papers L-22.2F, L- +22.2H, L-32.1, L-32.2, and L-32.3. + +3 + +5. Aesoph and Bennett failed to obtain sufficient, competent evidential matter to +provide assurances that management’s estimates were reasonable. They further failed to act with +due professional care or appropriate professional skepticism. + 6. These failures, along with others detailed below, demonstrate a single instance of +highly unreasonable conduct that resulted in a violation of applicable professional standards in +which Aesoph and Bennett knew, or should have known, heightened scrutiny was warranted; and +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 + 7. John J. Aesoph, CPA, age 40, is a resident of Omaha, Nebraska. Aesoph has +been an auditor at KPMG, LLP (“KPMG”) since 2001 and a partner at the firm since 2005. He +was on the TierOne audit engagement from 2002 through KPMG’s resignation in 2010, and was +the engagement partner for the 2008 audit. Aesoph is currently licensed as a CPA in Nebraska +and North Dakota. He has previously been licensed as a CPA in Idaho, Indiana, Iowa, Kansas, +and South Dakota. +8. Darren M. Bennett, CPA, age 35, is a resident of Elkhorn, Nebraska. Bennett +has been an auditor at KPMG since 2001. He worked on the TierOne audit each year from 2003 +through KPMG’s resignation in 2010, with the exception of one year. Bennett was the senior +manager for the 2008 TierOne audit. Bennett was also a member of KPMG’s financial services +practice and served as manager or senior manager on at least four financial services audits in +addition to TierOne. Bennett is licensed as a CPA in Nebraska, North Dakota, and South Dakota. +C. Other Relevant Parties +9. TierOne Corporation, a Wisconsin corporation, was, during the relevant time +period, a holding company for TierOne Bank, a federally-chartered savings bank headquartered +in Lincoln, Nebraska. TierOne’s common stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act; that registration was revoked by consent on June 4, 2012. +Prior to May 7, 2010, TierOne’s shares were listed on the NasdaqGS exchange under the stock +symbol “TONE.” TierOne’s common stock was thereafter quoted on OTC Pink, which is +operated by OTC Markets Group Inc. On June 4, 2010, TierOne Bank was closed by its primary +regulator, the United States Office of Thrift Supervision (“OTS”). The Federal Deposit Insurance +Corporation (“FDIC”) was named receiver and another bank took over TierOne’s assets and +deposit accounts. TierOne subsequently filed for Chapter 7 bankruptcy protection on June 24, +2010. +10. KPMG LLP is a limited liability partnership headquartered in New York, New +York, engaged in the business of providing accounting and auditing services. KPMG audited +TierOne’s 2008 financial statements and internal control over financial reporting as of December +31, 2008 and issued unqualified opinions. KPMG also performed quarterly reviews for TierOne +during the relevant time period. + +4 + +D. TierOne’s Risky Problem Loan Portfolio + + 11. TierOne was a century-old thrift bank that had historically focused on residential +and agricultural loans in the Nebraska/Iowa/Kansas region. Beginning in about 2004, however, +TierOne expanded into high-risk types of lending in regions such as Las Vegas, Florida, and +Arizona, which were experiencing unusual, rapid escalation in market values. This strategy +made the bank particularly vulnerable to the fallout from the financial crisis, as these areas were +hardest hit by the precipitous fall in real estate prices, which began in late 2006 and early 2007. + +12. Throughout 2008, TierOne was experiencing a dramatic rise in high-risk problem +loans including land and land development and residential construction. Certain of these problem +loans – typically larger and non-homogenous (i.e., not car or residential mortgage loans) – were +deemed “impaired” pursuant to FAS 114, meaning it was probable the bank would not recover +all amounts as contractually due. TierOne’s reported FAS 114 impaired loan balance had +increased from less than $4 million as of December 31, 2006 to nearly $186 million as of +December 31, 2008. +13. In June 2008, the OTS conducted a “risk-focused examination” of the bank that +focused on asset quality, credit administration, management, earnings, and the adequacy of +ALLL. As a result of that examination, the OTS downgraded the bank’s composite CAMELS +rating from a one (indicating a financial institution that was “sound in every respect”) to a four +(indicating a financial institution with “serious financial or managerial deficiencies” that require +close supervisory attention). The OTS provided the bank with a report that deemed the institution +to be in troubled condition and board and management performance to be exceptionally poor. +OTS concluded that TierOne had experienced a significant deterioration in asset quality due to +eroding real estate values in Nevada and Florida, and that poor board and management oversight +had exacerbated the problem. The OTS cited data demonstrating that real estate values were +declining at unprecedented rates in states and markets where the bank had a concentration of +loans. The OTS also directed TierOne to maintain higher minimum capital ratios. Failure to +correct the problems identified by the OTS or to meet the heightened capital requirements would +result in additional OTS enforcement action. + 14. The bank’s FAS 114 loans had a negative effect on TierOne’s ability to meet the +heightened capital requirements mandated by the OTS. Under Generally Accepted Accounting +Principles (“GAAP”), TierOne was required to assess probable losses associated with its +impaired loans and record those losses in its ALLL. GAAP permits the impairment to be +measured using the fair value of the underlying collateral if the loan is collateral dependent, +which is the method that was typically utilized by TierOne on its FAS 114 loans. As loan losses +increased, the bank’s capital was further eroded, directly impacting the OTS capital +requirements. +15. In order to assess loan losses for the bank’s FAS 114 loans, TierOne prepared +loan-by-loan spreadsheets that contained estimates of collateral values and loan impairment +determinations. TierOne generally based the valuation on the most recent appraisal in its loan +files. If the appraisal was aged, as it typically was, TierOne would sometimes apply a discount to +the appraised value. These discounts were determined by an informal committee at the bank. The + +5 + +rationale for applying any particular discount – or for not discounting an appraisal at all – was +not documented. +16. In the summer of 2009, when the OTS began its annual exam, the bank was +forced to get a significant number of updated appraisals and to use those appraisals in its loan +loss calculations. In the fall of 2009, TierOne disclosed over $130 million in additional loan loss +provisions. TierOne was shut down by bank regulators on June 4, 2010 and filed for bankruptcy +later that month. +17. In April 2010, KPMG resigned as TierOne’s auditor. KPMG withdrew its audit +opinion relating to TierOne’s 2008 financial statements on the basis that they were materially +misstated with respect to certain out-of-period adjustments for loan loss reserves. KPMG also +withdrew its opinion relating to TierOne’s internal control over financial reporting as of the year- +end 2008 due to a material weakness in internal control over financial reporting related to the +material misstatements. +E. The Auditors Recognized the Risks in TierOne’s Problem Loan Portfolio + 18. Prior to and during their 2008 audit of TierOne, Aesoph and Bennett were aware +of the risk and significance of the bank’s loan loss provisions, and of the loan loss component +related to the bank’s FAS 114 loans specifically. + 1. The Auditors Identified ALLL Risks +19. The bank’s ALLL had two primary components: an allowance for loans impaired +under FAS 114 and an allowance for loans impaired under Statement of Financial Accounting +Standards No. 5 (“FAS 5”). The portion of the ALLL allocable to loans that TierOne evaluated +for impairment under FAS 114 was individually material to the financial statements and +presented a significant risk of material misstatement. +20. The audit planning document – reviewed and approved by both Aesoph and +Bennett – identified the ALLL as a risk that could result in a material misstatement of TierOne’s +financial statements. Specifically, the audit plan noted that the ALLL presented a significant risk +of material misstatement, both with respect to inherent risk and control risk, including the risk of +fraud. + + 2. Numerous Red Flags Further Underscored the Risks + 21. Compounding the identified risks were numerous red flags and other irregularities +that should have triggered Aesoph and Bennett’s professional skepticism and led them to +investigate further. + a. OTS Identified a Significant Understatement of the ALLL +22. In connection with its June 2008 examination, the OTS identified a deficiency in +TierOne’s ALLL as of March 31, 2008 of between $17 million and $22 million, representing an +approximate 25% increase over the previously reported ALLL. Aesoph and Bennett were aware +of this deficiency: Bennett directly identified it in a memo he authored – and Aesoph reviewed – + +6 + +that discussed the OTS report. Further, the June 2008 OTS report, discussed above in paragraph +13, was provided to KPMG and included in the auditors’ work papers. +b. Third-Party Market Data Showed Significant Declines in Real Estate +Values That Were Not Reflected in TierOne’s Valuations of its FAS +114 Loans + 23. As another red flag, TierOne’s valuation adjustments on the collateral underlying +the bank’s FAS 114 loans were inconsistent with independent market data. Third-party market +data indicated that real estate values were declining precipitously in many of the markets where +the bank’s FAS 114 collateral was located, including Las Vegas, Nevada and Phoenix, Arizona. +At year-end 2008, TierOne had prepared spreadsheets analyzing more than fifty borrower +relationships, totaling approximately $255 million in loans, for evaluation for impairment under +FAS 114. Approximately $186 million of these loans were actually deemed impaired by the +bank. The majority of the loans that the bank evaluated for impairment under FAS 114 were +collateralized by property with appraisals more than a year old; over half of those stale appraisals +were not discounted. Critically, when management did discount appraisals, those discounts were +typically inconsistent with – and more favorable to the bank than – the declines indicated by the +independent market data. + c. Management Typically Did Not Get Updated Appraisals + 24. Further, despite the market declines, TierOne management often did not get +updated appraisals on the collateral underlying the bank’s FAS 114 loans. This failure came +despite the fact that the OTS and members of the audit engagement team noted stale appraisals +and recommended that appraisals be updated. +d. New Appraisals Obtained Throughout 2008 Indicated Management +Overestimated Collateral Values and Understated Loss Provisions +25. In the limited instances where TierOne did get updated appraisals or valuations on +the bank’s FAS 114 loans during 2008, the collateral value typically showed a significant decline +from the amount used by management in the immediately preceding quarter. Appraisals received +throughout 2008 showed that management’s estimates were inflated by twenty to almost fifty +percent in the prior quarter. The magnitude of the quarter-to-quarter declines could not be +explained by market conditions alone. +2 In addition to the updated appraisals showing differences +in value from the immediately-preceding quarter, some of those appraisals revealed tremendous +drops in the value TierOne had used at year end 2007.3 + +2 New appraisals or valuations were received on several of the bank’s FAS 114 loans, including: +Storybook Homes; Rising Sun; Grand Teton; Quarter 10; Stetson Ridge; La Madre 48; Rome 24; +Clearwater Estates; Equestrian Meadow; HD Tbella; and HDB, LLC. + +3 TierOne received new appraisals on several loans that had been booked as FAS 114 loans at +year-end 2007, including: Storybook Homes, Clearwater Estates, Grand Teton, and Rising Sun. + +7 + +26. When considered in conjunction with management’s reluctance to obtain new +appraisals, these sharp declines in collateral values should have raised significant questions about +management’s motivations. +e. Stale Appraisals Were Not Discounted Despite TierOne’s Internal +Policy +27. During the 2008 audit, the auditors reviewed a memorandum that was prepared by +TierOne and annotated by the audit engagement team that assessed the adequacy of the fourth +quarter 2008 ALLL balance. That memorandum stated that, for Nevada land and residential +construction loans, TierOne “tries to estimate collateral value declines in real estate by +discounting appraised values, which are older than six months.” Despite this stated policy, +TierOne often failed to discount Nevada appraisals that were more than six months old. + f. TierOne’s Unallocated Loan Loss Reserve Decreased at Year End +28. TierOne designated a portion of its ALLL as an “unallocated” reserve which was +intended to cover loan losses inherent in TierOne’s loan portfolio, including particularly loans in +Nevada. However, despite the fact that market conditions continued to deteriorate throughout +2008, TierOne’s unallocated reserve decreased significantly at year end. The unallocated reserve +dropped from approximately $7 million in the second and third quarters to approximately $4 +million at year end. This decrease was particularly troubling given that during its year end audit, +the audit engagement team relied on the unallocated reserve to absorb potential errors in +TierOne’s calculation of its ALLL or to justify not performing additional audit work. These +conclusions by the audit engagement team were reviewed by Aesoph and Bennett. + g. Management Failed to Document Their Discounting Decisions +29. As a final red flag to the auditors, TierOne did not document the rationale and +basis for management’s assumptions regarding valuation of the collateral underlying the bank’s +FAS 114 loans, despite the guidance in Financial Reporting Release (“FRR”) No. 28. See also +Staff Accounting Bulletin No. 102 (“SAB 102”). +3. TierOne’s FAS 114 Loans Were Material + 30. In addition to these red flags, the portion of the ALLL related to the bank’s FAS +114 loans was material. PCAOB auditing standards recognize that financial statements are +materially misstated when they contain misstatements whose effect, individually or in the +aggregate, is important enough to cause the financial statements not to be presented fairly, in all +material respects, in conformity with generally accepted accounting principles. AU § 312, ¶ 4. +31. The portion of the ALLL related to the bank’s FAS 114 loans was material to the +financial statements taken as a whole. It far exceeded the $1.9 million materiality threshold +established for the 2008 audit. It was reasonably possible that even a relatively small change in +the value of the bank’s FAS 114 loans would cause a material error in the financial statements. + 32. The portion of the ALLL related to the bank’s FAS 114 loans was material for +additional reasons. For example: + +8 + +a. Any additional loan losses discovered by the audit engagement team +would have pushed the bank closer to falling below the OTS-mandated 8.5% core capital ratio +and 11% risk-based capital ratio. TierOne’s core and risk-based capital ratios at December 31, +2008 were 8.9% and 11.6%, respectively. +b. The bank’s loan losses factored significantly into TierOne’s overall +operating results and profitability. The bank’s net interest income after provision for loan losses +was only $2.9 million at year end 2008, meaning a small increase in loan losses would change a +reported net income to a reported net loss. Further, the trend in this net interest income figure +was in precipitous decline, decreasing from $119.8 million at year end 2006 to $48 million at +year end 2007 to $2.9 million at year end 2008. +c. TierOne itself acknowledged the importance of its ALLL, including its +FAS 114 loans, devoting several pages in its 2008 Form 10-K to a discussion of problem loans +and the ALLL. Indeed, the 10-K expressly stated that “[a]n inadequate allowance for loan losses +could adversely affect our results of operations.” +33. Given the risk and materiality of the ALLL related to the bank’s FAS 114 loans, +and the many red flags, Aesoph and Bennett had heightened responsibilities in auditing this area, +and were required to apply professional skepticism in obtaining sufficient competent evidential +matter to support their opinions. They failed in these responsibilities. +F. Aesoph and Bennett’s Improper Professional Conduct + 34. 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). For auditors of issuers +such as TierOne, the applicable professional standards include standards issued by the PCAOB. + + 1. General Standards + 35. The PCAOB’s three general standards of auditing require that an auditor (1) have +adequate technical training and proficiency, (2) maintain an independent mental attitude, and (3) +act with due professional care in the performance of the audit. AU § 150, ¶ 2. The three basic +standards of field work require the auditor to (1) adequately plan and properly supervise the +audit, (2) obtain a sufficient understanding of internal control to plan the audit, and (3) obtain +sufficient competent evidential matter to afford a reasonable basis for an opinion. AU § 150, ¶ 2. +36. “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, ¶ 2. The concept of due professional care includes acting with reasonable diligence. AU § +230, ¶ 3. It also includes exercising professional skepticism. AU § 230, ¶ 7. “Professional +skepticism is an attitude that includes a questioning mind and a critical assessment of audit +evidence.” AU § 230, ¶ 7. “The auditor neither assumes that management is dishonest nor +assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be +satisfied with less than persuasive evidence because of a belief that management is honest.” AU +§ 230, ¶ 9. + +9 + +37. Auditors are required to obtain “sufficient competent evidential matter” to afford +a reasonable basis for the auditor’s opinions. AU § 326, ¶ 1; see also AU § 230, ¶ 11 (“The +independent auditor’s objective is to obtain sufficient competent evidential matter to provide him +or her with a reasonable basis for forming an opinion.”). “Gathering and objectively evaluating +audit evidence requires the auditor to consider the competency and sufficiency of the evidence.” +AU § 230, ¶ 8. PCAOB standards attach greater validity to evidential matter obtained directly by +the auditors, and to evidential matter obtained from independent sources outside an entity. AU § +326, ¶ 21. Representations from management, while part of the evidential matter the auditor +obtains, “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, ¶ 2. +38. Further, audit procedures, and the amount and persuasiveness of evidence auditors +are required to obtain, are driven by risk. “Audit risk and materiality, among other matters, need +to be considered together in determining the nature, timing, and extent of auditing procedures +and in evaluating the results of those procedures.” AU § 312, ¶ 1; see also AU § 312, ¶ 12 (“The +auditor should consider audit risk and materiality both in (a) planning the audit and designing +auditing procedures and (b) evaluating whether the financial statements taken as a whole are +presented fairly, in all material respects, in conformity with generally accepted accounting +principles. The auditor should consider audit risk and materiality in the first circumstance to +obtain sufficient competent evidential matter on which to properly evaluate the financial +statements in the second circumstance.”). When auditors identify a significant risk of material +misstatement, as they did here, that fact is relevant to the nature and extent of the audit +procedures to be applied. AU § 312, ¶ 17. “Higher risk may cause the auditor to expand the +extent of procedures applied, apply procedures closer to or as of year-end, particularly in critical +audit areas, or modify the nature of procedures to obtain more persuasive evidence.” AU § 312, ¶ +17. +39. Aesoph, as the engagement partner, was responsible for the audit engagement and +its performance, for proper supervision of the work of the engagement team members, and for +compliance with PCAOB standards. Aesoph sought and received the assistance of Bennett, who +was the senior manager on the 2008 TierOne audit, in fulfilling his responsibilities as +engagement partner. + 40. Bennett contributed significantly to the planning of the audit, the design of tests of +controls, and the design and implementation of substantive procedures. Additionally, Bennett +was responsible for executing the audit, including directing the audit engagement team on how to +conduct the audit. Bennett reviewed the audit work papers and was responsible for on-site +supervision of the audit engagement team. Bennett also played a significant role in gathering and +evaluating evidential matter to support the audit of ALLL, and specifically the valuation of +collateral underlying the bank’s FAS 114 loans. Bennett, like Aesoph, was responsible for +compliance with PCAOB standards with respect to the supervisory responsibilities that were +assigned to him. +4 + +4 See, e.g., In the Matter of Robert M. Harbrecht, CPA and Brian R. Spires, CPA, Rel. No. 34- +56469, AAE Rel. No. 2720 (Sept. 19, 2007) (experienced senior manager who was responsible, + + +10 + + 41. At the completion of the audit, both Aesoph and Bennett signed off that “all +necessary auditing procedures were completed,” that “support for conclusions was obtained,” +and that “sufficient appropriate audit evidence was obtained.” Further, Aesoph specifically +signed off on the audit checklist’s requirement that the audit engagement team had “performed +and documented its work in compliance with . . . applicable auditing standards . . . , and the +working papers demonstrate this compliance.” +42. As detailed below, Aesoph and Bennett’s conduct in planning, supervising, and +implementing KPMG’s audit of TierOne’s 2008 financial statements – and specifically the +portions of the audit relating to the bank’s FAS 114 loans – violated numerous PCAOB +standards. Most prominently, the auditors violated the requirements of AS No. 5 regarding audits +of internal control over financial reporting, and AU Sections 328 (auditing fair value +measurements) and 342 (auditing accounting estimates) related to the substantive audit +procedures. Aesoph and Bennett also violated: the third general audit standard (due professional +care), see AU § 150, ¶ 2; and the third standard of field work (obtaining sufficient competent +evidential matter), see AU § 150, ¶ 2; AS No. 3; and AU §§ 230, 312, 316, 319, 326, 333, and +561. +2. The Audit of TierOne’s Internal Controls Violated Professional Standards +43. KPMG performed an integrated audit of TierOne, meaning that the audit of +TierOne’s internal control over financial reporting was integrated with the audit of TierOne’s +financial statements. When an auditor assesses control risk below the maximum level, as the +auditors did here, he or she should obtain sufficient evidential matter to support that assessed +level. AU § 319, ¶¶ 80, 90. Moreover, if one or more material weaknesses exist, the company’s +internal control over financial reporting cannot be considered effective. AS No. 5, ¶ 2. A +material weakness is a deficiency, or a combination of deficiencies, in internal control over +financial reporting, such that there is a reasonable possibility that a material misstatement of the +company’s annual or interim financial statements will not be prevented or detected on a timely +basis. AS No. 5, Appendix A, ¶ A7. + 44. AS No. 5 provides specific requirements for auditing internal control over +financial reporting in an integrated audit, including that the auditors should understand likely +sources of potential misstatements and focus more of their attention on the areas of highest risk. +But the key ALLL control that the audit engagement team identified (the bank’s Asset +Classification Committee) did not effectively address the riskiest component of the ALLL: the +bank’s valuation of collateral for the bank’s FAS 114 loans with stale appraisals. In addition, the +audit engagement team failed to identify or test any effective internal controls to determine +whether TierOne was complying with its own policies for updating appraisals. The auditors +therefore violated AS No. 5, and further lacked a reasonable basis for KPMG’s conclusion that +there were no material weaknesses in TierOne’s internal control over financial reporting. + +along with partner, for planning and executing audit sanctioned pursuant to Rule 102(e) for +violations of PCAOB standards). + +11 + + a. Relevant PCAOB Standards +45. In an integrated audit, an auditor should design tests of controls to obtain +sufficient evidence both to support his or her opinion on internal control over financial reporting +and to support his or her control risk assessments for the purpose of the audit of the financial +statements. AS No. 5, ¶ 7. +46. Auditors also should determine and understand the likely sources of potential +misstatements. One of the ways to do so is “by asking himself or herself ‘what could go wrong?’ +within a given significant account or disclosure.” AS No. 5, ¶¶ 28-31. +47. To further understand the likely sources of potential misstatements, and as part of +selecting the controls to test, the auditor should understand the flow of transactions related to the +relevant assertions, identify points within the company’s processes at which a misstatement +could arise that would be material, and identify the controls that management has implemented +to address these potential misstatements. AS No. 5, ¶ 34. +48. Performing a “walkthrough” is often the most effective way to understand likely +sources of potential misstatements and identify the appropriate controls to test. AS No. 5, ¶ 37. +Walkthroughs require the auditor to “follow[ ] a transaction from origination through the +company’s processes . . . until it is reflected in the company’s financial records, using the same +documents and information technology that company personnel use.” AS No. 5, ¶ 37. +49. The selection of the controls to test, and the evidence needed to evaluate a given +control, are driven by the auditors’ risk assessment. AS No. 5, ¶ 10. “The auditor should focus +more of his or her attention on the areas of highest risk,” taking into consideration the risks such +as the risk of fraud with respect to significant management estimates. AS No. 5, ¶¶ 11, 14. +Further, the level of evidence needed increases as the risk associated with the control increases. +AS No. 5, ¶¶ 46-47. +50. Some types of tests, by their nature, produce greater evidence of the effectiveness +of controls than other tests. AS No. 5, ¶ 50. PCAOB standards include a hierarchy of tests. +Inquiry, which ordinarily produces the lowest level of evidence, is never alone sufficient to +support a conclusion about the effectiveness of a control. AS No. 5, ¶¶ 45, 50. +51. If there are deficiencies in a company’s internal control over financial reporting +that, individually or in combination, result in one or more material weaknesses, the auditor “must +express an adverse opinion on the company’s internal control over financial reporting, unless +there is a restriction on the scope of the engagement.” AS No. 5, ¶ 90. +52. Aesoph and Bennett’s internal control test work did not comply with the +foregoing PCAOB standards. +b. Failure to Identify Effective Controls over the Valuation of the +Collateral for the Bank’s FAS 114 Loans +53. Aesoph and Bennett both reviewed and approved key audit work papers involving +the evaluation and testing of TierOne’s internal controls over the ALLL. These work papers + +12 + +identified seventeen key controls over TierOne’s loan process. The audit engagement team used +the work of TierOne’s internal audit department to provide evidence on many of these controls, +but determined to independently test five key controls “due to the fraud risk and/or the high risk +of failure associated with the controls.” Each of these five controls purported to address some +aspect of TierOne’s problem loans. None, however, effectively addressed TierOne’s valuation of +the collateral underlying the bank’s FAS 114 loans. +54. The key control identified for prevention of a material misstatement of the ALLL +was TierOne’s Asset Classification Committee review. However, while the audit work papers do +identify that the Asset Classification Committee had general responsibility for the ALLL, there is +no reference to whether or how the Committee assessed the value of the collateral underlying +individual loans evaluated under FAS 114, including any necessary adjustments to appraised +values. The Asset Classification Committee meeting minutes included in the work papers contain +no discussion about discounting stale appraisals or otherwise estimating the value of collateral. +55. The Asset Classification Committee was not an effective control over valuation of +the collateral underlying the bank’s FAS 114 loans. The Committee did not generate or review +written documentation to support TierOne’s calculations, including, specifically, documentation +of the rationale and basis for management’s assumptions regarding valuation of collateral. +Without such documentation, there was insufficient evidence upon which to conclude that the +bank’s internal controls related to valuation of collateral were effective. See FRR No. 28; see +also SAB 102. +56. The other controls independently tested during the audit also failed to address +TierOne’s valuation of collateral underlying the bank’s FAS 114 loans. Further, the +“walkthrough” described in the audit work papers, which was specifically reviewed by Bennett, +was insufficient to provide a sufficient understanding of the valuation process or to identify +important points at which a necessary control in the process was missing or was not designed +effectively. See AS No. 5, ¶¶ 37, 38. +c. Failure to Identify or Test Controls Relating to Compliance with +TierOne’s Appraisal Policies +57. TierOne’s written lending policy required all loans to be supported by “current +appraisals or evaluations.” The policy noted that “[i]n a rapidly escalating or deteriorating +market, a value may be valid for only a few months.” The policy also stated that new appraisals +should be obtained when a loan was renewed, extended, or refinanced if market deterioration +indicated that the collateral may no longer fully protect the loan. +58. While TierOne’s lending policy may have been sound, it was not in and of itself a +control. The auditors failed to identify any control to ensure compliance with this policy. In fact, +TierOne frequently ignored or violated this policy, continuing to rely on stale appraisals in +significantly deteriorated markets. TierOne also failed to obtain new appraisals on loans that had +been modified. + +13 + +d. The Absence of These Controls Was a Material Weakness +59. PCAOB audit standards define a material weakness as a deficiency, or a +combination of deficiencies, in internal control over financial reporting, such that there is a +reasonable possibility that a material misstatement of the company’s annual or interim financial +statements will not be prevented or detected on a timely basis. AS No. 5, Appx. A, ¶ 7. Whether +a deficiency or combination of deficiencies rises to the level of a material weakness depends on +the severity of the deficiencies. AS No. 5, ¶¶ 62-63. The absence of effective controls over the +valuation of collateral underlying the bank’s FAS 114 loans and over compliance with TierOne’s +appraisal renewal policy, individually or in combination, represented a material weakness in +TierOne’s internal control over financial reporting as of December 31, 2008. Because of the +material weakness in internal control, KPMG should have issued an adverse opinion on the +bank’s internal control over financial reporting. Further, the auditors’ inappropriate conclusion +that controls were effective led to an unsupported – and incorrect – conclusion that, for purposes +of the financial statement audit, the risk of significant misstatement with respect to the ALLL +was only moderate. +3. Substantive Testing of the Bank’s FAS 114 Loans Violated Professional +Standards + 60. Adding to the failures in connection with auditing TierOne’s internal control over +ALLL were Aesoph and Bennett’s deficient substantive audit procedures. Specifically, the audit +engagement team failed to follow PCAOB standards in reviewing the reasonableness of +management’s estimates of the value of the collateral underlying the bank’s FAS 114 loans – one +of the riskiest and most critical elements of the bank’s FAS 114 loss estimate calculation. The +audit engagement team relied principally on the most recent (and often stale) appraisals given +them and on management’s uncorroborated representations of current value. The audit +engagement team relied on these representations despite evidence that management’s estimates +were biased and inconsistent with independent market data. Bennett was directly involved in the +audit engagement team’s FAS 114 test work. Specifically: Bennett initially reviewed the +individual spreadsheets prepared by TierOne that purported to justify the valuation of the +underlying collateral of the bank’s FAS 114 loans; Bennett supervised the audit test work and +collection of evidential matter, including meeting directly with management to discuss +management’s estimates of the value of collateral; and Bennett approved the audit engagement +team’s FAS 114 test work prior to passing it to Aesoph. Aesoph reviewed the FAS 114 test work +prior to signing the audit opinion. By failing to subject management’s estimates to appropriate +scrutiny, the auditors violated PCAOB standards, including particularly AU Sections 328 and +342, which address auditing fair value and accounting estimates, respectively. The auditors +failed to obtain sufficient, competent evidential matter to provide assurances that management’s +estimates were reasonable. They further failed to act with due professional care or appropriate +professional skepticism. + a. Relevant PCAOB Standards + 61. TierOne’s calculation of the appropriate loss reserve on the bank’s FAS 114 +loans, which was based largely on an assessment of the value of the underlying collateral, was an +estimate. As such, the auditors’ responsibility was to obtain sufficient competent evidence to + +14 + +provide reasonable assurance that the estimates were reasonable and presented in conformity +with the relevant accounting principles. AU §§ 328, ¶ 3; 342, ¶ 7. +62. In evaluating reasonableness, the auditor should obtain an understanding of how +management developed the estimate. Based on that understanding, the auditor should use one or +a combination of the following approaches: (1) review and test the process used by management +to develop the estimate; (2) develop an independent expectation of the estimate to corroborate +the reasonableness of management’s estimate; or (3) review subsequent events or transactions +occurring prior to the date of the auditor’s report. AU § 342, ¶ 10; see also AU 328, ¶ 23. +63. Where management’s estimate is based on a valuation, such as an appraisal, that +was made prior to the financial reporting date, the following is an example of a consideration in +the development of audit procedures: “obtain[ing] evidence that management has taken into +account the effect of events, transactions, and changes in circumstances occurring between the +date of the fair value measurement and the reporting date.” AU § 328, ¶ 25; see also AU § 313, ¶ +3 (“Applying principal substantive tests to the details of an asset or liability account as of an +interim date rather than as of the balance-sheet date potentially increases the risk that +misstatements that may exist at the balance-sheet date will not be detected by the auditor.”), ¶ 6 +(“The auditor should consider whether there are rapidly changing business conditions or +circumstances that might predispose management to misstate financial statements in the +remaining period. If such conditions or circumstances are present, the auditor might conclude +that the substantive tests to cover the remaining period would not be effective in controlling the +incremental audit risk associated with them. In those situations, the asset and liability accounts +affected should ordinarily be examined as of the balance-sheet date.”). +64. Importantly, because estimates were involved, the auditors were required to be +particularly attuned to management bias – intentional or not. Among other things, auditors +normally should consider “the historical experience of the entity in making past estimates.” AU § +342, ¶ 9. “Even when management’s estimation process involves competent personnel using +relevant and reliable data, there is potential for bias in the subjective factors. Accordingly, when +planning and performing procedures to evaluate accounting estimates, the auditor should +consider, with an attitude of professional skepticism, both the subjective and objective factors” +management used in making the estimates. AU § 342, ¶ 4. +65. Further, as the auditors had correctly identified TierOne’s ALLL as presenting a +risk of fraud and a high risk of error, the auditors had a heightened responsibility over this area. +AU § 312, ¶ 17 (“Higher risk may cause the auditor to expand the extent of procedures applied, +apply procedures closer to or as of year end, particularly in critical audit areas, or modify the +nature of procedures to obtain more persuasive evidence.”); AU § 316, ¶ 2 (“[T]he auditor’s +response to the risks of material misstatement due to fraud involves the application of +professional skepticism when gathering and evaluating audit evidence.”). + +15 + +Because of the characteristics of fraud, the auditor’s exercise of professional +skepticism is important when considering the risk of material misstatement due to +fraud. Professional skepticism is an attitude that includes a questioning mind and +a critical assessment of audit evidence. The auditor should conduct the +engagement with a mindset that recognizes the possibility that a material +misstatement due to fraud could be present, regardless of any past experience with +the entity and regardless of the auditor’s belief about management’s honesty and +integrity. Furthermore, professional skepticism requires an ongoing questioning of +whether the information and evidence obtained suggests that a material +misstatement due to fraud has occurred. In exercising professional skepticism in +gathering and evaluating evidence, the auditor should not be satisfied with less- +than-persuasive evidence because of a belief that management is honest. +AU § 316, ¶ 13. +66. The risk of material misstatement generally increases where, as here, the relevant +account is an estimate. AU § 312, ¶ 36. While estimates may differ, an unreasonable estimate +should be considered a likely misstatement. AU § 312, ¶ 36. The auditor should also consider +whether differences in management’s estimates and estimates best supported by the audit +evidence suggest possible management bias. AU § 312, ¶ 36. +67. While representations from management are a part of the audit evidence, “they +are not a substitute for the application of those auditing procedures necessary to afford a +reasonable basis for an opinion regarding the financial statements under audit.” AU § 333, ¶ 2. +This is particularly true in an area, like the ALLL, involving estimates. AU § 316, ¶ 54 (“In +addressing an identified risk of material misstatement due to fraud involving accounting +estimates, the auditor may want to supplement the audit evidence otherwise obtained ….”). It is +even more critical where the audit area involves a risk of fraud. AU § 316, ¶ 46 (“Examples of +the application of professional skepticism in response to the risks of material misstatement due to +fraud are … obtaining additional corroboration of management’s explanations or representations +concerning material matters, such as through third-party confirmation, the use of a specialist, +analytical procedures, examination of documentation from independent sources, or inquiries of +others within or outside the entity.”); AU 316 ¶ 53 (example of modification of procedures in +response to identified risks of material misstatement due to fraud include “[i]nterviewing +personnel involved in activities in areas where a risk of material misstatement due to fraud has +been identified to obtain their insights about the risk and how controls address the risk”); AU § +326, ¶ 21 (“When evidential matter can be obtained from independent sources outside an entity, +it provides greater assurance of reliability for the purposes of an independent audit than that +secured solely within the entity …. The independent auditor’s direct personal knowledge, +obtained through physical examination, observation, computation, and inspection, is more +persuasive than information obtained indirectly.”). +68. The auditor should be thorough in his or her search for evidential matter and +unbiased in its evaluation. AU § 326, ¶ 25; see also id. (“In developing his or her opinion, the +auditor should consider relevant evidential matter regardless of whether it appears to corroborate +or to contradict the assertions in the financial statements.”). The inability to obtain sufficient + +16 + +competent evidential matter may require the auditor to qualify his or her opinion or to disclaim +an opinion. See AU § 508, ¶ 22. +69. Finally, auditors are required to clearly document the work they perform. See AS +No. 3. “Audit documentation should be prepared in sufficient detail to provide a clear +understanding of its purpose, source, and the conclusions reached.” AS No. 3, ¶ 4. “The auditor +must document the procedures performed, evidence obtained, and conclusions reached with +respect to relevant financial statement assertions.” AS No. 3, ¶ 6. “Audit documentation must +clearly demonstrate that the work was in fact performed.” AS No. 3, ¶ 6. “Because audit +documentation is the written record that provides the support for the representations in the +auditor’s report, it should,” among other things, “[d]emonstrate that the engagement complied +with the standards of the PCAOB.” AS No. 3, ¶ 5. +70. Aesoph and Bennett’s substantive audit procedures fell short of these standards. +b. Improper Professional Conduct +71. TierOne estimated the value of the collateral underlying the bank’s FAS 114 loans +on a loan-by-loan basis because the bank’s FAS 114 portfolio was made up of large, non- +homogenous loans. Therefore, the audit engagement team performed a loan-by-loan review of +the bank’s FAS 114 loan portfolio to test whether management’s estimates of value were +reasonable. However, the substantive audit procedures and the evidence obtained from those +procedures were insufficient to meet PCAOB standards. + + i. Failure to Test Management’s Estimates of Collateral Value +72. The audit engagement team obtained and reviewed each of the more than fifty +FAS 114 spreadsheets prepared by the bank. Most of the audit work was simply “ticking and +tying”: recalculating figures, agreeing charge off amounts, and tying reported appraisal values to +the actual appraisals. +73. The audit engagement team did, however, obtain a sample of original appraisals +from management for additional testing. Specifically, the audit engagement team assumed that +appraisals less than a year old were “current” (regardless of the market). For appraisals older +than a year, they inquired whether a discount was applied to the appraised value, and if not, they +inquired why TierOne didn’t think it was necessary or appropriate. In addition, Bennett and +members of the audit engagement team discussed with management a sample of FAS 114 +calculations and recent trends, and “leveraged” information from certain loan reviews. +5 +Following this test work, Bennett also reviewed and discussed the bank’s FAS 114 spreadsheets +with Aesoph to ensure that Aesoph was satisfied with the audit engagement team’s conclusions. +Based on the entirety of these procedures, the auditors concluded that “the FAS 114 calculations + +5 Although the auditors may have “leveraged” the aspects of the loan reviews that arguably +supported their conclusions as to the reasonableness of management’s valuations of certain of the +bank’s FAS 114 loans, they ignored information in those same loan reviews that contradicted +management’s valuation assessment. + +17 + +appear to be properly prepared and adequately supported at 12/31/08.” Aesoph and Bennett +lacked a reasonable basis for this conclusion. +74. Aesoph and Bennett relied on an unsupported – and unsupportable – assumption +that appraisals less than a year old were “current,” without regard to the property’s location or +stage of development, and that market conditions had not materially deteriorated throughout the +year. Many of the markets in which TierOne’s collateral was located were seeing significant +continuing quarterly declines in the value of real estate. In addition, many of the properties that +served as collateral were under development and in varying stages of completion. TierOne’s +lending policy cautioned against relying on aged appraisals in these markets. According to the +policy, “[i]n a rapidly escalating or deteriorating market, a[n appraisal] value may be valid for +only a few months.” Despite this policy, Aesoph and Bennett arbitrarily assumed that only +appraisals older than a year potentially needed adjusting. +75. This assumption that appraisals up to a year old were current was unsupported by +any evidence and particularly troubling in the Nevada market. As noted above, TierOne’s +memorandum prepared to support its ALLL balance – a memo annotated by the audit +engagement team, included in the audit work papers, and reviewed by Aesoph and Bennett – +noted that the bank would estimate collateral for Nevada real estate by discounting appraisals +older than six months, acknowledging that six month old appraisals in that market were not +reflective of current market conditions. Even so, the bank failed to discount many Nevada +appraisals that were more than six months old and Aesoph and Bennett failed to reconcile the +inconsistency between the bank’s stated practice and its actual practice. + 76. In addition, the test work over management’s valuation estimates was insufficient. +Again, according to its audit program, the audit engagement team would “inquire” of +management whether discounts had been applied to older appraisals, and if not, why not. But +uncorroborated management representations are not sufficient evidence in a high risk audit area. +77. Further calling into question the auditors’ work, the auditors relied on +management’s uncorroborated representations even though independent evidence indicated that +management’s estimating and discounting decisions were biased. As noted above, earlier in +2008, the OTS had determined that TierOne had underreported its ALLL by nearly 25%. And the +few times TierOne obtained a new appraisal on an impaired loan throughout 2008, that new +appraisal typically showed that TierOne’s valuation in the immediately preceding quarter was +seriously deficient. In addition, TierOne’s discount decisions and amounts were often +significantly different on properties in the same market, and were typically inconsistent with +third-party market information. Further, the rationale for TierOne’s discounting decisions was +not documented. Despite these red flags, the auditors continued to rely on management’s +representations regarding management’s appraisal discounting decisions, without performing any +additional test work or obtaining independent corroboration of management’s representations. +78. Auditors are required to document their work, including the procedures performed +and the evidence obtained. Based upon the documentation in the audit work papers, including +the audit programs, memoranda, and individual FAS 114 loan analyses, the audit engagement +team obtained little if any reliable or persuasive evidence with respect to management’s +adjustments (or lack thereof) to stale appraised values. The little that is documented shows that + +18 + +Bennett and the audit engagement team made various inquiries of management and accepted +management’s representations. There is little to no documentation of management’s +representations with respect to specific properties, or of the auditors performing any rigorous +testing or independent corroboration of management’s discounting decisions. The audit +documentation does not demonstrate that the engagement complied with the standards of the +PCAOB. + ii. Failure to Corroborate Additional Information + 79. In addition to appraisal information, TierOne’s FAS 114 worksheets sporadically +contained references to other information in support of management’s estimates of the fair value +of the collateral. This information included, for example, asking prices, borrower development +plans and status, estimated costs to complete, offers to purchase, and other information. The +auditors failed to obtain independent corroboration of any of this information. +4. The Auditors’ Failure to Recognize Bias in Management’s Estimates +Violated Professional Standards + 80. Exacerbating Aesoph and Bennett’s failures surrounding the reasonableness of +management’s loan loss estimates on its FAS 114 loans was their failure to recognize bias in +those same estimates. + a. Relevant PCAOB Standards +81. As noted above, auditors normally should consider “the historical experience of +the entity in making past estimates.” AU § 342, ¶ 9. Relatedly, “[t]he auditor also should perform +a retrospective review of significant accounting estimates reflected in the financial statements of +the prior year to determine whether management judgments and assumptions relating to the +estimates indicate a possible bias on the part of management.” AU § 316, ¶ 64. “With the benefit +of hindsight, a retrospective review should provide the auditor with additional information about +whether there may be a possible bias on the part of management in making the current-year +estimates.” AU § 316, ¶ 64. +b. Improper Professional Conduct +82. Consistent with PCAOB standards, KPMG’s audit program required the auditors +to assess management bias. The auditors claimed to do so, noting in the audit completion +document that +[t]he Company’s historical ability to reliably develop significant estimates has +been adequate. We have considered current events as they relate to prior quarters +and years during our audit procedures and noted there was no indication of bias +on management’s part in developing their estimates. + 83. This conclusion was inconsistent with the OTS’ findings in June 2008 about +management’s numerous failures to develop reliable estimates. It was also inconsistent with +evidence of management bias that surfaced throughout 2008. As discussed above, Aesoph and +Bennett knew that the OTS identified a deficiency in TierOne’s ALLL that represented + +19 + +approximately 25% of the ALLL balance at the time. Further, as discussed above, Aesoph and +Bennett knew, or should have known, that the limited instances in which the bank actually +obtained new appraisals on impaired loans resulted in significant declines in the value of the +collateral both compared to the previous quarter and, in some cases, compared to the values used +in the prior year. In many cases, these new appraisals resulted in significant increases in the loan +loss provisions associated with these loans. Despite this evidence, the auditors improperly +concluded that the bank’s estimation process was “adequate” and that there was “no indication of +bias on management’s part.” +5. The Failure to Investigate Subsequent Discovery of Facts Violated +Professional Standards + 84. Finally, the auditors failed to investigate facts discovered after the date of their +report on the 2008 financial statements that may have affected the 2008 financial statements. +a. Relevant PCAOB Standards +85. PCAOB audit standards set out a number of steps that should be taken by an +auditor who, “subsequent to the date of the report upon audited financial statements, becomes +aware that facts may have existed at that date which might have affected the report had he or she +then been aware of such facts.” AU § 561, ¶ 1. As an initial matter, “[w]hen the auditor becomes +aware of information which relates to financial statements previously reported on by him, but +which was not known to him at the date of his report, and which is of such a nature and from +such a source that he would have investigated it had it come to his attention during the course of +his audit, he should, as soon as practicable, undertake to determine whether the information is +reliable and whether the facts existed at the date of his report.” AU § 561, ¶ 4. If in fact the +information is reliable and existed at the date of the report, other steps may be required. AU § +561, ¶¶ 5-8. “Subsequent events affecting the realization of assets . . . ordinarily will require +adjustment of the financial statements . . . .” AU § 560, ¶ 7. + b. Improper Professional Conduct + 86. During KPMG’s 2009 quarterly reviews, the engagement team learned of several +borrower relationships that had new appraisals or valuations that likely existed at the date of +KPMG’s 2008 audit report, issued on March 12, 2009. In each case, that new valuation showed a +significant decline from management’s estimate at year end. +6 + 87. Despite learning that there were new appraisals and valuation assessments which +were dated prior to the issuance of the 2008 audit report, Aesoph and Bennett failed to perform +the procedures required by AU § 561. Rather, Aesoph and Bennett assumed they had no reason +to investigate because, they claim, they received representations from management shortly +before issuing their audit opinion that no new appraisals had been received that impacted the +2008 financial statements. This is, however, precisely what should have triggered AU § 561: new + +6 The specific loans included: Celebrate 50, MME, Ashley Turner, Stratton Group, Blake Home +Builders, and Den Mark Construction. + +20 + +information came to light after the audit report was issued that was inconsistent with previous +information and, for that matter, management’s purported representations that all new appraisals +had been given to KPMG. Aesoph and Bennett had an obligation to investigate, but failed to do +so. +G. Violations + 88. As described in detail above, Aesoph and Bennett violated numerous PCAOB +audit standards, failed to obtain sufficient competent evidential matter to support their audit +conclusions, and failed to exercise due professional care and appropriate professional skepticism. + 89. Specifically, Aesoph and Bennett violated: the third general audit standard (due +professional care), see AU § 150, ¶ 2; the third standard of field work (competent evidential +matter), see AU § 150, ¶ 2; AS Nos. 3 and 5; and AU §§ 230, 312, 316, 319, 326, 328, 333, 342, +and 561. +90. Aesoph and Bennett engaged in improper professional conduct, as defined in +Section 4C of the Exchange Act and Rule 102(e)(1)(ii), in that their conduct constituted +negligent conduct consisting of (1) a single instance of highly unreasonable conduct that resulted +in a violation of applicable professional standards in which Aesoph and Bennett knew, or should +have known, that heightened scrutiny was 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. +III. + In view of the allegations made by the Division of Enforcement and the Office of Chief +Accountant, the Commission deems it appropriate that public administrative proceedings be +instituted to determine: + A. Whether the allegations set forth in Section II hereof are true and to afford +Respondents Aesoph and Bennett an opportunity to establish any defenses to such allegations; +and + B. What, if any, remedial action is appropriate against Respondents Aesoph and +Bennett pursuant to Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules +of Practice, including, but not limited to, censure or denying, temporarily or permanently, the +privilege of appearing or practicing before the Commission. +IV. + IT IS ORDERED that a public hearing for the purpose of taking evidence on the +questions set forth in Section III hereof shall be convened at a time and place to be fixed, and +before an Administrative Law Judge to be designated by further order as provided by Rule 110 +of the Commission’s Rules of Practice, 17 C.F.R. § 201.110. + +21 + + IT IS FURTHER ORDERED that Respondents Aesoph and Bennett shall file their +answers to the allegations contained in this Order within twenty (20) days after service of this +Order, as provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + If Respondents Aesoph or Bennett fail to file the directed answer, or fail to appear at a +hearing after being duly notified, the Respondents may be deemed in default and the proceedings +may be determined against the Respondents upon consideration of this Order, the allegations of +which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f), and 310 of the +Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + This Order shall be served upon the Respondents personally or by certified mail. + IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) +of the Commission’s Rules of Practice, 17 C.F.R. § 201.360(a)(2). + 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 a witness or counsel in proceedings held pursuant to notice. Since this proceeding is not a +“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. + +Elizabeth M. Murphy + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3437.txt b/raw/aaer/2013/AAER-3437.txt new file mode 100644 index 0000000000000000000000000000000000000000..76e4785532bca8aae9f6faf50e74c2d5f06ae933 --- /dev/null +++ b/raw/aaer/2013/AAER-3437.txt @@ -0,0 +1,1389 @@ + + + + + + + + + + + + + + + + SEC.gov | Edward J. Woodard, Jr., Cynthia A. Sabol, CPA and Stephen G. Fields + + + + + + + + !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\/513476","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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Woodard, Jr., Cynthia A. Sabol, CPA and Stephen G. Fields + + + + + + + + + + + + Edward J. Woodard, Jr., Cynthia A. Sabol, CPA and Stephen G. Fields + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22587 / January 9, 2013 + Accounting and Auditing Enforcement Release No. 3437 / January 9, 2013 + Securities and Exchange Commission v. Edward J. Woodard, Jr., Cynthia A. Sabol, CPA and Stephen G. Fields , Civil Action No. 2:13cv16 (Eastern District of Virginia, Complaint filed January 9, 2013) + + SEC Charges Three Former Senior Officers of Commonwealth Bank With Understating Losses and Material Misstatements During Financial Crisis + + + The Securities and Exchange Commission today charged three former bank executives in Virginia for understating millions of dollars in losses and masking the true health of the bank's loan portfolio at the height of the financial crisis. + + The SEC alleges that Edward J. Woodard, Jr., who was the CEO, President and Chairman of the Board at Norfolk, Virginia-based Bank of the Commonwealth and its publicly-traded parent, Commonwealth Bankshares, along with Chief Financial Officer and Secretary Cynthia A. Sabol, a CPA, and Executive Vice President and Commercial Loan Officer Stephen G. Fields understated the bank's loan-related losses as well as losses on real estate repossessed by the bank (other real estate owned or OREO). + + The SEC's complaint alleges that, from in or about November 2008 through August 2010, the consistent message in Commonwealth's SEC filings and public statements was that its portfolio of loans, which comprised approximately 94% and 81% of the company's total assets in 2008 and 2009, respectively, was conservatively managed according to strict underwriting standards aimed at keeping Commonwealth's reserved losses low during a time of unprecedented economic turmoil. In reality, internal practice deviated so much from what the investing public was told that, from November 2008 through August 2010, Commonwealth understated its ALLL by approximately 17% to 25% with a corresponding understatement to its reported loss before income taxes for fiscal year 2008 of approximately 64%; understated its OREO in two quarters by approximately 19% to 20%, which resulted in a corresponding understatement of Commonwealth's reported loss before income taxes in the first quarter of 2010 of approximately 35%; and underreported its total non-performing loans throughout the entire period by at least 30%. + + The SEC's complaint further alleges that Woodard, as CEO, knew of the true state of Commonwealth's loan portfolio, was involved in the activity to hide the deterioration of many of the loans at issue and was responsible for the misleading public statements and in particular those in earnings releases. Sabol, as CFO, knew of the activity to mask the problems with the company's loan portfolio and the corresponding effect these masking practices had on the bank's financial statements and disclosures, yet signed the disclosures and certified to the investing public that they were accurate. Fields oversaw the bank's largest portfolio of construction and development loans and was involved in the masking practices. + + The SEC's complaint charges Woodard and Sabol with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and aiding and abetting violations of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The SEC's complaint charges Fields with violating Exchange Act Section 13(b)(5) and aiding and abetting violations of Exchange Act Sections 10(b) and 13(a), and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3438.pdf b/raw/aaer/2013/AAER-3438.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bee6b17bad1154f0d11e1a3cbe659db3ad0c868e Binary files /dev/null and b/raw/aaer/2013/AAER-3438.pdf differ diff --git a/raw/aaer/2013/AAER-3438.txt b/raw/aaer/2013/AAER-3438.txt new file mode 100644 index 0000000000000000000000000000000000000000..a2ac46641d2896cff7a5fcab915591d761d36dbb --- /dev/null +++ b/raw/aaer/2013/AAER-3438.txt @@ -0,0 +1,110 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68611 / January 9, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3438 / January 9, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-13555 + +In the Matter of +Jimmie Dean Jones, 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 July 17, 2009, Jimmie Dean Jones, CPA (“Jones”) 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 Jones pursuant to Rule +102(e)(1)(iii) of the Commission's Rules of Practice. +1 Jones consented to the entry of that order +without admitting or denying the findings therein. This Order is issued in response to Jones’ +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. +At all times relevant to the 2009 Order, Jones was a certified public accountant who was +licensed to practice in the state of Oklahoma, and served as the Chief Accounting Officer for +LSB Industries, Inc. (“LSB”). The Commission found that during the first three quarters of +fiscal year 2004 and the full fiscal year 2004, LSB failed to comply with the disclosure and +restatement requirements of Accounting Principles Board Opinion No. 20, “Accounting +Changes” (“APB 20”). Rather than comply with APB 20’s restatement and disclosure +requirements, Jones directed his subordinates to bleed down LSB’s reserve relating to its last in, +first out inventory pricing method (“LIFO”) during 2004. Jones also failed to comply with +LSB’s requirement that he alert the company’s CFO to items with a financial statement impact +exceeding $100,000. Moreover, Jones was responsible for LSB’s false disclosures in its Forms +10-Q for the first and second quarters of 2004 that it maintained LIFO inventory. Jones knew + +1 See Accounting and Auditing Enforcement Release No. 3015, dated July 17, 2009. Jones was permitted, pursuant +to the order, to apply for reinstatement after two years upon making certain showings. + + 2 +that LSB’s Forms 10-Q for the first three quarters of fiscal year 2004 and Form 10-K for the year +ended December 31, 2004 materially overstated LSB’s reported net income. Jones also knew +that LSB’s Form 10-Q for the quarter ended March 31, 2004 failed to comply with APB 20. +Finally, Jones knew or should have known that LSB’s Forms 10-Q for the quarters ended March +31, 2004 and June 30, 2004 contained false disclosures that LSB maintained inventory using the +LIFO pricing methodology. As a result of this conduct, Jones willfully violated Exchange Act +Section 13(b)(5) and Rule 13b2-1 and caused and willfully aided and abetted LSB’s violations of +Exchange Act Sections 13(a) and 13(b)(2)(A), and Rules 13a-1 and 13a-13. + +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, Jones +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. Jones 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 order in this regard. Therefore, the denial of Jones’ +privilege of appearing or practicing 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 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 Jones, it appears that he has complied with the terms of the July 17, 2009 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 Jones, by undertaking to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Jimmie Dean Jones, CPA is hereby reinstated to appear and practice before the Commission as + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the 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 +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission. + +By the Commission. + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3439.txt b/raw/aaer/2013/AAER-3439.txt new file mode 100644 index 0000000000000000000000000000000000000000..0d105e14b507695cf86c0ad66cea3e533072767e --- /dev/null +++ b/raw/aaer/2013/AAER-3439.txt @@ -0,0 +1,1380 @@ + + + + + + + + + + + + + + + + SEC.gov | Volt Information Sciences, Inc. and Debra L. Hobbs and Jack J. Egan, Jr. + + + + + + + + !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\/513486","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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Hobbs and Jack J. Egan, Jr. + + + + + + + + + + + + Volt Information Sciences, Inc. and Debra L. Hobbs and Jack J. Egan, Jr. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22589 / January 11, 2013 + Accounting and Auditing Enforcement Release No. 3439 / January 11, 2013 + Securities and Exchange Commission v. Volt Information Sciences, Inc. and Debra L. Hobbs , Civil Action No. 13-CV-237 (S.D.N.Y.) and 13-CV-236 (S.D.N.Y.) + Securities and Exchange Commission v. Jack J. Egan, Jr., Civil Action No. 13-CV-236 (S.D.N.Y.) (January 10, 2013) + + headline --> + + + SEC Charges Volt Information Sciences, Inc. and Two Former Officers with Securities Fraud + + The Securities and Exchange Commission yesterday filed civil injunctive complaints in the U.S. District Court for the Southern District of New York in connection with improper accounting at Volt Information Sciences, Inc. ("Volt" or the "Company"), a company located in New York, New York. + + In its complaint against Jack J. Egan, Jr. Volt's former Chief Financial Officer, the Commission alleges that Egan participated in a scheme to materially overstate revenue. For Volt's fourth quarter and fiscal year ended October 28, 2007, Egan signed and filed financial statements reporting $7.55 million of revenue that had not been earned and was not recognizable under U.S. Generally Accepted Accounting Principles. The $7.55 million of improper revenue caused Volt's net income for its fourth quarter and fiscal year ended October 28, 2007, to be materially overstated. The complaint further alleges that the scheme relied on fabricated paperwork purporting to be a contract selling software to a customer. Egan knew that any sale of the software was impossible because Volt intended to lease the same software to the same customer the following year. Nevertheless, Egan authorized that the $7.55 million in improper revenue be included in the Company's consolidated income statement for 2007, which were included in Volt's: (1) 2007 Form 10-K filed with the Commission on January 11, 2008, as amended by Form 10-K/A filed with the Commission on February 25, 2008; and (2) earnings release on Form 8-K furnished to the Commission on December 20, 2007. Egan signed the fraudulent 2007 Form 10-K and subsequent SEC filings that included the same overstatement of revenue. In addition, the complaint alleges that Egan mislead Volt's external auditors and he signed one or more certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading. + + The Commission's complaint charges Egan with violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"); Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"); and Exchange Act Rules 10b-5, 13b2-1, 13b2-2, and 13a-14. The complaint further charges Egan with aiding and abetting violations by the Company. The Commission seeks that Egan be permanently enjoined, be ordered to pay a civil money penalty, and be prohibited from acting as an officer or director. + + In addition to the complaint against Egan, the Commission filed a settled civil action against Volt and Debra L. Hobbs ("Hobbs"), the former chief financial officer of the Volt subsidiary where the fraud originated. Without admitting or denying the complaint's allegations, Volt agreed to be enjoined from violating Section 17(a) of the Securities Act , and Sections 10(b),13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-11. The Company cooperated during the Commission's investigation and has undertaken significant remediation efforts. + + Without admitting or denying the complaint's allegations, Hobbs agreed to be enjoined from violating Exchange Act Section 10(b) and Exchange Act Rule 10b-5, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, and 13a-11. The judgment further provides that the Court later will determine issues relating to civil money penalty and other remedies. Hobbs has agreed to cooperate with the SEC in connection with this action. + + The Commission's settlements with Volt and Hobbs are subject to the approval of the U.S. District Court for the Southern District of New York. + +   + + + + + SEC Complaint - Volt Information Sciences, Inc. and Debra L. Hobbs + SEC Complaint - Jack J. 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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/2013/AAER-3440.txt b/raw/aaer/2013/AAER-3440.txt new file mode 100644 index 0000000000000000000000000000000000000000..5fbb352d4353a5e8d5dba95f4adbb6e16d2552e4 --- /dev/null +++ b/raw/aaer/2013/AAER-3440.txt @@ -0,0 +1,160 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68628 / January 11, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3440 / January 11, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15171 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + ERIC ASHMAN, 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 Eric +Ashman (“Respondent” or “Ashman”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Ashman, age 45, is and has been a certified public accountant licensed to +practice in the State of Massachusetts. He served as Chief Financial Officer of TheStreet, Inc. +(“TheStreet”) from July 2006 through May 2009. + + 2. TheStreet was, at all relevant times, a Delaware corporation with its principal +place of business in New York, New York. TheStreet is, and at all relevant times was, a digital +financial media company providing users, subscribers and advertisers with a variety of content and +tools through a range of online channels. At all relevant times, TheStreet’s common stock was +registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”), and traded on the NASDAQ National Market. + + 3. On December 21, 2012, a final judgment was entered against Ashman, +permanently enjoining him from violating, directly or indirectly, Sections 10(b) and 13(b)(5) of the +Exchange Act and Rules 10b-5, 13a-14 and 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-13 thereunder, in the civil action entitled Securities and Exchange Commission v. +Eric Ashman, Civil Action Number 12-CV-9189, in the United States District Court for the +Southern District of New York. Ashman was also ordered to pay a $125,000 civil money penalty, +ordered to reimburse TheStreet $34,149 pursuant to Section 304 of the Sarbanes Oxley Act of +2002, and prohibited for 3 years from acting as an officer or director of any issuer that has a class +of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports +pursuant to Section 15(d) of the Exchange Act. + + 4. The Commission’s complaint alleged, among other things, that Ashman +aided and abetted a fraud resulting in TheStreet filing materially false and misleading financial +statements in the company’s annual report on Form 10-K for the fiscal year ended December 31, +2008, and in the company’s quarterly reports on Form 10-Q for the first three quarters of fiscal +year 2008. The Complaint alleged that Ashman engaged in a number of improper accounting +practices that materially increased TheStreet’s operating income, or decreased its operating loss, in +a departure from generally accepted accounting principles (“GAAP”). These practices included, + 3 +among other things: (1) recognizing revenue based on purported contracts for services when +Ashman knew or recklessly disregarded that TheStreet had not performed the related services +and/or had no basis to believe that such services had been performed; and (2) prematurely +recognizing revenue based on services contracts. In addition, the complaint alleged that Ashman +made a false statement regarding revenue growth at a subsidiary of TheStreet when he knew or +recklessly disregarded that such revenue only increased as a result of accounting improprieties. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Ashman’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Ashman is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his/her practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to + 4 +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3441.pdf b/raw/aaer/2013/AAER-3441.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d0d7337f797f4815a826154eba7ca5cf31e67d45 Binary files /dev/null and b/raw/aaer/2013/AAER-3441.pdf differ diff --git a/raw/aaer/2013/AAER-3441.txt b/raw/aaer/2013/AAER-3441.txt new file mode 100644 index 0000000000000000000000000000000000000000..d33989e00da21d6c32edf48eabc47d77f3090fae --- /dev/null +++ b/raw/aaer/2013/AAER-3441.txt @@ -0,0 +1,124 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68661 / January 15, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3441 / January 15, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15175 + +In the Matter of + +Kevin A. Howard, 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 +Kevin A. Howard (“Respondent” or “Howard”) 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 (“Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . [p]ermanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. +2 + +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. Kevin A. Howard, age 49, resides in Houston, Texas. From 1986 until 1998, +Howard was a CPA licensed to practice in the State of Texas. Between August 1999 and +September 2001, Howard served as Chief Financial Officer and Vice President of Finance for +Enron Broadband Services (“EBS”), a subsidiary of Enron Corp. (“Enron”). Howard was +terminated by Enron on March 12, 2003. +2. Enron was, at all relevant times, an Oregon corporation with its principal place of +business in Houston, Texas. Until its bankruptcy filing in December 2001, Enron was the +seventh largest corporation in the United States based upon reported revenue. In the previous ten +years, Enron had evolved from a regional natural gas provider to a commodity trader of natural +gas, electricity, and other physical commodities with retail operations in energy and other +products. Enron also created and traded financial products. At all relevant times, the common +stock of Enron was registered with the Commission pursuant to Section 12(b) of the Securities +Exchange Act of 1934 (“Exchange Act”) and traded on the New York Stock Exchange. +3. On January 4, 2013, the U.S. District Court for the Southern District of Texas, +Houston Division, entered a final judgment by consent against Respondent, permanently +enjoining him from violating Section 17(a) of the Securities Act of 1933 (“Securities Act”); +permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and +Exchange Act Rules 10b-5 and 13b2-1; and permanently enjoining him from aiding and abetting +the violation of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Exchange Act +Rules 12b-20, 13a-1 and 13a-13, in the civil action entitled Securities and Exchange +Commission v. Kevin A. Howard, et al., Civil Action Number H-03-0905 (S.D. Tex.). The final +judgment also prohibits Respondent from serving as an officer or director of any issuer that has a +class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. Respondent was also ordered to pay a +$65,000 civil money penalty. +4. The Commission’s First Amended C omplaint (“FAC”) alleged, among other +things, that Respondent engaged in a fraudulent scheme known as “Project Braveheart,” which +involved the “monetization” of certain assets resulting in the immediate recognition of earnings +from a long term agreement with Blockbuster Inc. to develop and provide video-on-demand +services. Respondent carried out the scheme by forming a purported joint venture, assigning the +Blockbuster agreement to the joint venture, and selling an interest in the joint venture based on +the value of future revenues from the Blockbuster agreement to a third party. The FAC further +alleged that Project Braveheart was a sham from its inception since it had no economic substance +3 + +and was created solely for the purpose of generating earnings. Additionally, the FAC alleged +that Respondent was aware that the joint venture partner was an entity that never intended to +participate as a partner, and its equity was not at risk because Enron guaranteed the entity a short +term take-out at a specified rate of return. The FAC alleged that Respondent did not inform +Enron’s outside auditor, Arthur Andersen, about the true nature of the transaction, and in +meetings and conversations with Andersen made false and misleading statements about the +transaction. As a result, EBS recognized $53 million in earnings in the fourth quarter of 2000 +and $58 million in earnings in the first quarter of 2001, thus enabling EBS to meet its earnings +targets. +IV. +In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent Howard’s Offer. + Accordingly, IT IS HEREBY ORDERED, effective immediately, that: +Howard is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + +` + + + + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3442.txt b/raw/aaer/2013/AAER-3442.txt new file mode 100644 index 0000000000000000000000000000000000000000..790d748db2ac1822776be6860d87b0a1115f3fb4 --- /dev/null +++ b/raw/aaer/2013/AAER-3442.txt @@ -0,0 +1,111 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68754 / January 29, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3442 / January 29, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15191 + + +In the Matter of + + BRIAN D. FOX, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities a nd Exchange Commission (“Commission”) deems it appropriate +and in the public interest that public administrative proceedings be, and hereby are, instituted +pursuant to Rule 102(e)(3) of the Commission’s Rules of Practice against Brian D. Fox +(“Respondent” or “Fox”). + +II. + +The Commission finds that: + +A. RESPONDENT + +1. Brian D. Fox, age 64, served as Powder River Petroleum International, Inc.’s +(“Powder River” or the “company”) sole director, president and CEO from December 2003 until +July 2008, and as its CFO until August 2007. From year-end 2004 through the first-quarter 2008, +Fox misled the investing public by fraudulently inflating the revenue and assets and fraudulently +omitting major liabilities, of Powder River in the company’s Commission filings, and by making +other false and misleading public disclosures. + + + +B. CIVIL INJUNCTION + +2. On November 2, 2012, the U.S. District Court for the Northern District of +Oklahoma entered judgment against Fox, permanently enjoining him from future violations, direct +or indirect , of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities +Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and +13b2-2 thereunder. The Judgment further prohibited Fox, pursuant to Exchange Act Section +21(d)(2), 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 required to file reports pursuant to Section 15(d) of +the Exchange Act. Securities and Exchange Commission v. Brian D. Fox, Civil Action Number +4:11-CV-0211-CVE-PJC. + +3. The Commission’s complaint alleged that from year-end 2004 through the +first-quarter 2008, Fox misled the investing public by fraudulently inflating the revenue and assets +and fraudulently omitting major liabilities, of Powder River in the company’s Commission filings, +and by making other false and misleading public disclosures. From year-end 2004, Powder River +conveyed working interests in oil-and-gas leases to investors in Asia for over $43 million. Because +Powder River promised full repayment of the working interest investors’ initial investment, with a +9% guaranteed annual return of principal, these transactions were, in reality, loans. But Powder +River, with Fox as chairman, president, CFO and Chief Executive Officer CEO, improperly +recognized the loan proceeds as revenue in the company’s financial statements. These bogus +revenues were incorporated in Powder River’s quarterly and annual public filings with the SEC. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Brian D. Fox, from violating the Federal securities laws within the meaning +of Rule 102(e)(3)(i)(A) of the Commission ’s Rules of Prac tice. In view of these findings, the +Commission deems it appropriate and in the public interest that Brian D. Fox be temporarily +suspended from appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Brian D. Fox be, and hereby is, te mporarily suspended +from appearing or practicing before the Commission. This Order shall be effective upon service +on the Respondent. + + IT IS FURTHER ORDERED that Brian D. Fox may within thirty days after service of this +Order file a petition with the Com mission to lift the temporary suspension. If the Commission +within thirty days after service of the Order receives no petition, the suspension shall become +permanent pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordere d, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a + +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order sha ll be served upon Brian D. Fox personally or by certified mail at his last +known address. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3443.pdf b/raw/aaer/2013/AAER-3443.pdf new file mode 100644 index 0000000000000000000000000000000000000000..00d649103170b344d8df240af702e382f72609e6 Binary files /dev/null and b/raw/aaer/2013/AAER-3443.pdf differ diff --git a/raw/aaer/2013/AAER-3443.txt b/raw/aaer/2013/AAER-3443.txt new file mode 100644 index 0000000000000000000000000000000000000000..7b9c20828835bf496949b8fb48ebc5c63211688d --- /dev/null +++ b/raw/aaer/2013/AAER-3443.txt @@ -0,0 +1,189 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68756 / January 29, 2013 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 3539 / January 29, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3443 / January 29, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15193 + + + + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in +the public interest that public administrative proceedings be, and hereby are, instituted pursuant +to Rule 102(e)(3)(i) of the Commission’s Rules of Practice +1 and pursuant to Section 203(f) 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 + + +In the Matter of + + +LISA B. HOVAN, CPA + + +Respondent. + + + +ORDER INSTITUTING ADMINISTRATIVE +PROCEEDINGS PURSUANT TO RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE AND SECTION 203(f) OF THE +INVESTMENT ADVISERS ACT OF 1940, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +2 + +Investment Advisers Act of 1940 (“Advisers Act”) against Lisa B. Hovan, CPA (“Respondent” +or “Hovan”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, and the findings contained in Section III.3, below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice and Section 203(f) of the Investment Advisers Act of 1940, +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 45, is a certified public accountant, currently licensed in +California and previously licensed in New Jersey and New York. She is a resident of Belvedere, +California. + +2. From 1999 through 2010, Respondent was a member, indirect owner with +her husband, and Chief Financial Officer of Hovan Capital Management, LLC (“HCM”), an +investment adviser registered with the Commission. Among HCM’s clients, from August 2006 +until March 2009, HCM served as a sub-adviser to a Commission-registered investment company +that was based in Harrison, New York. + +3. On January 14, 2013, a final judgment was entered against Hovan, +permanently enjoining her from future violations of Section 10(b) of the Securities Exchange Act +of 1934 (“Exchange Act”), Exchange Act Rule 10b-5, Sections 206(1), 206(2) and 207 of the +Advisers Act, in the civil action entitled Securities and Exchange Commission v. Kurt Hovan, et +al., Civil Action No. CV-11-4795-RS, in the United States District Court for the Northern District +of California. Hovan was also ordered to pay a $50,000 civil money penalty. + +4. The Commission’s complaint alleged, among other things, that Hovan, +acting with her husband, Kurt Hovan, misused so-called “soft dollars” that HCM had obtained as +rebates on commissions paid for securities trades executed in the accounts of HCM’s clients. +According to the complaint, contrary to assurances to clients and others that HCM would only use +soft dollars to pay for a limited category of services that benefitted HCM’s clients, Respondent and +her husband and HCM used the soft dollars for prohibited purposes, including for HCM’s rent, +salaries, and for office equipment for HCM. The complaint further alleged that Respondent +provided the mutual fund client of HCM’s with certifications stating that soft dollars had not been + +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. +3 + +used to pay for items other than research that would benefit the client. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Hovan’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, Respondent +Hovan is suspended from appearing or practicing before the Commission as an accountant. + +B. After five years from the date of this Order, Respondent may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in her practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which she works or in some other acceptable manner, as long as she practices before the +Commission in this capacity; or + +2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which she is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which +she is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the Respondent’s or the firm’s quality control system that +would indicate that the Respondent will not receive appropriate supervision; + + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges her responsibility, as long as Respondent +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that her state CPA license is +4 + +current and she has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + +D. Pursuant to Section 203(f) of the Advisers Act, Respondent Hovan is barred +from association with any broker, dealer, investment adviser, municipal securities dealer, +municipal advisor, transfer agent, or nationally recognized statistical rating organization, with +the right to apply for reentry after five years to the appropriate self-regulatory organization, or +if there is none, to the Commission. + +E. 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. + + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3444.pdf b/raw/aaer/2013/AAER-3444.pdf new file mode 100644 index 0000000000000000000000000000000000000000..34c6a170d9751b1a7263ed0832f2ec2e9d7ad12c Binary files /dev/null and b/raw/aaer/2013/AAER-3444.pdf differ diff --git a/raw/aaer/2013/AAER-3444.txt b/raw/aaer/2013/AAER-3444.txt new file mode 100644 index 0000000000000000000000000000000000000000..35feb4dcc017e6f06cb59bbfd63e68f97c90cd51 --- /dev/null +++ b/raw/aaer/2013/AAER-3444.txt @@ -0,0 +1,120 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68845 / February 6, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3444 / February 6, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15206 + + +In the Matter of + +Joseph J. Repko, CPA + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE +AND IMPOSING TEMPORARY +SUSPENSION + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3) +1 of the Commission’s Rules of Practice against Joseph J. Repko (“Respondent” or +“Repko”). + + + + + + + +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. + +After an investigation, the Division of Enforcement alleges that: + +A. RESPONDENT + +1. Repko, age 63, has been a certified public accountant (“CPA”) licensed to +practice in the State of Pennsylvania since August 1981. Repko’s CPA license is currently inactive. +From no later than April through June 2009, Repko was the chief financial officer of Sure Trace +Security Corporation (“Sure Trace”) and, during a portion of that time, its president. + + B. CIVIL INJUNCTION + +2. On November 28, 2012, the U.S. District Court for the Southern District of +Florida entered a final judgment by default against Repko that, among other things, permanently +enjoins him from future violations, direct or indirect, of Section 17(a)(1) of the Securities Act of +1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) thereunder. +Securities and Exchange Commission v. Joseph J. Repko, et al., Civil Action Number 0:12-cv- +61079-KMW. + +3. The Commission’s complaint alleged that from April through June 2009, +Repko and others engaged in a fraudulent scheme involving illicit kickbacks to induce the +purchase of Sure Trace’s stock. Specifically, according to the complaint, Repko participated in +paying illegal kickbacks to a purported trustee of an employee pension fund so the trustee would +purchase 133 million restricted shares of the company’s stock. Repko and the other defendants +attempted to conceal the kickbacks by entering into a sham consulting agreement between Sure +Trace and a purported consulting company created to receive the kickbacks. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Repko, a CPA, from violating the Federal securities laws within the meaning +of Rule 102(e)(3)(i)(A) of the Commission’ s Rules of Practice. In view of these findings, the +Commission deems it appropriate and in the public interest that Repko be temporarily suspended +from appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Repko be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on the +Respondent. + + IT IS FURTHER ORDERED that Repko may within thirty days after service of this Order +file a petition with the Commission to lift the temporary suspension. If the Commission within +thirty days after service of the Order receives no petition, the suspension shall become permanent +pursuant to Rule 102(e)(3)(ii). + 3 + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designat ed by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served upon Repko personally or by certified mail at his last known +address. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3445.pdf b/raw/aaer/2013/AAER-3445.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4839f017bfd2d558985efde40d9066e1cc56ab3d Binary files /dev/null and b/raw/aaer/2013/AAER-3445.pdf differ diff --git a/raw/aaer/2013/AAER-3445.txt b/raw/aaer/2013/AAER-3445.txt new file mode 100644 index 0000000000000000000000000000000000000000..68c97cdf62d3fabeb3b7c9193fe688893084224f --- /dev/null +++ b/raw/aaer/2013/AAER-3445.txt @@ -0,0 +1,108 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 68949 / February 19, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3445 / February 19, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-12938 + +In the Matter of +Michael Lowther, 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 January 28, 2008, Michael Lowther, CPA (“Lowther”) 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 +Lowther’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 Lowther engaged in improper professional conduct in his +role as the concurring reviewer for Arthur Andersen LLP’s (“Andersen”) audits and reviews of +Enron Corp.’s (“Enron”) financial statements for the year ended December 31, 1997 through the +third quarter ended September 30, 2001. During this period, Enron senior executives engaged in +a scheme to materially overstate the company’s earnings and cash flows while concealing debt +through a variety of complex structured transactions, related party transactions, misleading +disclosures, and a widespread abuse of generally accepted accounting principles (“GAAP”). For +each year during this time period, Andersen issued an auditor’s report falsely stating that Enron’s +financial statements were presented fairly, in all material respects, in conformity with GAAP, +and that Andersen had conducted its audit of those financial statements in accordance with +generally accepted auditing standards. Lowther engaged in improper professional conduct by +concurring with the audit engagement team’s faulty conclusions regarding Enron’s accounting + +1 See Accounting and Auditing Enforcement Release No. 2775 dated January 28, 2008. Lowther was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. + + 2 +for certain transactions and by authorizing the issuance by Andersen of unqualified audit reports +that were materially false and misleading. +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, Lowther +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. Lowther 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, Lowther’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 Lowther, it appears that he has complied with the terms of the January 28, 2008 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 Lowther, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, in +his practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Michael Lowther, 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. + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3446.txt b/raw/aaer/2013/AAER-3446.txt new file mode 100644 index 0000000000000000000000000000000000000000..be9ae1e887736fe58327521b45551b680f091915 --- /dev/null +++ b/raw/aaer/2013/AAER-3446.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Fernando J. 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Espuelas et al. + + + + + + + + + + + + Fernando J. Espuelas et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22624 / February 26, 2013 + Litigation Release No. AAER-3446 / February 26, 2013 + Securities and Exchange Commission v. Fernando J. Espuelas et al. , Civil Action No. 06 CV 2435 (PAE) (S.D.N.Y.) + + FORMER STARMEDIA EXECUTIVE AGREES TO SETTLEMENT IN SEC LITIGATION + + + The U.S. Securities and Exchange Commission today announced that on February 6, 2013, the U.S. District Court for the Southern District of New York entered a settled final judgment as to Peter R. Morales, the former Controller and Vice President, Finance, for StarMedia Network, Inc., a now-defunct Internet portal, in Securities and Exchange Commission v. Fernando J. Espuelas et al., Civil Action No. 06 CV 2435 (PAE) (S.D.N.Y. filed Mar. 29, 2006). The Commission's amended complaint charged violations of the federal securities laws by eight former StarMedia executives, alleging, in relevant part, that for fiscal year 2000 and the first two quarters of fiscal year 2001, StarMedia's books and records misstated the company's revenue. + + Without admitting or denying the allegations in the amended complaint, Morales consented to the entry of the Final Judgment permanently enjoining him from future violations of Rules 13b2-1 and 13b2-2 promulgated under the Securities Exchange Act of 1934 (Exchange Act), and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13, and ordering him to pay a civil penalty of $10,000. + + The Commission had previously settled with six other defendants. In addition, on October 26, 2012, the court granted defendant Betsy D. Scolnik's motion for summary judgment and ordered that the clerk terminate her as a defendant from the case. Accordingly, the Commission's litigation is concluded. + + See Litigation Releases No. 22285 (March 13, 2012); No. 22147 (Nov. 7, 2011); No. 22023 (July 1, 2011); No. 21880 (Mar. 9, 2011); No. 19839 (Sept. 20, 2006); No. 19627 (Mar. 29, 2006). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Keyuan Petrochemicals, Inc. and Aichun Li + + + + + + + + + + + + Keyuan Petrochemicals, Inc. and Aichun Li + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22627 / February 28, 2013 + Accounting and Auditing Enforcement Release No. 3447 / February 28, 2013 + Securities and Exchange Commission v. Keyuan Petrochemicals, Inc. and Aichun Li , Civil Action No. 13-cv-00263 (D.D.C.) + + headline --> + + + The Securities and Exchange Commission ("Commission") today charged Keyuan Petrochemicals, Inc., a China-based issuer formed through a reverse merger in April 2010, with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The SEC further charged Aichun Li, Keyuan's former Chief Financial Officer, with aiding and abetting Keyuan's reporting and books and records violations and for failing to implement internal accounting controls. Keyuan and Li have agreed to settle the SEC's claims against them. + + According to the SEC's complaint, between May 2010 and January 2011, in what was its first year as a U.S. public company, Keyuan systematically failed to disclose in its SEC filings numerous material related party transactions, as required by U.S. Generally Accepted Accounting Principles ("GAAP") and Commission rules and regulations. The related parties included the company's three founding and controlling shareholders, including its current Chief Executive Officer, entities controlled by or affiliated with these persons, and entities controlled by Keyuan's management or their family members. The related party transactions included sales of products, purchases of raw materials, loan guarantees, and short term financing. + + Keyuan also operated an off-balance sheet cash account that was kept off the company's books by the former Vice President of Accounting. The account was used to pay for various items, including cash bonuses for senior officers and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment. The account was also used to fund giftsâ€"both cash and non-cashâ€"for Chinese government officials. By failing to properly record these transactions on the company's books and records, the company misstated its reported balances in its financial statements filed with the Commission. + + The SEC further alleges that Keyuan's then-CFO Aichun Li, a resident of North Carolina, played a role in the company's failure to disclose the related party transactions. Li was hired to ensure the company's compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan's registration statements and quarterly reports that failed to disclose material related party transactions. + + The SEC's complaint, which was filed in federal court in Washington, D.C., charges Keyuan with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"), Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 12b-20 and 13a-13 thereunder. The SEC's complaint further charges Li with violations of Section 13(b)(5) of the Exchange Act and aiding and abetting Keyuan's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + + Without admitting or denying the claims against them, Keyuan and Li have consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Keyuan has agreed to pay a civil penalty in the amount of $1,000,000. Li has agreed to pay a civil penalty in the amount of $25,000. Li also has consented to the issuance of a Commission order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending her from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement is subject to approval by the court. + + The SEC's investigation, which is continuing, was conducted by Fuad Rana, Avron Elbaum, and Melissa A. Robertson. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3448.pdf b/raw/aaer/2013/AAER-3448.pdf new file mode 100644 index 0000000000000000000000000000000000000000..629234607d851c4bc953cffd04ed618ce671c80b Binary files /dev/null and b/raw/aaer/2013/AAER-3448.pdf differ diff --git a/raw/aaer/2013/AAER-3448.txt b/raw/aaer/2013/AAER-3448.txt new file mode 100644 index 0000000000000000000000000000000000000000..5dbb9af8b7b7afed6fa84214e0c4f25ca5d3847a --- /dev/null +++ b/raw/aaer/2013/AAER-3448.txt @@ -0,0 +1,581 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69036 / March 5, 2013 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 3562 / March 5, 2013 + +INVESTMENT COMPANY ACT OF 1940 +Release No. 30414 / March 5, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3448 / March 5, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-14979 +_______________________________________ + +In the Matter of : + : ORDER MAKING FINDINGS AND +PEAK WEALTH OPPORTUNITIES, LLC, and : IMPOSING SANCTIONS BY +DAVID W. DUBE, CPA : DEFAULT +_______________________________________ + + The Securities and Exchange Commission (Commission) instituted this proceeding with +an Order Instituting Administrative Proceedings (OIP) on August 10, 2012, pursuant to Section +15(b)(6) of the Securities Exchange Act of 1934 (Exchange Act), Sections 203(e), 203(f), and +203(k) of the Investment Advisers Act of 1940 (Advisers Act) , Sections 9(b) and 9(f) of the +Investment Company Act of 1940 (Investment Company Act), and Rule 102(e) of the +Commission’s Rules of Practice (Commission Rules). + +I held a telephonic prehearing conference on September 27, 2012, at which time I found +that Respondents were served with the OIP no later than September 10, 2012. Commission Rule +220(b) requires Respondents to file their Answers to the OIP within twenty days after service. +OIP at 7; 17 C.F.R. § 201.220(b). At the prehearing conference, the parties represented that they +were actively engaged in settlement discussions, and I postponed sine die the due date for +Respondents to file their Answers. I held a second telephonic prehearing conference on October +24, 2012. Respondents represented that they were still interested in pursuing settlement +discussions, and I ordered Respondents to file their Answers by November 16, 2012. + +Respondents failed to file Answers to the OIP, and on November 19, 2012, I ordered +Respondents to show cause why they should not be deemed in default and have the proceeding +determined against them . See 17 C.F.R. §§ 201.155(a)(2), .220(f). Respondents failed to +respond to the show cause order. On January 15, 2013, I held a third telephonic prehearing +2 + +conference, in which Respondents failed to participate. Respondents are therefore in default for +failing to answer the OIP, respond to the show cause order, participate in a prehearing +conference, or otherwise defend the proceeding. See 17 C.F.R. §§ 201.155(a), .220(f) , .221(f). +Accordingly, the allegations in the OIP are deemed true and this proceeding is determined +against them by default. + +On December 5, 2012, I issued an order finding Respondents in default and directing the +Division of Enforcement (Division) to file a motion requesting relief and supported by sufficient +evidence consistent with Rapoport v. SEC , 682 F.3d 98 (D.C. Cir. 2012). On December 26, +2012, the Division filed a Motion for Sanctions Against Respondents Peak Wealth Opportunities +and David W. Dube (Motion), to which was attached 13 exhibits (Exhs. 1-13). At t he January +15, 2013 prehearing conference, I expressed concern about the strength and nature of the case +against Respondents, and directed the Division to file additional legal authority and evidentiary +support. Post Third Prehearing Conference Order (unpublished). On January 30, 2013, the +Division filed a Supplement to its Motion for Sanctions (Supplement), to which was attached a +Declaration of Roda Johnson (Johnson Decl.) and the transcript of investigative testimony of +Edward Cofrancesco (Cofrancesco Tr.). + +FINDINGS OF FACT + +Peak Wealth Opportunities, LLC (Peak Wealth), a Florida limited liability company +located in Largo, Florida, has been registered with the Commission as an investment adviser +since October 2007. OIP, p. 2. From April 2008 to June 2010, Peak Wealth was the investment +adviser to StockCar Stocks Index Fund (Fund), the sole series of the StockCar Stocks Mutual +Fund, Inc. (Company), formerly a registered investment company. Id. Although the Fund +terminated Peak Wealth’s advisory agre ement in June 2010, Peak Wealth remains registered +with the Commission as an investment adviser. Id., p. 5. Peak Wealth has not filed a Form ADV +since September 2008, nor has it filed a Form ADV -W or annually amended Forms ADV for its +fiscal years ended September 30, 2009, 2010, or 2011. Id., p. 5; Motion, Exh. 13. Peak Wealth’s +September 2008 Form ADV states that its basis for registration with the Commission is its status +as an investment adviser to a registered investment company. Id., p. 5. Peak Wealth is a wholly +owned subsidiary of Peak Capital Corporation (Peak Capital), which also owns Peak Securities +Corporation, a former broker -dealer (which withdrew its broker- dealer registration in March +2010), and a publishing and debt collection business. Id., p. 2. + +David W. Dube (Dube), age 55, owns Peak Capital and its subsidiary businesses. OIP, p. +2. He is the president and sole managing member of Peak Wealth. Id. He was also the acting +chief compliance officer of the Fund from October 2009 unti l June 2010. Id. Dube is a certified +public accountant licensed in New Hampshire and, as of December 31, 2012, Florida . Id. ; +Motion, Exh. 2. Dube registered with the Public Company Account ing Oversight Board in +January 2010, indicating that he may conduct or play a substantial role in an audit in the future. +OIP, p. 2. A recent public company filing in September 2011 indicates that Dube has been +engaged to prepare the company’s audited financial statements. Id., p. 2; Motion, Exh. 3, p. 8. +Other public filings from 2001 and 2002 indicate that Dube has also served on at least two public +company audit committees. OIP, p. 2. Dube has a disciplinary history with the Financial +Industry Regulatory Authority (FINRA) in connection with his formerly registe red broker - +3 + +dealer, and has twice had FINRA arbitration awards imposed against him . Id.; Motion, Exhs. 4- +6. + +The Company was a Maryland corporation that operated as an open- end diversified +management investment company. OIP, p. 2. The Company was registe red with the +Commission from September 1998 until March 2011, when it formally deregistered. Id. The +Company is now defunct. Id. + +The Fund was an open- end management company that invested in companies of the +StockCars Stocks Index (Index), the Fund’s pr oprietary index consisting of approximately 40 +companies that support NASCAR racing events. OIP, pp. 2-3. The Fund reported net assets of +approximately $3.9 million in its most recently filed annual report, for the fiscal year ended +September 30, 2009. Id., p. 3. Edward Cofrancesco (Cofrancesco) was one of the Fund’s +directors. Cofrancesco Tr., p. 17. + +A. Peak Wealth’s Relationship with the Fund + +Peak Wealth became the investment adviser to the Fund in April 2008, pursuant to a vote +by a majority of the C ompany’s shareholders approving Peak Wealth’s written advisory +agreement. OIP, p. 3. The advisory agreement was for an initial term of two years and was +subject to the Fund board’s annual review and approval thereafter. Id. Peak Wealth also served +as t he Fund’s administrator pursuant to a separate administration agreement. Id. Dube had +previously done business with Cofrancesco and arranged to have him serve as a director of the +Fund. Cofrancesco Tr., pp. 18-19, 24. + +For its advisory services, Peak Wealth charged an annual fee of 0.65% of the Fund’s +average daily net assets. OIP, p. 3 . Peak Wealth contractually agreed to waive fees and/or +reimburse the Fund for all expenses it incurred to the extent necessary to maintain the Fund’s +total operating expenses at 1.5% of the Fund’s average daily net assets for a two- year period +ending April 15, 2010. Id. Throughout the period of the reimbursement agreement, the expenses +paid by the Fund, exclusive of advisory fees, exceeded the 1.5% cap. Id. This wa s largely +because assets under management were low, which in turn was partly the result of poor +economic conditions and partly the result of poor marketing efforts by Dube and Peak Wealth. +See Cofrancesco Tr., pp. 59- 61, 65. Thus, due to the waiver agree ment, Peak Wealth did not +collect advisory fees while it served as adviser to the Fund , and indeed, paid approximately +$80,000 to the Fund. OIP, p. 3; Cofrancesco Tr., pp. 87, 129. + +In late 2008, the Fund’s board began to raise concerns about Peak Wealth’ s ability to +meet its expense reimbursement obligation to the Fund. OIP, p. 3. Peak Wealth had failed to +reimburse the Fund for expenses it owed under the advisory agreement, which resulted in the +Fund delaying the filing of its annual report for the fis cal year ended September 30, 2008. Id.; +Cofrancesco Tr., pp. 51, 54. By September 2009, the Fund had accumulated another receivable +for expenses owed from Peak Wealth of approximately $50,000. OIP, p. 3; Cofrancesco Tr., pp . +66, 82. Dube repeatedly promised the board that he would repay the Fund, but he never did. +OIP, p. 3. The Fund’s auditor refused to release its audit opinion without repayment of the +outstanding obligation, resulting in the Fund delaying the filing of its 2009 annual report. Id.; +4 + +Cofrancesco Tr., pp. 90 -91. Ultimately, the board liquidated Dube’s personal holdings in the +Fund in order to satisfy the outstanding receivable. OIP, p. 3; Cofrancesco Tr., pp. 90-91. + +The Fund’s portfolio manager, who worked for Peak Wealth and handle d the trading +activity and index rebalancing for the Fund, also encountered problems with Peak Wealth and +Dube. OIP, p. 3. Dube failed to respond to multiple letters and emails from the portfolio +manager throughout 2008 and 2009 regarding the Fund’s compliance obligations, the portfolio +manager’s concerns about the regularity and substance of his communications with Peak Wealth +and Dube, and his compensation. Id., p. 3; Motion, Exh. 7 . The portfolio manager raised his +concerns about the lack of communic ation directly with the Fund’s board. OIP , p. 3. The +portfolio manager was eventually hired and compensated directly by the Fund. Cofrancesco Tr., +pp. 44, 101. + +In March 2010, prior to the conclusion of Peak Wealth’s initial two- year investment +advisory agreement with the Fund, the Fund’s board requested documents from Peak Wealth and +Dube in connection with its review of Peak Wealth’s investment advisory contract under Section +15(c) of the Investment Company Act. OIP, pp. 3- 4; Motion, Exh. 8; Cofranc esco Tr., pp. 104- +05. The board sent a second request in May 2010. OIP, p. 4; Motion, Exh. 8; Cofrancesco Tr., +p. 118. Peak Wealth requested an extension of time to respond to the board’s requests but failed +to provide the board with any of the requeste d documents. OIP, p. 4; Cofrancesco Tr., pp. 106 - +08. One reason for this failure, according to Dube, was Dube’s health problems. Cofrancesco +Tr., p. 121. + +In June 2010, the board terminated Peak Wealth’s advisory agreement, and voted to +liquidate the Fund’s assets (approximately $4 million) and to deregister the Company. OIP, p. 4; +Cofrancesco Tr., p. 127. The Fund distributed to investors all remaining assets net of liquidation +expenses. OIP, p. 4. On March 23, 2011, the Commission’s Division of Investment +Management issued an order terminating the Company’s registration under the Investment +Company Act. Id. + +B. Examination of Peak Wealth + +In April 2010, Commission staff from the Miami Regional Office initiated an +examination of Peak Wealth and the Fund. OIP, p. 4. The examination staff faxed its initial +document request list to Peak Wealth and the Fund on April 7, 2010, one week before +commencement of the examination. Id.; Johnson Decl., p. 1. When the staff arrived on April 14, +Dube did not have any documents for Peak Wealth or the Fund. OIP, p. 4; Johnson Decl., p. 1. +Dube repeatedly assured examiners that responsive documents would be forthcoming. OIP, p. 4 ; +Johnson Decl., p. 2. He frequently assured examiners that his assistant was making copies, but +she never returned with any. Johnson Decl., p. 2. + +The examination staff submitted many additional document requests, follow-up requests, +and Fail to Produce l etters to Peak Wealth. OIP, p. 4; Motion, Exh. 9 ; Johnson Decl., p. 2. +These incl uded requests for financial records relating to Peak Wealth’s advisory business, +including Peak Wealth’s balance sheet, trial balance, income statement, cash flow statements, +and cash receipts and disbursements journals. OIP, p. 4; Motion, Exh. 9. Dube and Peak Wealth +5 + +did not produce these financial records because they did not exist. OIP, p. 4. Instead, Dube told +examiners that he would create the requested financial records relating to Peak Wealth. Id., p. 4. + +The examination staff also submitted a document request to Dube, in his capacity as a +representative of Peak Wealth and the Fund’s acting chief compliance officer, for documents +relating to the maintenance of the Index, including the list of eligible issuers and proof of their +eligibility, as well as records of daily value computations, the weighting of positions, the annual +rebalancing process, and the correlation between the performance of the Fund and the Index. +OIP, p. 4; Motion, Exh. 10. + +At the conclusion of the field work portion of the examination, the majority of the +requests for Peak Wealth’s financial records remained outstanding, as did r equests relating to the +maintenance of the Index. OIP, p. 4 ; Johnson Decl., p. 2. Examination staff referred the matter +to the Division for further review. OIP, p. 4. + +The Company, the Fund (through its board), and the former portfolio manager +subsequently produced documents in response to a subpoena from the enforcement staff. OIP, p. +4. However, Peak Wealth and Dube never responded to the st aff’s document subpoenas, and +Dube failed to appear for investigative testimony pursuant to a subpoena. Id.; Motion, Exhs. 11- +12. + +During the examination, Dube spoke to Cofrancesco, the only remaining board member +of the Fund, one time. Cofrancesco Tr., pp. 111- 12, 122. Respondents’ inaction and dearth of +communication may have been because of Dube’s health problems, including a bad skiing +accident and HIV infection. Id., pp. 112- 13, 133. In part, however, it was because Dube was +making money in other ways, including teaching overseas. Id., pp. 66- 67, 122. In any event, +Dube represented to the board that the Commission examination was “going fabulously well.” +Id., p. 125. + +CONCLUSIONS OF LAW + + Peak Wealth violated Section 15(c) of the Investment Co mpany Act . That provision +makes it the duty of an investment adviser of a registered investment company to furnish such +information as may reasonably be necessary for fund directors to evaluate the terms of any +contract whereby a person undertakes regular ly to serve or act as investment adviser of such +company. 15 U.S.C. § 80a-15(c). The Fund requested documents from Peak Wealth twice, in +March 2010 and May 2010. Peak Wealth requested an extension of time to respond to these +requests, but ultimately did not furnish the requested documents. + + Peak Wealth violated Section 204 of the Advisers Act and Rules 204 -1(a)(1) and 204- +2(a)(1), (2), (4), (5), and (6) thereunder. Section 204 of the Advisers Act requires investment +advisers to make and keep certain records specified by rule, which are subject to examination by +the Commission. 15 U.S.C. § 80b-4(a). Rule 204-1(a)(1) requires an investment adviser to file a +Form ADV annually, within 90 days of the end of its fiscal year. 17 C.F.R. § 275.204-1(a)(1). +Rule 204- 2(a) requires a registered investment adviser to make and keep true, accurate, and +6 + +current copies of certain books and records relating to its investment advisory business, +including: + +- A journal or journals, including cash receipts and disburseme nts, records, and any +other records of original entry forming the basis of entries in any ledger; +- General and auxiliary ledgers (or other comparable records) reflecting asset, liability, +reserve, capital, income and expense accounts; +- All check books, bank statements, cancelled checks and cash reconciliations of the +investment adviser; +- All bills or statements (or copies thereof), paid or unpaid, relating to the business of +the investment adviser as such; and +- All trial balances, financial statements, and inte rnal audit working papers relating to +the business of such investment adviser. + +17 C.F.R. § 275.204-2(a)(1), (2), (4), (5), (6). Peak Wealth did not make and keep many of the +records requested by the Commission’s examination staff in April 2010. It did not timely file +any Forms ADV for its fiscal years ended September 2009, 2010, or 2011. The examination +revealed that it did not make and keep, in their entirety, the five categories of books and records +alleged in the OIP. + +Peak Wealth violated Section 203A of the Advisers Act and Rule 203A -1(b)(2) +thereunder. Section 203A of the Advisers Act generally prohibits an investment adviser from +registering unless it has assets under management of not less than $25,000,000 or it is an +investment adviser for a registered investment company. 15 U.S.C. § 80 b-3a(a)(1). Rule 203A- +1(b)(2) requires a registered investment adviser to file a Form ADV -W within 180 days of the +end of its fiscal year if it becomes ineligible for registration. 17 C.F.R. § 275.203A-1(b)(2).1 +Peak Wealth’s most recently filed Form ADV, for the period ended September 30, 2008, stated + +1 This relatively recent regulation, entitled “Eligibility for SEC registration; Switching to or from +SEC registration,” is somewhat obscure. 17 C.F.R. § 275.203A -1 (stating an effective date of +September 19, 2011). It has two sections, the second of which is entitled “Switching to or from +SEC registration.” 17 C.F.R. § 275.203A -1(b). Subsecti on (2), entitled “SEC -registered +advisers – switching to State registration,” reads in pertinent part: “If you are registered with the +Commission and file an annual updating amendment to your Form ADV reporting that you are +not eligible for SEC registratio n . . . you must file Form ADV -W to withdraw your SEC +registration within 180 days of your fiscal year end.” 17 C.F.R. § 275.203A -1(b)(2). Read +literally, it appears to require the filing of a Form ADV -W only if ineligibility for Commission +registration is reported on an associated annual Form ADV, all for the purpose of switching to +state registration. So read, Peak Wealth was under no obligation to file a Form ADV-W, because +it had not also filed an associated annual Form ADV. Such a construction is w holly +unreasonable, however; surely the duty to file a Form ADV -W is not excused by the failure to +properly file an annual Form ADV. Consequently, I interpret Rule 203A -1(b)(2) to read, in +effect: “If you are registered with the Commission and [are no lon ger] eligible for SEC +registration . . . you must file Form ADV -W to withdraw your SEC registration within 180 days +of your fiscal year end.” +7 + +that its only basis for registration was its status as investment adviser to a registered investment +company, a status that ended in June 2010. Peak Wealth ne ver filed a Form ADV -W to +withdraw its registration. + + Peak Wealth’s violations are not of anti-fraud provisions, and do not require a showing of +scienter. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976) (“ When a statute speaks so +specifically i n terms of manipulation and deception, and of implementing devices and +contrivances . . . we are quite unwilling to extend the scope of the statute to negligent conduct.”). +Where no scienter is required, aiding and abetting liability requires proof that: 1) another party +has committed a securities law violation; 2) the accused aider and abetter had a general +awareness that his role was part of an overall activity that was improper; and 3) the accused aider +and abetter knowingly and substantially assisted t he principal violation. Investors Research +Corp. v. SEC , 628 F.2d 168, 178 (D.C. Cir. 1980). The knowledge or awareness requirement +can be satisfied by a finding of recklessness when the alleged aider and abettor is a fiduciary. +See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990) . An associated person of an investment +adviser is a fiduciary to his investment advisory clients. See Flickinger v. Harold C. Brown, Inc., +947 F. 2d 595, 599 (2d Cir. 1991). Recklessness is “highly unreasonable” conduct, “which +represents ‘an extreme departure from the standards of ordinary care . . . to the extent that the +danger was either known to the defendant or so obvious that the defendant must have been aware +of it.’” Rolf v. Blyth, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978) (quoting Sanders v. +John Nuveen & Co., 554 F.2d 790, 793 (7th Cir. 1977)). A respondent who aids and abets a +violation also is a cause of the violation under the federal securities laws. See Sharon M. +Graham, Exchange Act Release No. 4 0727 (Nov. 30, 1998), 53 S.E.C. 1072, 1085 n.35, aff’d, +222 F.3d 994 (D.C. Cir. 2000) . Negligence is sufficient to establish liability for causing a +primary violation that does not require scienter . See KPMG Peat Marwick LLP , Exchange Act +Release No. 438 62 (Jan. 19, 2001), 54 S.E.C. 1135, 1175 (2001), recon. denied, 55 S.E.C. 1, +aff’d, 289 F.3d 109 (D.C. Cir. 2002). + +Peak Wealth is controlled by Dube; he is its owner, president, and sole managing +member. He therefore substantially assisted Peak Wealth’s primary violations, and was a +fiduciary to Peak Wealth’s investment advisory clients . He was also at least reckless regarding +Peak Wealth’s primary violations, as demonstrated by, for instance, his request for an extension +of time to respond to the Fund’s Section 15(c) requests, his assurances to the examination staff +that he would comply with document requests, and his filing of a Form ADV on behalf of Peak +Wealth in 2008, one year after initially registering with the Commission , but not thereafter . +Therefore, he aided and abetted all of Peak Wealth’s violations, and also caused them. +2 + + + + +2 An associated person may be charged as a primary violator, where the investment adviser is an +alter ego of the associated person. John J. Kenny, Securities Act Release No. 8234 (May 14, +2003), 56 S.E.C. 448, 485 n.54, aff’d, 87 F. App’x 608 (8th Cir. 2004). Although Peak Wealth is +apparently Dube’s alter ego, I need not reach this issue because Dube is only char ged with +secondary liability. OIP, pp. 5-6. + +8 + + + +SANCTIONS + +The Division requests that I: (1) order Respondents to cease and desist from violating +Sections 204 and 203A of the Advisers Act , and Rules 203A -1(b)(2), 204-1(a)(1), 204-2(a)(1), +(2), (4), (5), and (6) thereunder ;3 (2) revoke Peak Wealth’s investment adviser registration; (3) +permanently bar Dube from association with a broker, dealer, investment adviser, municipal +securities dealer, municipal advisor, transfer agent, and nationally recognized statistical rating +organization (NRSRO); (4) permanently deny Dube the privilege of appearing or practicing +before the Commission as an accountant; and (5) order Respondents to pay second- tier civil +penalties. Motion at 6-16. + +A. Willfulness and the Public Interest Factors + +Some of the requested sanctions are only appropriate if Respondents’ violations were +willful. 15 U.S.C § 80b-3(e)(5), (6) (revocation of investment adviser registration); 15 U.S.C. § +80b-3(e)(6), (f) (associational bar pursuant to the Advisers Act); 17 C.F.R. § 201.102(e)(1)(iii) +(bar on appearing or practicing before the Commission pursuant to Commission Rule +102(e)(1)(iii). A finding of willfulness does not require intent to violate the law, but merely +intent to do the act which constitutes a violation of the law. Wonsover v. SEC , 205 F.3d 408, +414 (D.C. Cir. 2000); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976). + +Where, as here, the violation s are omissions, the y may be willful even though +inadvertent. Oppenheimer & Co., Exchange Act Release No. 16817 (May 19, 1980), 47 S.E.C. +286, 288. Some cases suggest that an omission is willful if a r espondent knew or should have +known of the required action. Id. at 287; Herbert Moskowitz, Initial Decision Release No. 163 +(Apr. 26, 2000), 72 SEC Docket 912, 925. Other cases state that the “failure to make a required +report, even though inadvertent, constitutes a willful violation,” with no knowledge requirement. +Robert G. Weeks, Initial Decision Release No. 199 (Feb. 4, 2002), 76 SEC Docket 2609, 2662; +see also Jesse Rosenblum, Advisers Act Release No. 913 (May 17, 1984), 47 S.E.C. 1065, 1067 +(failure to file form required by Section 204 of Advisers Act and Rule 204- 1 thereunder held +willful), aff’d, 760 F.2d 260 (3d Cir. 1985); Amaroq Asset Management, LLC , Initial Decision +Release No. 351 (Jul. 14, 2008), 93 SEC Docket 7932, 7943 (failure to file amended Form ADV +held willful). +For the reasons explained above regarding aiding and abetti ng, Dube knew or should +have known of the requirements to respond to the Fund’s Section 15(c) requests, comply with the +examination staff’s document requests, and file a Form ADV -W. Thus, whether or not the +“knew or should have known” standard is applicable here, it is satisfied. Respondents’ violations +were therefore willful. + +3 The Division does not cite to the Investment Company Act in arguing for a cease- and-desist +order, and therefore no such order will be entered under that Act. Motion, p. 6. +9 + +When considering whether an administrative sanction serves the public interest, the +Commission considers the factors identified in Steadman v. SEC , 603 F.2d 1126, 1140 (5th Cir. +1979), aff’d on other grounds , 450 U.S. 91 (1981) : the egregiousness of the respondent ’s +actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the +sincerity of the respondent’s assurances against future violations, the respondent’s recognition of +the wrongful nature of his or her conduct, and the likelihood that the respondent ’s occupation +will present opportunities for future violations (Steadman factors). Gary M. Kornman, Advisers +Act Release No. 2840 ( Feb. 13, 2009), 95 SEC Docket 14246, 14255, pet. denied, 592 F.3d 173 +(D.C. Cir. 2010). The Commission’ s inquiry into the appropriate sanction to protect the public +interest is a flexible one, and no one factor is dispositive. Id. +Respondents’ conduct wa s not par ticularly egregious. Admittedly, there is at least a +likelihood that Respondents’ overall misfeasance contributed to the failure of the Fund. +Cofrancesco Tr., pp. 117- 18. However, this is not alleged in the OIP, nor is the evidence +supporting this concl usion entirely clear. What is clear is that Respondents v iolated what are +essentially only record keeping and reporting statutes and regulations. +Respondents violated Section 15(c) of the Investment Company Act only twice, but the +violations were part o f a course of conduct that involved a notable lack of communication with +the Fund, as demonstrated by Cofrancesco’s investigative testimony. I conclude that this +violation was recurrent. Respondents’ violations of Section 204 of the Advisers Act, and the +applicable Rules thereunder, w ere plainly recurrent. Respondents violated Section 203A of the +Advisers Act, and Rule 203A-1(b)(2) thereunder, only once, and it was therefore isolated. +Although I have concluded that Dube aided and abetted Peak Wealth’s vi olations +recklessly, this demonstrates only the lowest degree of scienter. See David Disner, Exchange +Act Release No. 38234 (Feb. 4, 1997), 52 S.E.C. 1217, 1222 & n.20; Hollinger v. Titan Capital +Corp., 914 F.2d 1564, 1568- 69 (9th Cir. 1990), cert. denied , 499 U.S. 976 (1991) (citing eleven +circuits holding that recklessness satisfies scienter in Section 10(b) and Rule 10b -5 actions). +Because both Respondents have defaulted, they have offered no assurances against future +violations and they have shown no recognition of the wrongful nature of their conduct. Dube’s +occupation and Peak Wealth’s registration present opportunities for future violations. +Although I consider each form of requested relief individually below, I place +considerable weight on the s trikingly recurrent nature of Respondents’ infractions, and on +Respondents’ opportunities for future violations in light of their occupation and registration +status. On balance, t he public interest factors generally weigh in favor of the requested +sanctions. +B. Cease-and-Desist Order + +Section 203(k) of the Advisers Act authorizes the Commission to impose a cease -and- +desist order on any person who “is violating, has violated, or is about to violate” any provision of +the Advisers Act or rules thereunder. 15 U.S.C. § 80b-3(k). The Commission may also impose a +cease-and-desist order against any person that “is, was, or would be a cause of the violation, due +to an act or omission the person knew or should have known would contribute to such violation.” +10 + +Id. Wh ile some likelihood of future violation must be present, the required showing is +“significantly less than that required for an injunction.” KPMG Peat Marwick LLP , 54 S.E.C. at +1183-91. Indeed, absent evidence to the contrary, a single past violation ordi narily suffices to +establish a risk of future violations. Id. at 1191. In evaluating the propriety of a cease-and-desist +order, the Commission considers the Steadman factors, as well as the recency of the violation, +the resulting degree of harm to investors or the marketplace, and the effect of other sanctions. Id. +at 1192. + +Respondents’ violations of the Advisers Act were, as noted, strikingly recurrent, the +Steadman factors otherwise weigh in favor of the requested relief , and the violations were +relatively recent. Although there is no demonstrated harm to investors or the marketplace, and +the other sanctions discussed below are serious, a cease -and-desist order is still warranted under +the totality of the circumstances. Accordingly, Respondents will be ordered to cease and desist +from violating Sections 204 and 203A of the Advisers Act and Rules 204 -1(a)(1), 204-2(a)(1), +(2), (4), (5), and (6), and 203A-1(b)(2) thereunder. + +C. Registration Revocation + +Section 203(e) of the Advisers Act authorizes the Com mission to revoke an investment +adviser’s registration if it, or any person associated with it, has willfully violated, or willfully +aided and abetted the violation of, any provision of the Advisers Act, and the revocation is in the +public interest. 15 U.S.C . § 80b-3(e)(5), (6). Based on the Steadman factors, Peak Wealth has +no business serving as an investment adviser; it is plainly in the public interest to revoke its +registration. + +D. Associational Bar + +Section 203(f) of the Advisers Act and Section 15(b) (6) of the Exchange Act authorize +the Commission to bar a person from association with a broker, dealer, investment adviser, +municipal securities dealer, municipal advisor, transfer agent, and NRSRO, if that person has +willfully violated, or willfully aide d and abetted the violation of, any provision of the Advisers +Act, and the bar is in the public interest. 15 U.S.C . § 80b-3(f); 15 U.S.C. § 78o(b)(6)(A). Based +on the Steadman factors, Dube has no business operating or working for an investment adviser, +or any other member of the securities industry. Dube will be permanently barred from +association with an investment adviser. The Commission has held that the requested collateral +bars are not imp ermissibly retroactive, and they will be imposed, as well. John W. Lawton, +Advisers Act Release No. 3513 (Dec. 13, 2012), 105 SEC Docket 61722, 61737. + +E. Commission Rule 102(e)(1)(iii) Bar + +Commission Rule 102(e)(1)(iii) allows the Commission to censure or deny, temporarily +or permanently, the privilege of appearing or practicing before the Commission to any person +who has willfully violated, or willfully aided and abetted the violation of, any provision of the +federal securities laws or the rules and regulations thereunder. 17 C.F.R. § 201.102(e)(1)(iii) . +The Steadman factors are considered in evaluating any sanction under Commission Rule 102(e). +Altman v. SEC, 666 F.3d 1322, 1329 (D.C. Cir. 2011). As with the sanctions discussed above, +11 + +the Steadman factors point directly at the need to permanently bar Dube from practicing before +the Commission as an accountant. + +F. Civil Penalties + +In administrative cease-and-desist proceedings, the Commission is authorized to impose a +civil monetary penalty if a respondent has violated or caused any violation of the Investment +Company Act or rules thereunder, or has violated or caused any violation of the Advisers Act or +rules thereunder. 15 U.S.C. § 80a-9(d)(1)(B); 15 U.S.C § 80b-3(i)(1)(B). A three -tier system +identifies the maximum amount of a civil penalty. 15 U.S.C. § 80a-9(d)(2); 15 U.S.C § 80b- +3(i)(2). Respondent s’ violative conduct occurred in 2010 and 2011, except for the failure to +timely file the Form ADV for the fiscal year ending September 2009, which was due December +29, 2009. F or each act or omission by a natural person in that period, the maximum penalty in +the first tier is $ 7,500; in the second tier, $75,000; and in the third tier, $150,000. +4 15 U.S.C. § +80a-9(d)(2); 15 U.S.C § 80b- 3(i)(2). A first -tier penalty is imposed for each statutory violation. +15 U.S .C. § 80a-9(d)(2)(A); 15 U.S.C § 80b- 3(i)(2)(A). A second -tier penalty is permissible +where the conduct involves fraud, deceit, manipulation, or deliberate or reckless disregard of a +regulatory requirement. 15 U.S.C. § 80a-9(d)(2)(B); 15 U.S.C § 80b- 3(i)(2)(B). A third -tier +penalty involves conduct where such state of mind is present and where the conduct directly or +indirectly (i) resulted in substantial losses, (ii) created a significant risk of substantial losses to +other persons, or (iii) resulted in substantial pecuniary gain to the person who committed the act +or omission. 15 U.S.C. § 80a-9(d)(2)(C); 15 U.S.C § 80b-3(i)(2)(C). + +The Commission must also find that such a penalty is in the public interest. 15 U.S.C. § +80a-9(d)(3); 15 U.S.C § 80b- 3(i)(3). Six factors (not the Steadman factors) are relevant: (1) +whether the violation involved fraud, deceit, manipulation, or deliberate or reckless disregard of +a regulatory requirement, (2) the resulting harm to other persons, (3) any unjust enrichment and +prior restitution, (4) the respondent’s prior regulatory record, (5) the need to deter the respondent +and other persons, and (6) such other matters as justice may require. 15 U.S.C. § 80a-9(d)(3); 15 +U.S.C § 80b-3(i)(3). “Not all factors may be relevant in a given case, and the factors need not all +carry equal weight.” See Robert G. Weeks , 76 SEC Docket at 2671. “To impose second- tier +penalties, the Commission must determine how many violations occurred and how many +violations are attributable to each person.” Rapoport v. SEC, 682 F.3d 98, 108 (D.C. Cir. 2012). + +As explained above, Respondents’ omissions involved recklessness, that is, reckless +disregard for their various legal and regulatory obligations. Thus, the threshold requirement for +second-tier penalties has been met. However, under the totality of the circumstances and +particularly in light of the statutory public interest factors, I conclude that no civil penalty is +warranted. + +As noted, the violations involved reckless disregard of a reg ulatory requirement. Also, +Dube has a FINRA disciplinary record and has been the subject of two FINRA arbitration + +4 These amounts reflect inflationar y adjustments, as required by the Debt Collection +Improvement Act of 1996, as of March 3, 2009, prior to the time Respondents began their +violative conduct. See 17 C.F.R. § 201.1004. +12 + +awards. However, there has been no demonstrated resulting harm to other persons and +Respondents were not unjustly enriched – quite the opposite, in fact. These four factors roughly +balance each other. + +The remaining two factors are, in my view, the weightiest. Although a civil penalty of +any amount will have a deterrent effect on Respondents and on other persons, I am not +convinced that a civil penalty is needed to deter anyone in light of the specific facts of this case. +In simple terms, Respondents failed to comply with reporting and record keeping requirements, +nothing more. In light of the other sanctions imposed against Respondents, a civil penalty is +entirely unnecessary to deter Respondents, or any other investment adviser or accountant, from +committing such violations in the future. Revocation of registration, an associational bar, and +revocation of the privilege of practicing befor e the Commission, collectively, are more than +sufficient to deter anyone from committing the violations proven in this case. + +Additionally, as another matter under the sixth, catch- all factor, Dube’s health weighs +against a civil penalty. An important que stion, left unanswered by the record in this case, is +exactly why Respondents failed to meet their legal and regulatory obligations. All they had to do +to avoid any sanction at all was simply keep proper records, furnish them to persons entitled to +them, and file a few Commission forms. Their violations were entirely of omission rather than +commission, and the record is utterly silent as to any explanation. There is some evidence that +Dube may have neglected the Fund and Peak Wealth because he was making money teaching. +Cofrancesco Tr., pp. 66- 67, 122. However, it is at least as likely that Dube’s omissions were +primarily the result of potentially serious health problems. Id., pp. 112- 113, 133. If the latter, +such health problems are a significant mit igating factor. Taken together with the overdeterrence +presented by a civil penalty, and in view of the other public interest factors and the totality of the +circumstances, a civil penalty is not appropriate. + +ORDER + +IT IS ORDERED, pursuant to Section 203(k) of the Investment Advisers Act of 1940, +that Peak Wealth Opportunities, LLC and David W. Dube, CPA, CEASE AND DESIST from +committing or causing any violations, or any future violations, of Sections 204 and 203A of the +Investment Advisers Act and Rules 204- 1(a)(1), 204-2(a)(1), (2), (4), (5), and (6), and 203A- +1(b)(2) thereunder; + +IT IS FURTHER ORDERED, pursuant to Section 203(e) of the Investment Advisers Act +of 1940, that the investment adviser registration of Peak Wealth Opportunities, LLC is +REVOKED; + +IT IS FURTHER ORDERED, pursuant to Section 203( f) of the Investment Advisers Act +of 1940, that David W. Dube, CPA, is barred from association with brokers, dealers, investment +advisers, municipal securities dealers, transfer agents, municipal advisors, and nationally +recognized statistical rating organizations; + +13 + +IT IS FURTHER ORDERED, pursuant to Rule 102(e)( 1)(iii) of the Commission’s Rules +of Practice, that David W. Dube, CPA, is permanently DENIED the privilege of appearing or +practicing before the Commission. + +Respondents are notified that they may move to set aside the default in this case. Rule +155(b) of the Commission’s Rules of Practice permits me, at any time prior to the filing of the +initial decision, and the Commission, at any time, to set aside a default for good cause , in order +to prevent injustice and on such conditions as may be appropriate . 17 C.F.R. § 201.155(b). A +motion to set aside a default shall be made within a reasonable time, state the reasons for the +failure to appear or defend, and specify the nature of the proposed defense in the proceeding. Id. + + + ________________________ + Cameron Elliot + Administrative Law Judge \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3449.txt b/raw/aaer/2013/AAER-3449.txt new file mode 100644 index 0000000000000000000000000000000000000000..298d4b982ecb74bd12580b9e62c06360bb085c8b --- /dev/null +++ b/raw/aaer/2013/AAER-3449.txt @@ -0,0 +1,1374 @@ + + + + + + + + + + + + + + + + SEC.gov | Joseph Grendys 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\/513831","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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Joseph Grendys et al. , Civil Action No. 07-120 (D.D.C.) + + VENDOR SETTLES SEC CHARGES OF AIDING AND ABETTING VIOLATIONS BY ROYAL AHOLD + + + The Securities and Exchange Commission announced today that the U.S. District Court for the District of Columbia, on March 21, 2013, entered a settled Final Judgment as to defendant Joseph Grendys, in Securities and Exchange Commission v. Joseph Grendys et al., Civil Action No. 07-120 (D.D.C. filed Jan. 18, 2007). The Commission's complaint alleged, among other things, that Grendys aided and abetting violations of the periodic reporting, books and records, and internal controls provisions of the federal securities laws by Royal Ahold (Koninklijke Ahold N.V.), by signing a materially false audit confirmation letter and sending it to the company's independent auditors. At the time, Royal Ahold was the parent company of U.S. Foodservice, Inc. Grendys owns a vendor, Koch Poultry, which supplied U.S. Foodservice with certain products. + + The Commission's complaint alleges that Grendys signed the audit confirmation letter only after a U.S. Foodservice executive signed a private side letter that contradicted the audit confirmation letter. The audit confirmation letter was used in connection with the independent auditors' annual audit of the financial statements of U.S. Foodservice. + + Without admitting or denying the allegations in the Commission's complaint, Grendys agreed to settle the action against him by consenting to a Final Judgment permanently enjoining him from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rule 13b2-1 and imposing a $25,000 civil penalty. Grendys' three co-defendants settled with the Commission previously. + + The Commission acknowledges the assistance and cooperation of the Office of the United States Attorney for the Southern District of New York, and the New York Office of the Federal Bureau of Investigation. + + For further information, see Litigation Release No. 19975 (Jan. 22, 2007) and Litigation Release No. 21435 (March 4, 2010). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3450.pdf b/raw/aaer/2013/AAER-3450.pdf new file mode 100644 index 0000000000000000000000000000000000000000..898385591a56a4911fce7edadfc8be1e1d6548d6 Binary files /dev/null and b/raw/aaer/2013/AAER-3450.pdf differ diff --git a/raw/aaer/2013/AAER-3450.txt b/raw/aaer/2013/AAER-3450.txt new file mode 100644 index 0000000000000000000000000000000000000000..eb25d6c124bccef681dfbaef1dcbe1572f5a7ed1 --- /dev/null +++ b/raw/aaer/2013/AAER-3450.txt @@ -0,0 +1,116 @@ + + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69277 / April 2, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3450 / April 2, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-14201 + +In the Matter of +Eric J. Bur, 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 January 20, 2011, Eric J. Bur, CPA (“Bur”) 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 Bur pursuant to Rule 102(e)(3)(i) of the +Commission's Rules of Practice.1 Bur consented to the entry of the order without admitting or +denying the findings therein but for the Commission’s finding that a final judgment and +permanent injunction and other relief had been previously entered against him. This order is +issued in response to Bur’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 Complaint alleged, among other things, that from at least 2002 to 2007, +while Bur was employed as the Chief Financial Officer of NIC Inc. (“NIC”), the company’s Chief +Executive Officer received more than $1.18 million in undisclosed perquisites. Bur had +responsibility, along with NIC’s Chief Accounting Officer, for NIC’s internal controls, books and +records, and executive compensation disclosures in public filings. Bur was informed that the CEO +was not submitting documentation supporting a business purpose for his expenses as required by +NIC’s policies and a subordinate raised his concerns to Bur that some of the CEO’s expenses were +not business related. However, Bur permitted NIC to pay the CEO’s expenses, which caused NIC’s +books, records and accounts to falsely characterize the CEO’s perquisites as business expenses. In +addition, the Complaint alleged that Bur was aware of the Commission’s rules requiring the + +1 See Accounting and Auditing Enforcement Release No. 3233 dated January 20, 2011. Bur was permitted, pursuant +to the order, to apply for reinstatement after one year upon making certain showings . + + 2 +disclosure of perquisites in proxy statements and annual reports, yet he reviewed, signed, and/or +certified NIC’s filings with the Commission for 2002 through 2006, which failed to disclose the +CEO’s perquisites and contained false statements concerning the CEO’s compensation. As a result, +Bur violated Rules 13a-14 and 13b2-1 under the Securities Exchange Act of 1934 (“Exchange +Act”), and aided and abetted 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. + +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, Bur 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. Bur 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, Bur’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 Bur, it appears that he has complied with the terms of the January 20, 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 Bur, +by undertaking to have his work reviewed by the independent audit committee of any company +for which he works, or in some other manner acceptable to the Commission, in his practice +before the Commission as a preparer or reviewer of financial statements required to be filed with +the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforde d 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 Eric +J. Bur, 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. + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3451.pdf b/raw/aaer/2013/AAER-3451.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e2797ede77408de691b40c93d08ac86fa487e3a4 Binary files /dev/null and b/raw/aaer/2013/AAER-3451.pdf differ diff --git a/raw/aaer/2013/AAER-3451.txt b/raw/aaer/2013/AAER-3451.txt new file mode 100644 index 0000000000000000000000000000000000000000..609743fd95aa071ace4f5c9f87b775518c0b32a4 --- /dev/null +++ b/raw/aaer/2013/AAER-3451.txt @@ -0,0 +1,106 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69306 / April 4, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3451 / April 4, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15261 +__________________________________________ + : + : + : ORDER INSTITUTING + In the Matter of : ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO + COLLEEN ERIN KELLY BISHOP (CPA), : RULE 102(e) OF THE + : COMMISSION’S RULES OF + Respondent. : 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 Colleen +Erin Kelly Bishop ("Bishop" or “Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Bishop, is a California resident and is a California Certified Public +Accountant. Bishop is a sole practitioner and conducted audits of the financial statements for +Asthma Disease Management, Inc. (“ADMI”) for the fiscal year ended May 31, 1993 through the +fiscal year ended May 31, 1999. + + 2. ADMI was, at all relevant times, a Delaware corporation, which had its +principal place of business in Berlin, New Jersey. ADMI marketed proprietary asthma disease +management programs, focusing on allergy testing and diagnostic techniques by primary care +physicians. At all relevant times, ADMI had reporting obligations under Section 15(d) of the +Securities Exchange Act of 1934 (“Exchange Act”), and its stock traded over-the-counter in the +pink sheets. + + 3. On September 24, 2002, the Commission filed a complaint against Bishop +in SEC v. Asthma Disease Management, Inc., et al. (Civil Action No. 02-CV-7436 (E.D.Pa.)). On +March 14, 2013, the court entered an order permanently enjoining Bishop, by consent, from aiding +and abetting violations of Sections 10(b) and 15(d) of the Exchange Act and Rules 10b-5, 12b-20, +15d-1 and 15d-3 thereunder. + +4. The Commission’s complaint alleged, among other things, that +ADMI, along with its former president, CEO, and chairman of the board, and two of its directors, +engaged in a fraudulent marketing scheme in which they issued false press releases, fraudulently +inflated ADMI’s assets and disseminated misleading information in Commission filings by +omitting the auditor’s going concern opinion and by failing to disclose significant stock-based +executive compensation and related party transactions. The complaint further alleges that +Bishop aided and abetted the fraud by improperly booking a material asset on ADMI’s balance +sheet, by failing to review ADMI’s Forms 10-K before or after they were filed with the +Commission, and by failing to conduct her audit of ADMI’s financial statements in accordance +with generally accepted auditing standards. + + 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 Bishop’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Bishop is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3452.txt b/raw/aaer/2013/AAER-3452.txt new file mode 100644 index 0000000000000000000000000000000000000000..405f08d0ae9c712c22a4f9e93d73976eb56b77a7 --- /dev/null +++ b/raw/aaer/2013/AAER-3452.txt @@ -0,0 +1,254 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69327 / April 5, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3452 / April 5, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15265 + + +In the Matter of + +Koninklijke Philips +Electronics N.V., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER AND +DISGORGEMENT + + +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 Koninklijke Philips Electronics N.V. (“Philips” +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 and Disgorgement (“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 contr ols +provisions of the Foreign Corrupt P ractices Act (“FCPA”) by Philips. The violations took place +through Philips’s operations in Poland from at least 1999 through 2007. The violations relate to +improper payments made by employees of Philips ’s Polish subsidiary, Philips Polska sp. z o.o. +(“Philips Poland”) to healthcare officials in Poland regarding public tenders proffered by Polish +healthcare facilities to purchase medical equipment. + +Respondent + +2. Koninklijke Philips Electronics N.V. is a Netherlands-based parent of an +affiliation of companies that manufacture and supply goods and services related to healthcare, +consumer lifestyle, lighting business sectors (collectively referred to as “Philips”). Philips’s New +York Registry Shares are listed on the New York Stock Exchange and the company files periodic +reports pursuant to Section 12 of the Exchange Act as a foreign private issuer. Philips’s common +shares are also listed on Euronext Amsterdam. + +Facts + + 3. Since at least 1999, Philips has participated in public tenders to sell medical +equipment to Polish healthcare facilities. From 1999 through 2007, in at least 30 transactions, +employees of Philips Poland made improper payments to public officials of Polish healthcare +facilities to increase the likelihood that public tenders for the sale of medical equipment would be +awarded to Philips. + +4. Representatives of Philips Poland entered into arrangements with officials of +various Polish healthcare facilities whereby Philips submitted the technical specifications of its +medical equipment to officials drafting the tenders who incorporated the specifications of Philips’ +equipment into the contracts. Incorporating the specifications of Philips’ equipment in the tenders’ +requirements greatly increased the likelihood that Philips would be awarded the bids. + +5. Certain of the healthcare officials involved in the arrangements with Philips also +decided whom to award the tenders, and when Philips was awarded the contracts, the officials were +paid the improper payments by employees of Philips Poland. + +6. The improper payments made by employees of Philips Poland to the Polish +healthcare officials usually amounted to 3% to 8% of the contracts’ net value. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + 3 + +7. At times, Philips Poland employees also kept a portion of the improper payments as +a “commission.” The Philips Poland employees involved in the improper payments often utilized a +third party agent to assist with the improper arrangements and payments to Polish healthcare +officials. + +8. The improper payments made by employees of Philips Poland to Polish healthcare +officials were falsely characterized and accounted for in Philips’s books and records as legitimate +expenses. At times those expenses were supported by false documentation created by Philips +Poland employees and/or third parties. Philips Poland’s financial statements are consolidated into +Philips’ books and records. + +Discovery, Internal Investigation and Self Report + + 9. Philips became aware of misconduct by Philips Poland employees in August 2007, +when Polish officials conducted searches of three of Philips’ offices in Poland and arrested two +Philips Poland employees. + +10. In response to the search of Philips’ offices and arrests of its employees, Philips +conducted an internal audit in 2007. Philips failed to discover the improper payments to Polish +healthcare officials in its internal audit, but terminated and disciplined several Philips Poland +employees and made substantial changes to Philips Poland’s management and significant revisions +to the company’s internal controls. + +11. In December 2009, the Prosecutor’s Office in Poznan, Poland, indicted 23 +individuals, including three former Philips Poland employees and 16 healthcare officials, for +violating laws related to public tenders for the purchase of medical equipment. That indictment +described the improper payments discussed in this Order. + + 12. In response to the Polish authorities’ indictment, Philips conducted an internal +investigation. The findings of the investigation supported the allegations of the 2009 indictment +and revealed that Philips Poland employees had made unlawful payments to Polish healthcare +officials, that its books, records and accounts failed to accurately account for the improper +payments and that its internal controls failed to ensure that transactions were properly recorded by +Philips in its books and records. + +13. In early 2010, Philips self-reported its internal investigation to the staff of the +Commission and to the Department of Justice. As the internal investigation progressed, Philips +shared the results of the investigation with the staff and undertook significant remedial measures. + +Philips’s Remedial Measures + +14. In response to its internal audit and investigation, Philips terminated and disciplined +several Philips Poland employees and installed new management at Philips Poland, as stated +above. Philips also retained three law firms and two auditing firms to conduct the investigation + 4 +and design remedial measures to address weaknesses in its internal controls. Included in changes +to internal controls, Philips established strict due diligence procedures related to the retention of +third parties, formalized and centralized its contract administration system and enhanced its +contract review process, and established a broad-based verification process related to contract +payments. In addition, Philips has made significant revisions to its Global Business Principles +policies and continually revises the policies to keep them current and relevant. Philips also +established and enhanced an anti-corruption training program that includes a certification process +and a variety of training applications to ensure broad-based reach and effectiveness. + +Violations + +A. Standard for the Issuance of a Cease-and-Desist Order + +15. 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. + +B. The Requirements of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act + +16. Section 13(b)(2)(A) of the Exchange Act requires reporting companies to make and +keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and disposition of the assets of the issuer. 15 U.S.C. § 78m(b)(2)(A). + +17. Section 13(b)(2)(B) of the Exchange Act requires reporting companies to, among +other things, devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that the transactions: (i) are executed in accordance with management’s +general or specific authorization; and (ii) are recorded as necessary to permit preparation of +financial statements in conformity with GAAP or any other criteria applicable to such statements, +and to maintain accountability for assets. 15 U.S.C. § 78m(b)(2)(B). + +C. Philips Violated Sections 13(b)(2)(A) and 13(b)(2)(B) + +18. Employees of Philips Poland made improper payments to healthcare officials in +Poland to increase the likelihood that Philips would be awarded public tenders to sell medical +equipment to Polish healthcare facilities. The payments were improperly recorded in Philip’s +books and records as legitimate expenses. Philips Poland employees also utilized falsified records +to support the false accounting entries. Accordingly, as a result of its misconduct, Philips 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 as required by Section 13(b)(2)(A) of the +Exchange Act. + +19. Philips Poland’s improper payments to healthcare officials in Poland related to at +least 30 public tenders over a period of eight years. Philips’s internal controls failed to detect or +prevent the improper payments and false recordings of those transactions during that time. As a +result, Philips failed to devise and maintain a system of internal accounting controls sufficient to + 5 +provide reasonable assurances that transactions were properly recorded by Philips in its books and +records. Philips also failed to implement an FCPA compliance and training program +commensurate with the extent of its international operations. Accordingly, Philips violated Section +13(b)(2)(B) of the Exchange Act. + +Commission Consideration of Philips’s Remedial Efforts +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, it is hereby ORDERED that: + + 20. 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. + + 21. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$3,120,597 and prejudgment interest of $1,394,581 to the United States Treasury. 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 +Koninklijke Philips Electronics N.V. as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent to Karen L. +Martinez, Assistant Director, Salt Lake Regional Office, Securities and Exchange Commission, 15 +W. South Temple Street, Suite 1800, Salt Lake City, Utah 84101. + 6 + + 22. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon its cooperation in a Commission investigation and related enforcement action. If at any +time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission or in a related proceeding, the Division may, at its sole +discretion and without prior notice to the Respondent, petition the Commission to reopen this +matter and seek an order directing that the Respondent pay a civil penalty. Respondent may not, +by way of defense to any resulting administrative proceeding: (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. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3453.txt b/raw/aaer/2013/AAER-3453.txt new file mode 100644 index 0000000000000000000000000000000000000000..f541870dc05e88b5b994b36954002adaf409ca1d --- /dev/null +++ b/raw/aaer/2013/AAER-3453.txt @@ -0,0 +1,86 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69353 / April 9, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3453 / April 9, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15270 +______________________________ +: +In the Matter of : ORDER OF FORTHWITH + : SUSPENSION PURSUANT +JAMES C. FIELDS, CPA : TO RULE 102(e)(2) OF THE + : COMMISSION’S RULES OF + Respondent : PRACTICE +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of James C. Fields (“Fields”) 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. Starting in 1994 until at least 2006, Fields was a certified public accountant +licensed in Minnesota. + +2. On February 26, 2013, a judgment was entered convicting Fields of twenty eight criminal +charges, including securities fraud, false statements to company auditors and false statements and +false certifications in SEC filings in violation of 15 United States Code Sections 78ff(a), 78j(b) + +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 + +and 78m(b)(5) and 18 United States Code Sections 371, 1350 and 1957 before the United States +District Court for the District of Massachusetts, in United States of America v. James C. Fields +10-CR-10388-DPW. + +3. As a result of his conviction, Fields was sentenced to 60 months incarceration to +be followed by three years of supervised release, and the payment of restitution to be determined +at a later hearing. + +III. + +In view of the foregoing, the Commission finds that Fields 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 James C. Fields 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. + + + +Elizabeth M. Murphy +Secretary + + + + + + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3454.txt b/raw/aaer/2013/AAER-3454.txt new file mode 100644 index 0000000000000000000000000000000000000000..1ea10d22f9d5ce919b4c7e6aac404ea0492dec95 --- /dev/null +++ b/raw/aaer/2013/AAER-3454.txt @@ -0,0 +1,1389 @@ + + + + + + + + + + + + + + + + SEC.gov | Parker Drilling Company + + + + + + + + !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\/513906","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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Parker Drilling Company , Civil Action No. 1:13CV461 (E.D. Va., April 16, 2013) + + SEC Charges Parker Drilling Company with Violating the Foreign Corrupt Practices Act + + + The Securities and Exchange Commission today charged Parker Drilling Company, a worldwide drilling services and project management firm, with violating the Foreign Corrupt Practices Act (FCPA) by authorizing improper payments to a third-party intermediary retained to assist the company in resolving customs disputes. + + The SEC's complaint, filed in federal district court in Alexandria, Virginia, alleges that in 2004 Parker Drilling authorized payments to a Nigerian agent totaling $1.25 million. The company did so despite former senior executives knowing that the agent intended to use the funds to "entertain" Nigerian officials involved in resolving Parker Drilling's ongoing customs problems. Following the Nigerian agent's work, the company received an unexplained $3,050,000 reduction of a previously assessed customs fine, and the company was permitted to nationalize and sell its Nigerian rigs. + + To settle the SEC's charges, Parker Drilling will pay disgorgement of $3,050,000 plus pre-judgment interest of $1,040,818. Parker Drilling consented to the entry of a final judgment permanently enjoining it from violating Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. The proposed settlement is subject to court approval. + + In the parallel criminal proceedings, the Department of Justice entered into a Deferred Prosecution Agreement with Parker Drilling in which the company will pay an $11,760,000 penalty. + + The SEC acknowledges the assistance of the Department of Justice's Fraud Section, the Federal Bureau of Investigation, and the United Kingdom's Crown Prosecution Service and Metropolitan Police Service. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3456.txt b/raw/aaer/2013/AAER-3456.txt new file mode 100644 index 0000000000000000000000000000000000000000..1965b85afbe64763de01d4267edc97c5a6c5640e --- /dev/null +++ b/raw/aaer/2013/AAER-3456.txt @@ -0,0 +1,917 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69442 / April 24, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3456 / April 24, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15299 + +In the Matter of + +CAPITAL ONE FINANCIAL +CORPORATION, PETER A. +SCHNALL, AND DAVID A. +LAGASSA, + +Respondents. +ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS AND IMPOSING CEASE-AND-DESIST +ORDER AND CIVIL PENALTIES + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against Capital One Financial Corporation, +Peter A. Schnall, and David A. LaGassa ( collectively “Respondents”). + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over themselves and the subject +matter of these proceedings, which are admitted, Respondents consent to the entry of this Order +Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange +Act of 1934, Making Findings and Imposing a Cease-and-Desist Orders and Civil Penalties +(“Order”), as set forth below. + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds that: + +2 + + + +SUMMARY + +1. Capital One Financial Corporation (“Capital One”), a provider of consumer and +commercial lending and diversified banking services, materially understated its provision for +loan and lease losses (the “provision for loan losses” or “loan loss expense”) for the second and +third quarters of 2007. The understatement was of the provision for loan losses for Capital One’s +auto finance business, known as Capital One Auto Finance (“COAF”). As a result of the +understatement, Capital One materially understated its provision for loan losses by as much as +$72 million for its second quarterly filing and as much as $51 million in its third quarterly filing. +Capital One also failed to maintain effective internal controls to ensure the appropriate and +accurate recording and reporting of its loan loss expenses. Accordingly, Capital One violated the +reporting, books and records and internal controls provisions of the Exchange Act, and Capital +One’s Chief Risk Officer at the time, Peter A. Schnall (“Schnall”), and COAF’s Divisional +Credit Officer at the time, David A. LaGassa (“LaGassa”) were each a cause of Capital One’s +violations. + +2. Starting no later than October 2006 and continuing through the third quarter of 2007, +COAF, as well as nearly every other Capital One consumer lending business, experienced +significantly higher charge-offs and delinquencies for its loans than it had forecasted. COAF, +whose profitability was primarily derived from extending credit to subprime consumers, +experienced these higher loss variances across all types of loans. By the second quarter of 2007, +credit markets began to deteriorate, and COAF assessed from its internal loss forecasting tool +that its escalating loss variances were attributable to an increase in a forecasting factor it called +the “exogenous.” This factor measured the impact on credit losses from conditions external to +the business, including macroeconomic conditions. A change in the exogenous factor generally +had a significant impact on COAF’s loan loss expense, and it was closely monitored by the +company through its loss forecasting tool. + +3. Instead of incorporating the full exogenous levels generated by its loss forecasting tool +into COAF’s loss forecast, Capital One failed to include any of COAF’s exogenous-driven losses +for the second quarter provision for loan losses and only included one-third of such incurred +losses in its third quarter provision for loan losses. The exogenous losses were an integral +component of Capital One’s methodology for calculating its provision for loan losses. The +decisions made concerning the treatment of elevated exogenous levels gave insufficient weight +to the evidence available at the time. As a result, Capital One’s second and third quarter loan +loss expense for COAF did not appropriately estimate probable incurred losses in accordance +with accounting requirements. Accordingly, Capital One violated the periodic reporting +provisions of the Exchange Act. + +4. As a result of Capital One’s understatement, Capital One’s consolidated provision for +loan and lease losses was understated by approximately 18% in the second quarter and 9% in the +third quarter of 2007. COAF’s loan loss expense was understated by approximately 40% and +21%, respectively, for the second and third quarters of 2007. + +3 + +5. Because Capital One failed to include certain incurred losses as of its balance sheet date +and adequately document the rationale for its accounting treatment for such losses, it violated the +books and records and internal control provisions of the federal securities laws. These failures +also violated Capital One’s own policies and procedures, which, among other things, required +Capital One’s accounting group to ensure that COAF’s loan loss expense was properly supported +and documented and required Capital One’s credit risk management function to fully disclose the +significant assumptions underlying its loan loss allowance determination to the management +committee responsible for ensuring that Capital One’s allowance comported with accounting +guidelines. + +RESPONDENTS + +6. Capital One Financial Corp. is a Delaware company, headquartered in McLean, +Virginia, that provides commercial and consumer lending and diversified banking services. +Capital One’s common stock is registered with the Commission pursuant to Section 12(b) of the +Exchange Act and traded on the New York Stock Exchange (Ticker: COF). Capital One 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. + +7. Peter A. Schnall, age 49, was the Chief Risk Officer of Capital One, a position he held +from June 2006 until January 31, 2013. Beginning in 2002, Schnall oversaw Capital One’s +Credit Risk Management group. As part of his responsibilities, Schnall supervised the Chief +Consumer and Commercial Credit Officers. As their supervisor, Schnall was ultimately +responsible for, among other things, Credit Risk Management’s loan loss allowance +recommendations that are provided to Capital One’s Corporate Accounting Group, resulting +from the quarterly loss forecasting process conducted by the Chief Consumer and Commercial +Credit Officers’ organizations for each of Capital One’s consumer and commercial lending +divisions. Schnall reported directly to the Chief Executive Officer of Capital One. + +8. David A. LaGassa, age 44, is currently a Managing Vice President within Capital One’s +Financial Services division. From March 2007 through March 2010, including the time of the +events described in this Order, LaGassa was the Divisional Credit Officer for COAF. As the +Divisional Credit Officer, LaGassa was responsible for managing the COAF loss-forecasting +function. LaGassa reported to the Chief Consumer Credit Officer, who, in turn, reported to +Schnall. + +FACTS + +Relevant Accounting Principles for Allowance for Loan and Lease Losses + +9. The allowance for loan and lease losses (“allowance”) represents a company’s best +estimate of incurred losses1 inherent in its loan portfolio at any given financial reporting date. + +1 The term “incurred losses” refers to an estimated loss that meets the following two conditions for accrual as set +forth in paragraph 8 of Statement of Financial Accounting Standards (“FAS”) No. 5 (“FAS 5”), Accounting for +Contingencies: “(a) information available prior to the issuance of the financial statements indicates that it is probable + +4 + +The provision for loan losses, in turn, is the periodic cost (i.e., quarterly, annually, etc.) of +maintaining an adequate allowance. An increase to the allowance, or an “allowance build,” is +recorded as an expense on the institution’s income statement and decreases net income for that +period. The Commission has issued extensive guidance to financial institutions to ensure that +their accounting for loan losses is consistent with Generally Accepted Accounting Principles +(“GAAP”) and well documented.2 + +10. In accounting for COAF’s loan loss expense, Capital One was required to satisfy the +requirements of FAS 5, which, generally, provides that losses should be recorded if they are both +probable and reasonably estimable.3 Pursuant to FAS 5, an entity must capture the reasonable +estimate of losses “in light of the current economic environment” that exists as of the balance +sheet date.4 Given that the allowance is subjective and represents one of the key elements in a +bank’s financial statements, it is critical to maintain rigorous internal controls over the +allowance-setting process. +5 + +that an asset had been impaired or a liability had been incurred at the date of the financial statements […]; and (b) +the amount of the loss can be reasonably estimated.” Further, FASB Interpretation No. 14, Reasonable Estimation +of the Amount of a Loss an Interpretation of FASB Statement No. 5, states in paragraph 3 (in part) “[w]hen +condition (a) in paragraph 8 is met with respect to a particular loss contingency and the reasonable estimate of the +loss is a range, condition (b) in paragraph 8 is met and an amount shall be accrued for the loss. When some amount +within the range appears at the time to be a better estimate than any other amount within the range, that amount shall +be accrued.” +2 Accounting for loan losses is governed by FAS 5, Accounting for Contingencies, and FAS No. 114, Accounting by +Creditors for Impairment of a Loan. In December 1986, the SEC issued Financial Reporting Release No. 28, which +added subsection (b) Procedural Discipline in Determining the Allowance and Provision for Loan Losses to be +Reported, of Section 401.09, Accounting for Loan Losses by Registrants Engaged in Lending Activities, to the +Codification of Financial Reporting Policies. In July 2001, the SEC staff issued Staff Accounting Bulletin No. 102 +(“SAB 102”), Selected Loan Loss Allowance Methodology and Documentation Issues. In addition to Commission +guidance, in July 2001, the banking regulators, after issuance of a proposed policy statement and consideration of +comments, issued a “Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation +for Banks and Savings Institutions.” +3 Because Capital One has deemed the loans within the COAF portfolio to be a homogeneous population with +similar risk characteristics, the company accounts for the COAF provision for loan losses in accordance with FAS 5, +rather than FAS 114. +4 Paragraph 23 of FAS 5 states “[w]hether the amount of loss can be reasonably estimated (the condition in +paragraph 8(b)) will normally depend on, among other things, the experience of the enterprise, information about the +ability of individual debtors to pay, and appraisal of the receivables in light of the current economic environment .” +(Emphasis added). Interagency Policy Statement on the Allowance for Loan and Lease Losses (“Interagency +Policy”), which operates as regulatory interpretive guidance on FAS 5, similarly states that management should +consider the impact of “current qualitative or environmental factors” that exists as of the balance sheet date. +5 Accounting for Loan Losses by Registrants Engaged in Lending Activities, 51 Fed. Reg. 237 (Dec. 10, 1986) +(codified at 17 C.F.R. part 211) (“FR-28”) expresses the Commission’s views regarding certain matters affecting +reported amounts of loan losses, including, among other things, the need for procedural discipline in determining +amounts of loan losses to be reported. Specifically, expected in the books and records of a registrant such as Capital +One include “documentation of a systematic methodology to be employed each period in determining the amount of +loan losses to be reported, and rationale supporting each period’s determination that the amoun ts reported were +adequate.” Further, “specific rationale upon which the amount actually reported in each individual period is based – +i.e, the bridge between the findings of the detailed review and the amount actually reported in each period – would +be documented to help ensure the adequacy of the reported amount…” Several years after the publication of FR -28, +the SEC Staff issued SAB 102 to provide a more detailed explanation of its expectations concerning the allowance- + +5 + + +The Credit Risk Management Function + +11. Capital One’s consumer credit divisions, during the relevant period, primarily included +U.S. Credit Card, COAF, Installment Loans and the so-called United Kingdom division. These +businesses were divided in two distinct branches: Credit Risk Management (“CRM”), supervised +by Schnall; and the branch that is responsible for, among other things, originating new loans, +underwriting loans and marketing credit products (“the business side”), headed by the President +of each of these businesses. CRM is responsible for preparing the quarterly loss forecast that is +used to develop the allowance. Although the business side had no reporting duties to CRM or +official loss forecasting responsibilities, CRM considered the business side an important +stakeholder in the loss forecasting process and relied on it for providing views on credit risk +during the relevant period. + +12. Schnall had ultimate supervisory authority over the loss forecasting function for all +consumer and commercial businesses at Capital One as well as CRM’s allowance +recommendations for these businesses. Schnall directly supervised the Chief Consumer Credit +Officer for Capital One, who assumed the role in September of 2006. The Chief Consumer +Credit Officer, in turn, directly supervises each Divisional Credit Officer (“DCO”) assigned to a +particular business division. The DCOs manage the teams that conduct the quarterly loss +forecasting process for their respective business divisions, which is used to generate a +recommendation to the Chief Consumer Credit Officer, who then reviewed that recommendation +with Schnall. The recommendation is then sent to Capital One’s senior finance and accounting +officials for setting a provision for loan losses. During the relevant period, LaGassa was the +DCO for COAF. + +Allowance Methodology for COAF and the “Exogenous Factor” + +13. Capital One’s policies and procedures require a systematic methodology to determine +management’s best estimate of its allowance. The methodology in place included the use of a +loss forecasting tool known as “Look Ahead.” The purpose of Look Ahead is to assist +management in developing an accurate and reasonable quarterly loss forecast, which is used to +make CRM’s allowance recommendation. + +14. In preparing its quarterly loss forecast for COAF during the relevant period, CRM +considered, among other things, outputs from Look Ahead. CRM’s loss forecast is, in turn, +converted to an allowance recommendation for COAF. Capital One’s internal controls over the +loan loss expense component of its financial reporting, therefore, is directly impacted by Look +Ahead. Pursuant to Capital One’s policies and procedures, CRM was required to document its + +setting process, including the development, maintenance and documentation of a comprehensive, systematic and +consistently applied process for determining the allowance. SAB 102 further details that a registrant should +“maintain documentation to support its method of estimating loan losses” and “maintain copies of the economic and +other reports that provided source data.” SABs reflect the views of Commission staff regarding certain accounting - +related practices and represent interpretations and policies used by Commission staff to administe r the federal +securities laws. +6 + +allowance recommendations and the key judgments underlying the recommendations. By the +time CRM adopted Look Ahead for use in COAF in the first quarter of 2007, the tool had been +used for several years by Capital One’s credit card division, its largest business. CRM tested +Look Ahead for use in COAF and concluded that the tool was superior to the then-current loss +forecasting tool, and adopted Look Ahead as part of its loss forecasting methodology in arriving +at a reasonable forecast. + +15. The Look Ahead model utilizes at least five years of COAF historical loss data, which is +needed to run the model. The tool analyzes actual loan losses and breaks them down into four +constituent loss drivers: (a) maturation (losses due to the age of an account); (b) vintage (losses +due to credit quality based on when a loan was booked); (c) seasonality (loss variance patterns +due to the time of year); and (d) exogenous, a residual factor that identifies losses that Look +Ahead is not able to attribute to any of the other three factors. The exogenous output of Look +Ahead can include both internally driven and externally driven factors, including losses relating +to macroeconomic and credit deterioration. An increase in the exogenous factor reflects an +increase in losses across all loan vintages, regardless of the age of the accounts, including the +broad spectrum of loans that do not share the same underwriting, pricing or collection strategy. +In its loss forecasting policies and procedures, Capital One generally used the term “exogenous” +to represent losses driven by factors outside the company, including macroeconomic trends. + +16. CRM’s loss forecasting policies during the relevant period stated that the exogenous +factor, a “key element” in loss forecasting, was estimated based on “recent industry [exogenous] +factor performance and the application of judgment.” The policies further stated that the +“general bias” was to estimate the exogenous factor at current observed levels, unless there was +compelling data” justifying a deviation. Given that the external credit environment had a +material impact on incurred losses during the second and third quarters of 2007, FAS 5 required +that Capital One properly assess that environment in estimating its’ incurred exogenous-driven +losses. + +17. The exogenous factor generated by Look Ahead was viewed by loss forecasters at COAF, +during the relevant period, as the most important factor in making an allowance recommendation +and was closely monitored by Capital One. Unlike the other factors in the tool, the exogenous is +a direct multiplier on the entire loss forecast. + +18. CRM, in fact, adopted the Look Ahead tool in COAF because of its ability to develop a +more reliable exogenous output than the previous model generated. CRM noted in its Look +Ahead validation documents that accurate and timely understanding of the exogenous factor was +“critical in an uncertain economic environment.” CRM concluded, after a period of extensive +testing, that the “Look Ahead generated exogenous curve is more aligned with several pieces of +external data,” including competitor data, the credit card business’ exogenous factor, and other +economic factors, such as trends in the Gross Domestic Product growth rate, unemployment rate +and used car price index. + +Deteriorating Credit Environment Prior to the Second Quarter of 2007 + +7 + +19. COAF’s auto financing business includes several lines of business focused on dealer- +driven and direct financing platforms, both of which provide financing to subprime and prime +consumers. Within subprime financing, the Dealer Subprime business constituted the largest +area of profitability for COAF. COAF’s dealer and direct subprime businesses were deemed +high risk by Capital One because the customers were at the lower end of the credit quality +spectrum. + +20. Beginning no later than October 2006, Capital One started to face higher, unexplained +loan charge-offs and delinquencies than it had forecast in virtually all of its consumer lines of +business, including the credit card business, COAF, Global Financial Services and U.K. division. +COAF continued to experience significant higher actual losses than forecast, referred to +internally as adverse or negative variances, for the next four consecutive months. Moreover, +COAF experienced negative variances across both dealer and direct lines of businesses and +across both prime and subprime credit segments. Given the magnitude and broad scale of the +losses, COAF was concerned that it was experiencing a credit turn, which was understood within +the company to mean a phenomenon where there is a general worsening in the credit +environment in a way that drives credit losses for consumer lending businesses. + +21. For the month of January 2007, COAF’s actual losses, or charge-offs, were 20% higher +than forecast, creating a significant loss problem for the business. In a February 5, 2007 email, a +top level COAF business official advised Schnall and other senior finance officials that “COAF +credit results for January are quite concerning, continuing a trend that we’ve seen since October +[2006]” and that the “underlying trends suggest that gap [the adverse variance] is widening over +time.” In a report entitled “COAF Credit Risk Performance Assessment” dated February 12, +2007, COAF identified that, for the period of October 2006 through January 2007, “losses +exceeded forecasts by a sizable margin [averaging 10.4%] for the past 4 months, creating +substantial risk to our earnings.” Given the sustained negative variances, CRM and COAF +business officials explored the possibility that COAF was experiencing a credit turn and +discussed that such a scenario could cause future losses of up to $100 million over the course of +the year. + +22. As early as the first quarter 2007, Schnall and other CRM officials learned that an +adverse exogenous turn was causing higher delinquencies and significant credit deterioration in +Capital One’s credit card business. For example, CRM officials learned in March 2007 that an +official from the credit card business had warned against assuming that the credit card business’ +unexplained adverse variances were temporary, describing such an assumption as “aggressive” +and “underpredict[ing] losses.” The credit card business official further stated that, given the +subprime mortgage problems in the industry and increase in subprime credit card delinquencies, +there was a 70% chance that an “exogenous shift” was occurring. + +23. Given the negative loss variances in COAF, CRM increased COAF’s allowance by $70 +million at the end of the first quarter. This allowance build was intended to account, primarily, +for internally driven, non-exogenous causes for higher charge-offs, such as risk expansion +measures that the business had taken in extending credit to riskier applicants and worsening +performance of certain loan portfolios from acquisitions. There was a continued concern by a +senior official in COAF, however, that a credit turn brought on by exogenous worsening had +8 + +likely caused the adverse variances, and this concern continued to play an important role in +CRM’s credit risk assessments for COAF. In the second and third quarters of 2007, CRM +identified exogenous worsening as a significant risk to its COAF loss forecasts but, as set forth +below, did not adequately incorporate such worsening into COAF’s allowance reserves. + +The Look Ahead Exogenous Uptick in the Second Quarter of 2007 + +24. In April, the first month in the second quarter, COAF again suffered an adverse forecast +variance where its actual losses came in 11% higher than forecast. At the same time, the Look +Ahead tool reflected a 5% uptick in the exogenous factor. + +25. LaGassa discussed in a May 7, 2007 email with his loss forecast team that, given the +large allowance build in the first quarter that was intended to cover losses associated with +COAF’s credit risk expansion, COAF should expect the gap between actual and forecasted losses +to narrow, not worsen. CRM and COAF business officials also became concerned that the +company was facing a credit turn, which would indicate a longer term loss problem for the +business. LaGassa, for example, expressed concerns to his forecast team in the May 7, 2007 +email that the April forecast miss was broad-based, impacting all loan vintages and all COAF +business units. LaGassa further discussed that the pattern of losses were what he would expect +to see in a credit turn. + +26. By May, COAF’s actual losses had increased to 23% above forecast, while the Look +Ahead exogenous was now 14% higher and considered to be a significant uptick. The loss levels +for certain COAF businesses were even worse, including, for example, the Direct Subprime +business, which suffered 30% higher actual losses than forecast. + +27. In response to the loss situation, LaGassa organized a “swat team” to diagnose the drivers +of the losses. From June 2-11, 2007, LaGassa provided almost daily email updates to Capital +One senior executives, including Schnall and senior COAF business officials, regarding the swat +team’s loss assessment. By June 11, LaGassa highlighted for these officials the following +significant facts: (a) the Look Ahead tool had shown a 14% exogenous uptick; (b) the largest +driver of the losses stemmed from “environmental worsening” from the exogenous increase; and +(c) the worsening was broad-based, occurring across all vintages and lines of businesses, +including subprime and the better credit quality loans in the prime business, signaling an +“exogenous shift.” + +Capital One’s Failure to Recognize Projected Exogenous Losses in COAF’s Second Quarter +Loan Loss Expense + +28. By the close of the second quarter loss forecast in mid-June of 2007, CRM had assessed +that COAF’s allowance build would increase by approximately $72 million by year-end if the +current Look Ahead exogenous level was assumed to continue at that level for the 12-month +period covered by the loss forecast. In assessing how to incorporate the exogenous impact into +the forecast and allowance recommendation, LaGassa proposed the following three options to +Schnall and others: (a) none of the exogenous worsening would be factored into the forecast, +resulting in no exogenous impact to the allowance recommendation; (b) factoring in only one- +9 + +third of the exogenous level, resulting in a $24 million allowance impact by year-end; or (c) +factoring in the entire, current exogenous level, resulting in a $72 million allowance impact by +year-end. + +29. LaGassa informed his loss forecasting team, in an early June email, that the Installment +Loan division, which (unlike COAF) had a forward looking exogenous tool, expected a 10% +increase in losses over the course of 2007 “due to macro-economic softening” which he believed +was “another indicator that we [COAF] should be expecting some worsening [. . .].” CRM was +also aware that the credit card business, Capital One’s largest business, had already declared a +credit turn based on the several months of unexplained worsening across all vintages and account +ages. + +30. As reflected in a June 15, 2007 email, a top-level COAF business executive informed +Schnall and other senior Capital One business and finance executives that mid-month June loss +numbers were unfavorable to forecast. Moreover, LaGassa informed a senior CRM official that +based on the early June numbers, “our indications are that elevated unit loss levels are continuing +to occur.” + +31. In a June 19, 2007 email to Schnall, a senior CRM official and COAF business and +finance executive, LaGassa expressed that the exogenous worsening was not included in +COAF’s loan loss forecast, and that, based on mid-month results, he was “not optimistic that we +are going to suddenly see a slowing in losses” and assessed that COAF would continue to face +adverse variances. + +32. CRM ultimately chose to assume that no part of the elevated exogenous level generated +by Look Ahead would continue, resulting in the under-accrual of Capital One’s loan loss reserve. +This recommendation was made by LaGassa to the Chief Consumer Credit Officer and approved +by Schnall. CRM’s decision, which departed from the observed exogenous from Look Ahead, +gave insufficient weight to the evidence of exogenous-driven incurred losses as of the second +quarter balance sheet date. As a result, Capital One’s second quarter loan loss expense for +COAF did not appropriately incorporate information necessary to determine incurred losses +under GAAP. + +33. Had the full amount of the exogenous been incorporated by CRM, Capital One’s +consolidated second quarter loan loss expense would have been $473 million, an increase of 18% +over the $401 million that was reported. Further, Capital One’s consolidated net income would +have been reduced from $750 million to $699 million, a 7% decrease. COAF’s loan loss +expense would have increased from $182 million to $254 million, nearly a 40% increase, and +COAF would have reported a net loss of $13 million rather than net income of $38 million for +the second quarter. + +Capital One’s Recognition of Only One-Third of Exogenous Losses in the Third Quarter + +34. For the third quarter, COAF suffered approximately 15-20% in higher actual losses than +forecast, while the Look Ahead exogenous factor remained at elevated levels for five straight +months, including by 12.5% for most of the third quarter. By the third quarter, CRM had +10 + +assessed that COAF faced a potential allowance build by year-end of $100 million, $85 million +of which resulted from incorporating the full exogenous levels generated from Look Ahead. + +35. In August, Schnall and others were informed that Capital One’s net asset charge-off from +its company-wide loan portfolio was higher than forecast due, in large part, to loan charge-offs +from exogenous worsening in COAF. Also by August 2007, Capital One took steps internally to +protect its business interests against the exogenous impact. The Dealer Subprime business, +COAF’s largest area of profits, for example, took a series of steps to mitigate its risks from the +exogenous worsening, including tightening credit standards and underwriting policies “to match +the recently observed exogenous level,” as reflected in emails from LaGassa to several Capital +One senior executives, including Schnall. Further, as reflected in an August 30, 2007 email, +Schnall wanted to build COAF’s capital plan around “something somewhat worse than our +expectations” given how close COAF was running to its capital targets. + +36. In a September 10, 2007 email to a COAF finance official, LaGassa advised that “despite +the huge [allowance] impact of just assuming exogenous stays flat, I don’t assess such an +assumption to be ‘conservative’ – in fact, I think it is a bit optimistic.” CRM, nonetheless, +recommended that only one-third of the current exogenous impact be incorporated for the +allowance. + +37. In both the September 10, 2007 email, as well as another email on September 11 to a +senior CRM official and a senior COAF business executive that was forwarded to Schnall, +LaGassa recommended incorporating only one-third of the current exogenous impact into the +loan loss expense while recognizing and noting that the recommendation would create a high risk +to the loss forecast. + +38. As reflected in a September 28, 2007 document entitled “September Credit Outlook and +Corporate Implications” that was sent to CRM officials as well as other top level finance and +accounting executives, there was a “preponderance of evidence” across Capital One’s consumer +businesses of credit worsening arising from delinquency and overall exogenous worsening. + +39. By the end of the third quarter loss forecast, COAF’s business leaders identified as its “#1 +Top Risk” the deterioration in credit quality in subprime markets “due to negative movement in +the economy (mortgage market) and a general credit turn,” as reflected in an August 29, 2007 +presentation. + +40. A senior CRM official who reported to Schnall, recommended to Schnall that COAF, +consistent with the credit card business, recognize the current level of exogenous worsening— an +$85 million loan loss expense impact by year-end. Schnall, after discussions with that official, +noted that he and the other official were in agreement to recognize “some, but not all, of the +worsening in order to avoid oversteer,” but that they should highlight the remainder to +management and the finance and accounting teams as a “high” internal financial risk. Schnall +should have taken steps to ensure that differing views and approaches to CRM’s exogenous +treatment were communicated to Capital One’s allowance committee, which was responsible for +ensuring that COAF’s allowance complied with FAS 5. + +11 + +41. CRM decided to incorporate one-third of the exogenous level, which translated into a $28 +million exogenous impact on the loss forecast and allowance. Because the decision gave +insufficient weight to evidence of COAF’s exogenous-driven losses, the third quarter COAF +provision for loan losses did not appropriately incorporate information necessary to determine +incurred losses under GAAP. The decision was also not adequately documented or +communicated to the committee responsible for vetting allowance decisions. + +42. CRM’s exogenous treatment was questioned by COAF loss forecasters. These loss +forecasters raised concerns within CRM regarding the decision to incorporate only one-third of +the exogenous impact. The loss forecasters believed that incorporating anything less than the +full exogenous level would result in an insufficient allowance. The loss forecasters, however, +were not provided documentation or rationale supporting the exogenous decisions. + +43. Had Capital One incorporated the full exogenous worsening in COAF, its consolidated +third quarter provision for loan losses would have been $647 million, an increase of 9% over the +$596 million that was actually reported. Further, consolidated net loss for the quarter would +have been $115 million, a 41% increase over the reported net loss of $82 million. For COAF, +the provision for loan losses would have been $296 million, which is 21% higher than COAF’s +$245 million reported loan loss expense for the quarter. COAF’s $4 million reported net loss +would have been more than nine times greater than reported, or approximately a net loss of $37 +million.6 + +Capital One’s Deficient Controls Over Loss-Forecasting in COAF’s Prime Business + +44. In the third quarter of 2007, CRM conducted a loss forecasting analysis to determine the +loss impact attributable to COAF’s Dealer Prime business, including losses arising from a failed +“front-end pricing strategy” and a troubled portfolio known as “ONYX BAU” that COAF had +acquired from another lender. This process involved, among other things, running the Look +Ahead tool and engaging in discussions with COAF’s Dealer Prime business team. CRM +determined through this process that the loss impact arising from worsening portfolios in the +Dealer Prime business represented the second largest contributor of COAF’s total incurred losses +(following exogenous-driven losses). + +45. CRM’s loan loss expense recommendation for the loss impact attributable to its +worsening Dealer Prime portfolio, however, was at least $10 million less than what its initial loss +forecasting analysis yielded. Similar to the exogenous treatment, CRM did not adequately +document why it did not fully incorporate its initial loss forecasting analysis for COAF’s Dealer +Prime business, which included the results of Look Ahead. CRM failed to maintain adequate +documentation supporting its loan loss expense recommendation relating to COAF’s worsening +Dealer Prime loan portfolio. Further, the basis for CRM’s allowance recommendation relating to +COAF’s Dealer Prime business, which was at least $10 million less than its initial loss + +6 Had Capital One appropriately incorporated exogenous-driven losses in the second quarter, the magnitude of the +understatement of the Company’s third quarter financial results would have been proportionally less. +12 + +forecasting analysis, was not communicated to Capital One’s Allowance Advisory Committee, +which is responsible for reviewing CRM’s allowance recommendations. + +Capital One’s Internal Control Failures Over COAF’s Allowance-setting Process + +46. Capital One failed to incorporate sufficient amounts of COAF’s exogenous-driven losses +into the second and third quarter loss forecasts for COAF and, in turn, its loan loss expense, as a +result of its deficient internal controls over the COAF allowance-setting process. Schnall and +LaGassa failed to ensure that CRM followed Capital One’s policies and procedures governing +the exogenous treatment, documented the reasons and rationale for excluding the exogenous +impact on COAF’s loan loss expense, and addressed prior audit concerns. Schnall failed to +ensure that CRM’s allowance decisions and their rationale related to the COAF exogenous +treatment were adequately communicated to Capital One’s accounting group or the Allowance +Advisory Committee, Capital One’s committee responsible for vetting allowance decisions. +Further, Capital One’s accounting group failed to ensure that the COAF provision for loan losses +for the second and third quarters of 2007 was properly supported, documented and determined in +accordance with accounting requirements. + +Capital One’s Failure to Follow Policies and Procedures Regarding Exogenous Forecasting + +47. Capital One’s treatment of the exogenous factor in the second and third quarters of 2007 +was inconsistent with its policies and procedures. CRM’s COAF exogenous policy was to +incorporate the current Look Ahead exogenous levels into COAF’s loss forecast and, in turn, the +provision for loan losses, unless there was “compelling data” justifying a departure from its +policies. + +48. CRM’s COAF loss forecasting policies from October 2005 through August 2007 stated +that the exogenous factor, a “key element” in loss forecasting, “is estimated based on recent +industry [exogenous] factor performance and the application of judgment” but “[o]ur general +bias is to project future industry factor at current observed levels unless there is compelling data +to do otherwise.” + +Capital One’s Failure to Adequately Address Prior Internal Audit Concerns Regarding COAF’s +Loss Forecasting + +49. By the second quarter of 2007, Capital One was aware of several risks to COAF’s +allowance process from its exogenous forecasting that were identified by Internal Audit. + +50. In 2005, an Internal Audit report that was sent to Schnall found that, despite the ability of +the exogenous factor to drive significant swings in loss assessments, CRM did not have a reliable +method to forecast it in COAF. In responding to the finding, CRM acknowledged that its current +exogenous methodology was not “very scientific and also not reliable.” + +51. In 2006, another Internal Audit review found that CRM had “no guard rail process” in +place governing when the COAF exogenous factor should be changed. CRM agreed with the +audit finding and tasked COAF’s then Director of Loss Forecasting with the responsibility of +13 + +developing a guard rail process for governing how the exogenous factor would be incorporated +into the forecast. + +52. In the first quarter of 2007, the COAF Director of Loss Forecasting proposed a policy, +stating that “future exogenous will be straight-lined based on the last data point or average of the +last 3 data points, if the data is [sic] too volatile.” The concept of “straight-lining” was a +common term of art in the company, which meant that the last data point, or current exogenous +level, in a model would be carried forward for purposes of loss forecasting and, in turn, setting +the allowance. The “guard rails” policy further noted that if an exception to this rule was +applied, the exogenous treatment would be documented. + +53. The guard rails policy was sent to officials of COAF and to LaGassa, who were informed +that the new policy “closed out” the audit concern over exogenous forecasting. + +54. CRM, in setting the COAF loan loss expense, failed to follow the “guard rails” policy by +not “straight-lining” the current exogenous—which would have incorporated the full +worsening—or documenting the rationale for why it deviated from the policy. + +55. By the third quarter of 2007, Capital One’s Internal Audit group identified in its audit +planning materials that there was a “significant risk” that COAF gave “insufficient consideration +of external factors (credit environment, economy, legislation, etc.)” in determining its allowance. +This risk was identified by Internal Audit as “high” in terms of impacting allowance decisions. + +56. In addition, during the course of performing its procedures, Internal Audit expressed +concerns internally regarding CRM’s exogenous treatment for COAF in both the second and +third quarters of 2007. Internal Audit sought support for COAF’s exogenous treatment from +COAF’s loss forecasters. While the loss forecasters did not provide a complete explanation of +why the full exogenous was not included in the allowance, based on the information that was +provided, Internal Audit nonetheless signed off on the COAF allowance without raising any +issues or findings for both the second and third quarters. + +Capital One’s Failure to Adequately Document Support for COAF’s Allowance + +57. The exogenous treatment was an important assumption made for purposes of the loss +forecasts upon which the calculation of COAF’s loan loss expense was based. CRM was +responsible for ensuring that such important assumptions were adequately documented in Capital +One’s books and records. During the second and third quarters of 2007, despite requirements in +policies and procedures, several internal directives, Commission expectations detailed in FR-28, +and subsequently under SAB 102, regarding the need to document the rationale supporting +assumptions used, CRM failed to ensure that the exogenous assumptions made for purposes of +the COAF loss forecast and allowance recommendation were adequately documented. + +58. In 2006, there were several memos that were sent to CRM forecasters and CRM officials, +including Schnall, highlighting the need for CRM to formalize the exogenous documentation +process. One such memo stated that the exogenous sign-off “is becoming increasingly +important” because “changes in exogenous outlook drive a significant portion of the loss forecast +14 + +. . . . therefore documenting our exogenous assumptions becomes critical.” Another memo dated +August 8, 2006, acknowledged that the need to have documentation and governance surrounding +exogenous assumptions was critical because “[a]s we get closer to a potential credit turn, there is +increasing scrutiny inside and outside of CRM on our economic assumptions.” The August +memo further recognized that “the use of [exogenous] assumptions in our ALLL [allowance] +calculation requires explicit documentation and sign-off to satisfy Sarbanes-Oxley certification +requirements.” + +59. In the third quarter of 2007, Schnall, a senior finance executive and other credit officials +were sent a report from a CRM director level employee, highlighting the importance of +documenting exogenous assumptions in light of the credit worsening experienced throughout the +company. The report explicitly stated that “[w]e should be explicit about all assumptions in the +outlook, particularly when they differ from current trends, consensus view or historical pattern.” + +Failure to Adequately Communicate Key Assumptions and Judgments Regarding COAF’s +Exogenous Treatment to the Allowance Advisory Committee + +60. One of CRM’s key functions was to provide a recommendation concerning the provision +for loan losses for each consumer lending business and the assumptions supporting them, on a +quarterly basis, to the Allowance Advisory Committee (“allowance committee”), which +functioned as an advisory committee to Capital One’s Chief Financial Officer for purposes of +critically assessing CRM’s allowance recommendations. The allowance committee was +comprised of top-level executives with accounting expertise, such as the Controller, Assistant +Controller and Chief Accounting Officer of Capital One, who were responsible for ensuring that +Capital One’s allowance was compliant with GAAP. + +61. Schnall, as Capital One’s Chief Risk Officer, was a key member of the committee, along +with another newly-appointed senior CRM official, and was ultimately responsible for ensuring +that CRM’s key allowance-related judgments and assumptions were adequately communicated to +the allowance committee. + +62. During the second and third quarters of 2007, the allowance committee process was one +of Capital One’s primary internal controls over the allowance-setting function and for ensuring +GAAP compliance of CRM’s allowance-related decisions. As described by an Internal Audit +report, the company’s allowance policies “assign approval authority for the [allowance] +methodologies . . . to the Allowance Advisory Committee.” The committee’s oversight over the +COAF allowance determination was particularly critical, given that Capital One’s accounting +group did not otherwise analyze support for CRM’s allowance recommendations for COAF or +have insight into COAF’s loss forecasting function. + +63. Capital One’s accounting group relied on CRM and Schnall to provide information +concerning the judgments underlying the allowance recommendations during allowance +committee meetings. Schnall, however, did not take adequate steps to ensure that CRM’s +exogenous treatment for COAF and supporting rationale in the second and third quarters of 2007 +were adequately communicated to the allowance committee or documented in materials provided +to the committee. +15 + + +64. Schnall also failed to ensure that sufficient information was included in the written +materials provided to the allowance committee. For example, in connection with an allowance +committee meeting that took place on September 28, 2007, the presentation materials reflected +that COAF’s allowance impact from recognizing a “steady state” (current exogenous levels) was +$23 million, instead of the full $85 million impact the Look Ahead exogenous factor reflected. +The presentation materials also inaccurately reflected a $23 million allowance impact from a +“base risk increase” scenario, which analyzes exogenous worsening beyond current levels, even +though the allowance impact from the Look Ahead exogenous factor should have reflected an +amount higher than $85 million. + +Failure of Capital One’s Accounting Group to Obtain Support for CRM’s Exogenous Treatment + +65. Capital One’s allowance policy required that the Director of Loan Accounting “review +the monthly [allowance] calculations and supporting documentation” for each of the business +divisions, including COAF. With regard to the COAF allowance, however, this policy was not +followed in the second and third quarters of 2007, and the role of Capital One’s accounting +group was limited to recording the journal entry to post the allowance and performing balance +sheet reconciliations, as opposed to performing a detailed validation or verification of the +allowance calculations. + +66. Because Capital One failed to implement a system for Capital One’s accounting group to +monitor the COAF loss forecast, CRM loss forecasters were not required to—and did not— +provide Accounting with support for judgments that were made in the forecast, including the +exogenous assumptions. + +Capital One’s On-Top Adjustments to the COAF Loss Forecast + +67. During the second and third quarters of 2007, Capital One did not employ its standard +“grounds-up” loss forecasting practice for COAF and, instead, carried out the loss forecast +through a series of on-top adjustments. + +68. When CRM ran its loss forecasting tool in its entirety, it generated a “grounds-up” +forecast that used the loss analysis results as the basis for a quarterly loss forecast. In the second +and third quarters, however, LaGassa, with the knowledge of Schnall, the corporate accounting +group and internal audit, did not run Look Ahead to generate a grounds-up forecast. + +69. During these quarters, LaGassa was implementing a redesign of the loss forecasting +process. Because his team was working on the redesign, LaGassa instructed the team to start +with the previous quarter’s forecast and then apply “on-top” adjustments to arrive at a new +forecast. The on-top adjustments were made on the basis of CRM’s subjective views on changes +in trends from the prior quarter’s forecast. During this period, CRM ran Look Ahead only for +purposes of monitoring COAF’s exogenous, while choosing not to produce a full loss forecast +using Look Ahead loss data, such as maturation, vintage and seasonality. While the practice of +making on-top adjustments is not per se improper, Capital One was required to ensure that +proper controls surrounding the on-top adjustments were in place, given the adverse credit +16 + +deterioration experienced by COAF and the inherent risks stemming from making on-top +adjustments. The company, however, failed to ensure that the on-top adjustments were properly +supported and documented. + +70. By the third quarter, CRM was aware of certain deficiencies and risks surrounding a +forecast based on on-top adjustments, including at least one loss forecaster’s concerns that a +manually adjusted forecast would lead to a less accurate forecast and another concern by a senior +CRM official who expressed frustration over “making an exogenous credit assumption for loss +forecasting and provision build in Q3, in the absence of a full bottoms-up forecast.” CRM, +nonetheless, chose to carry out yet another on-top adjusted forecast in the third quarter using the +understated second quarter’s forecast as the foundation. + +VIOLATIONS + +71. Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require that 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, +pursuant to Rule 12b-20 of the Exchange Act, mandate that periodic reports contain such further +material information as may be necessary to make the required statements not misleading. + +72. Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder require reporting +companies to make and keep books, records and accounts which, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of their assets, and prohibit 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. + +73. Section 13(b)(2)(B) of the Exchange Act requires all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +74. As a result of the conduct described above, Capital One violated Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 thereunder because the provision for loan and lease +losses, which excluded exogenous-driven losses for COAF, was materially understated, and +income before taxes was materially overstated, and, thus, the Company filed inaccurate periodic +reports with the Commission for the quarters ended June 30, 2007 and September 30, 2007. + +75. As a result of the conduct described above, Capital One violated Section 13(b)(2)(A) of +the Exchange Act because it did not keep books, records or accounts that accurately reflected its +loan loss expense for COAF. + +76. As a result of the conduct described above, Capital One violated Section 13(b)(2)(B) of +the Exchange Act because it failed to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurances that its loan loss expense is recorded as +necessary to permit preparation of financial statements in accordance with GAAP. + +17 + +77. As a result of the conduct described above, Schnall and LaGassa caused Capital One’s +violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 +thereunder. As a result of that same conduct, Schnall and LaGassa violated Rule 13b2-1 under +the Exchange Act in that they indirectly caused Capital One’s violation of Section 13(b)(2)(A) of +the Exchange Act. + +IV. + +78. In determining to accept Capital One’s Offer, the Commission considered remedial acts +undertaken by Capital One. Among other things, Capital One redesigned COAF CRM’s loss +forecasting process starting in the fourth quarter of 2007, established an allowance +subcommittee, which meets quarterly to review the preliminary quarterly allowance calculations +for the company’s consumer businesses, appointed key personnel in the accounting group to +review key assumptions underlying the allowance and implemented additional controls designed +to prevent similar deficiencies going forward, including a formal process for documenting the +exogenous treatment in allowance determinations. + +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, Capital One cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + +B. Pursuant to Section 21C of the Exchange Act, Schnall and LaGassa 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 13b2-1 thereunder. + +C. Respondent Capital One shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $3,500,000 to 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; +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 + +7 The minimum threshold for transmission of payment electronically is $50,000.00 as of April 1, 2012. This +threshold will be increased to $1,000,000 by December 31, 2012. For amounts below the threshold, respondents +must make payments pursuant to option (2) or (3) above. + +18 + +(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 +Capital One Financial Corp. as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Gerald W. +Hodgkins, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549. + +D. Respondent Schnall shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $85,000 to 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; +8 +(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 +Peter A. Schnall as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Gerald W. Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549. + +8 The minimum threshold for transmission of payment electronically is $50,000.00 as of April 1, 2012. This +threshold will be increased to $1,000,000 by December 31, 2012. For amounts below the threshold, respondents +must make payments pursuant to option (2) or (3) above. + +19 + + + +E. Respondent LaGassa shall, within 10 days of the entry of this Order, pay a civil +money penalty in the amount of $50,000 to 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;9 +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm +; or +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +David A. LaGassa as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Gerald W. +Hodgkins, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549. + + + By the Commission. + + Elizabeth M. Murphy + Secretary + + + + + + +9 The minimum threshold for transmission of payment electronically is $50,000.00 as of April 1, 2012. This +threshold will be increased to $1,000,000 by December 31, 2012. For amounts below the threshold, respondents +must make payments pursuant to option (2) or (3) above. + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3457.txt b/raw/aaer/2013/AAER-3457.txt new file mode 100644 index 0000000000000000000000000000000000000000..c91d27439ce92e7c2e4a510bffb3df314b3c0590 --- /dev/null +++ b/raw/aaer/2013/AAER-3457.txt @@ -0,0 +1,1370 @@ + + + + + + + + + + + + + + + + SEC.gov | John Michael Kelly, 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\/513986","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 + + + John Michael Kelly, et al. + + + + + + + + + + + + John Michael Kelly, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22688 / April 26, 2013 + Accounting and Auditing Enforcement Release No. 3457 / April 26, 2013 + Securities and Exchange Commission v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker , Civil Action No. 08 CV 4612 (CM) (GWG) (S.D.N.Y. filed May 19, 2008) + + Remaining Claims Dismissed in Litigation with Aol Time Warner Executives + + + The U.S. Securities and Exchange Commission today announced that, on April 23, 2013, the United States District Court for the Southern District of New York ordered the entry of a stipulation of dismissal by plaintiff Securities and Exchange Commission of all remaining claims against Mark Wovsaniker, in SEC v. John Michael Kelly, Steven E. Rindner, Joseph A. Ripp, and Mark Wovsaniker, 08 CV 4612 (CM) (GWG) (S.D.N.Y. filed May 19, 2008). + + Wovsaniker is a former AOL Time Warner Inc. Senior Vice President for Accounting Policy. The Commission's complaint alleged that, from at least mid-2000 to mid-2002, the defendants participated in an effort by which AOL Time Warner overstated its online advertising revenue. Through counsel, Wovsaniker joined in the stipulation. He was the last remaining defendant in the Commission's action. + + See Litigation Release No. 20586 (May 19, 2008). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Crane + + + + + + + + !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\/514036","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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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + 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 + + + + + + + + + + + + + + + + + + + + + + + + + + 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 + + + Subaye, Inc. and James T. Crane + + + + + + + + + + + + Subaye, Inc. and James T. Crane + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22698 / May 8, 2013 + Accounting and Auditing Enforcement Release No. 3458 / May 8, 2013 + Securities and Exchange Commission v. Subaye, Inc. and James T. Crane , Civil Action No. 13 CIV 3114 (S.D.N.Y.) + + SEC Charges China-based Company and Former Chief Financial Officer in Fraudulent Scheme involving Non-Existent Computing Business + + The Securities and Exchange Commission announced today that it filed an enforcement action on May 8, 2013, in federal court in New York City charging Subaye, Inc., a company based in China whose stock trades in the U.S., and James T. Crane, its former Chief Financial Officer and a U.S. citizen believed to be recently living in southern California, with engaging in a fraudulent scheme during 2010-2011. The Commission alleges that Subaye and Crane misrepresented the company's business and operations, deceived the company's auditors, and misled investors about the company's true status and revenues.  According to the complaint, Subaye claimed to be operating a cloud computing business but investigations found no evidence of such a business. Subaye has offered to settle the case, while the action against Crane is unsettled. + + The Commission's complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Subaye began promoting itself during 2010 as a provider of cloud computing services to Chinese businesses.  According to the complaint, Subaye claimed to have over 1,400 sales and marketing employees in 2010, with reported revenues of $39 million that fiscal year and projected revenues of more than $71 million for 2011.  However, by May 2011, according to the complaint, and Subaye was revealed to be a company with no verifiable revenues, few, if any, real customers, and no infrastructure to support its claimed cloud computing business.  The complaint alleges that the business that Subaye had presented to investors and described in filings with the Commission was imaginary and non-existent. + + The complaint further alleges that Crane signed Subaye's materially misleading filings with the Commission that contained false statements about Subaye's revenues, business, number of employees, and number of paying customers.  According to the complaint, Crane also falsified the books, records, and accounts of Subaye and provided false information to Subaye's outside auditors.  The Commission's complaint also charges Crane with violating a bar from the Public Company Accounting Oversight Board (PCAOB).  According to the complaint, in January 2011, Crane and his Cambridge, Massachusetts-based accounting firm were sanctioned by the PCAOB, which permanently revoked his firm's registration and barred him from being associated with a registered accounting firm or being associated with any public company in an accounting or financial management capacity.  The complaint alleges that, in violation of the January 2011 PCAOB order, Crane remained as the CFO of Subaye until March 2011 , even after the PCAOB denied his request to remain as Subaye's CFO for those two months. + + The complaint alleges that Crane violated Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder, and Section 105(c)(7)(B) of the Sarbanes-Oxley Act of 2002; and that Crane aided and abetted Subaye's 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, thereunder.  The Commission is seeking a permanent injunction, disgorgement plus prejudgment interest, and civil penalties.  It also seeks an order prohibiting Crane from serving as an officer or director of a public company. + + The complaint alleges that Subaye violated Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-11 thereunder.  Subaye has agreed to settle this matter, subject to Court approval, without admitting or denying the allegations in the Commission's complaint, by consenting to the entry of a final judgment that would permanently enjoin it from future violations of the above law sections. + + The Commission acknowledges the assistance of the Ontario Securities Commission and the Public Company Accounting Oversight Board. + + The Commission's investigation was conducted by John Kaleba, Matthew Jacques and Rachel Hershfang of the Boston Regional Office.  The Commission's litigation will be conducted by Ms. Hershfang and Mr. Kaleba. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3459.pdf b/raw/aaer/2013/AAER-3459.pdf new file mode 100644 index 0000000000000000000000000000000000000000..f48f9b7624dab22bfa3c5252e34c727838d8ce8c Binary files /dev/null and b/raw/aaer/2013/AAER-3459.pdf differ diff --git a/raw/aaer/2013/AAER-3459.txt b/raw/aaer/2013/AAER-3459.txt new file mode 100644 index 0000000000000000000000000000000000000000..fef4f08517c6cb4c1f1be7c1efb29d150e9aa080 --- /dev/null +++ b/raw/aaer/2013/AAER-3459.txt @@ -0,0 +1,163 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69644 / May 28, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3459 / May 28, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15078 + + +In the Matter of + +RAJNISH K. DAS, + + Respondent. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +PURSUANT TO RULE 102(e)(3)(i) OF THE +COMMISSION’S RULES OF PRACTICE + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest to issue this Order Making Findings and Imposing Remedial Sanctions pursuant to +Rule 102(e)(3)(i) of the Commission’s Rules of Practice against Rajnish K. Das (“Respondent” or +“Das”) with respect to public administrative proceedings previously instituted against him. +1 + +II. + + In resolution 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 + +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; or found by any court of competent jurisdiction in an action brought by the +Commission to which he or she is a party . . . to have violated . . . or aided and abetted the +violation of any provision of the Federal securities laws or rules and regulations thereunder. +2 + +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 Sections III.2. and III.3. below, which are admitted, Respondent consents to the entry +of this Order 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. Rajnish K. Das, age 41, is a resident of New York, New York. From +approximately September 2003 through January 2006, Das was employed as chief financial officer +(“CFO”) of infoUSA, Inc. (“Info”), a database marketing company. As CFO, Das signed and +certified Info’s Forms 10-K which incorporated information from the company’s proxy statements. +Das was terminated from Info in approximately July 2006. Das has not passed the certified public +accountant (“CPA”) exam and has not been a licensed CPA. Prior to working at Info, Das was +employed with various investment banking firms. Following his employment at Info, Das has +owned and operated POM Partners, LLC. Das previously held Series 7 and 63 securities licenses. + + 2. On May 29, 2012, the U.S. District Court for the District of Nebraska +entered a final judgment against Das, permanently enjoining him from future violations, direct or +indirect, of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), and 14(a) of the Securities +Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, 13b2-2, 14a-3, +and 14a-9 thereunder. Securities and Exchange Commission v. Rajnish K. Das, et al. +, Civil Action +Number 8:10-cv-00102-LSC-FG3. In the final judgment, the court declared that Das “acted in bad +faith toward shareholders of [Info], when committing the acts and omissions that led to this +proceeding, and knew his actions were contrary to the interests of [Info] and its shareholders.” + + 3. Previously, on March 1, 2012, after a trial, a jury for the U.S. District Court +for the District of Nebraska, issued a verdict finding Das liable for violations of Sections 10(b), +13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a- +1, 13a-13, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 thereunder. Securities and Exchange +Commission v. Rajnish K. Das, et al., Civil Action Number 8:10-cv-00102-LSC-FG3. + + 4. The Commission’s complaint alleged that Das signed and certified Info’s +false Forms 10-K and proxy statements that materially understated and failed to properly +disclose the perquisite compensation of Vinod Gupta, Info’s former chief executive officer and +Chairman of the Board of Directors, and failed to properly disclose related party transactions +involving Gupta. The complaint alleged that for the years 2003 through 2007, Gupta used Info +to pay for his personal expenses associated with private jet flights, a yacht, homes, automobiles, +credit card expenses, country club memberships, and life insurance policies. As CFO, Das +approved Info’s payment of Gupta’s personal expenses and signed and certified Info’s false +Forms 10-K for 2003 and 2004 which incorporated information from Info’s proxy statements. +The complaint also alleged that Das aided and abetted the filing of Info’s false Form 10-K for +2005 which incorporated information from Info’s proxy statements. +3 + + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Das’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Das is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +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, if applying under Section IV.B.2. above, 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. For any +application for reinstatement, the Commission’s review may include consideration of, in addition +to the matters referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3460.pdf b/raw/aaer/2013/AAER-3460.pdf new file mode 100644 index 0000000000000000000000000000000000000000..85b5760fca5950a9aba51cb5b4e0ff6138c19eea Binary files /dev/null and b/raw/aaer/2013/AAER-3460.pdf differ diff --git a/raw/aaer/2013/AAER-3460.txt b/raw/aaer/2013/AAER-3460.txt new file mode 100644 index 0000000000000000000000000000000000000000..79de201235ace38c226c5f2b5edf169b9e8a9b87 --- /dev/null +++ b/raw/aaer/2013/AAER-3460.txt @@ -0,0 +1,166 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69645 / May 28, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3460 / May 28, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15077 + + +In the Matter of + +STORMY L. DEAN, + + Respondent. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +PURSUANT TO RULE 102(e)(3)(i) OF THE +COMMISSION’S RULES OF PRACTICE + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest to issue this Order Making Findings and Imposing Remedial Sanctions pursuant to +Rule 102(e)(3)(i) of the Commission’s Rules of Practice against Stormy L. Dean (“Respondent” or +“Dean”) with respect to public administrative proceedings previously instituted against him. +1 + +II. + + In resolution 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 + +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; or found by any court of competent jurisdiction in an action brought by the +Commission to which he or she is a party . . . to have violated . . . or aided and abetted the +violation of any provision of the Federal securities laws or rules and regulations thereunder. +2 + +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 Sections III.2. and III.3. below, which are admitted, Respondent consents to the entry +of this Order 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. Stormy L. Dean, age 54, is a resident of Ralston, Nebraska. From 1995 +through 2008, Dean served in various capacities in the accounting department of infoUSA, Inc. +(“Info”), an Omaha-based database marketing company. At Info, Dean served as controller, +principal accounting officer, and chief financial officer (“CFO”). Dean was Info’s CFO from +January 2000 to September 2003, and then again from January 2006 through December 2008. As +Info’s CFO, Dean signed and certified Info’s public filings. Dean passed the certified public +accountant (“CPA”) examination in 1995 and holds a CPA certificate in the state of Nebraska. +Dean has never obtained a CPA license. + + 2. On May 29, 2012, the U.S. District Court for the District of Nebraska +entered a final judgment against Dean, permanently enjoining him from future violations, direct or +indirect, of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), and 14(a) of the Securities +Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 +thereunder. Securities and Exchange Commission v. Stormy L. Dean, et al. +, Civil Action Number +8:10-cv-00102-LSC-FG3. In the final judgment, the court declared that Dean “acted in bad faith +toward shareholders of [Info], when committing the acts and omissions that led to this proceeding, +and knew his actions were contrary to the interests of [Info] and its shareholders.” + + 3. Previously, on March 1, 2012, after a trial, a jury for the U.S. District Court +for the District of Nebraska, issued a verdict finding Dean liable for violations of Sections 10(b), +13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a- +1, 13a-14, 13b2-1, 13b2-2, 14a-3, and 14a-9 thereunder. Securities and Exchange Commission v. +Stormy L. Dean, et al., Civil Action Number 8:10-cv-00102-LSC-FG3. + + 4. The Commission’s complaint alleged that Dean signed and certified Info’s +false Forms 10-K and proxy statements that materially understated and failed to properly +disclose the perquisite compensation of Vinod Gupta, Info’s former chief executive officer and +Chairman of the Board of Directors, and failed to properly disclose related party transactions +involving Gupta. The complaint alleged that for the years 2003 through 2007, Gupta used Info +to pay for his personal expenses associated with private jet flights, a yacht, homes, automobiles, +credit card expenses, country club memberships, and life insurance policies. As CFO, Dean +approved Info’s payment of Gupta’s personal expenses and signed and certified Info’s false +Forms 10-K for 2005 and 2006 which incorporated information from Info’s proxy statements. +The complaint also alleged that Dean aided and abetted the filing of Info’s false Form 10-K for +2003 which incorporated information from Info’s proxy statements. +3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Dean’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Dean is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission as an independent accountant provided that his state CPA +4 + +license is current and he has resolved all other disciplinary issues with the applicable state boards +of accountancy. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission provided that his state CPA license or certificate is current and he has resolved all +other disciplinary issues with the applicable state boards of accountancy. However, if state +licensure is dependent on reinstatement by the Commission, the Commission will consider an +application on its other merits. The Commission’s review may include consideration of, in addition +to the matters referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3461.pdf b/raw/aaer/2013/AAER-3461.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5f87133ffff94d502a926175926f5c7191b3fc24 Binary files /dev/null and b/raw/aaer/2013/AAER-3461.pdf differ diff --git a/raw/aaer/2013/AAER-3461.txt b/raw/aaer/2013/AAER-3461.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4246f4ec548b00d01f60fe38807038597f44507 --- /dev/null +++ b/raw/aaer/2013/AAER-3461.txt @@ -0,0 +1,477 @@ + +UNITED STATES OF AMERICA +Before The +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69654 / May 29, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3461 / May 29, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-15338 + +----------------------------------------------------------- x + + +In the Matter of + +TOTAL, S.A., + +Respondent. + +: +: +: +: +: +: +: +: +: +: +ORDER INSTITUTING +CEASE-AND-DESIST +PROCEEDINGS PURSUANT +TO SECTION 21C OF THE +SECURITIES EXCHANGE +ACT OF 1934, MAKING +FINDINGS, AND IMPOSING +A CEASE-AND-DESIST +ORDER +----------------------------------------------------------- x + +I. +The Securities and Exchange Commission (the “Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (the “Exchange Act”), against Total, S.A. (“Total” 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 consents to the Commission’s +jurisdiction over it and the subject matter of these proceedings and to the entry of this Order +Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Exchange Act, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +2 + +III. + +FACTS +On the basis of this Order and the Respondent’s Offer, the Commission finds1 that: +Summary +1. From approximately September 1995 to November 2004, Total and others paid +approximately $60 million in unlawful payments to intermediaries for the purpose of inducing an +Iranian government official (the “Iranian Official”) to use his influence to assist Total in +connection with obtaining contracts to develop the Sirri A and E oil fields and two phases of the +South Pars oil and gas field in Iran. Between 1995 and 2004 the Iranian Official was first the +head of one wholly owned subsidiary of the National Iranian Oil Company (“NIOC”) and later +the head of another NIOC wholly owned subsidiary. The Iranian Official was also a government +advisor to a high-ranking Iranian official. Total made these payments at the direction of the +Iranian Official to intermediaries through a consulting and services agreement and subsequent +amendments, entered into with an intermediary designated by the Iranian Official (“Intermediary +One”). +2. During the relevant time period, Total and others violated the anti-bribery +provisions of the Foreign Corrupt Practices Act by making payments at the direction of the +Iranian Official in connection with obtaining contracts. In addition, Total lacked sufficient +internal controls and, by mischaracterizing the payments as legitimate consulting fees, Total +violated the books and records provisions of the federal securities laws. +Respondent +3. Total is a public company organized under the laws of the Republic of France and +headquartered in Nanterre, France. Total explores for and develops oil and gas resources around +the globe, and has American Depositary Shares that trade under the symbol TOT on the New +York Stock Exchange and are registered pursuant to Section 12(b) of the Exchange Act (15 +U.S.C. § 781(g)). Total is required to file reports with the Commission under Section 13 of the +Exchange Act, and is an “issuer” within the meaning of the Foreign Corrupt Practices Act +(“FCPA”), 15 U.S.C. § 78dd-1. +The Unlawful Payments +A. Sirri A and E +4. Total is an international oil and gas company involved primarily in the +exploration for, development, production, and sale of oil and natural gas from around the world. +Beginning in 1995, Total negotiated a development contract with NIOC to allow Total to +develop the Sirri A and E oil and gas fields. + +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. NIOC was an agency and instrumentality of the Government of Iran and its +officers and employees were “foreign officials,” within the meaning of the FCPA, Title 15, +United States Code, Section 78dd-1(f)(1)(A). +6. Prior to Total’s executing the development contract with NIOC, in late May 1995 +Total held a meeting with the Iranian Official and agreed to enter into a purported consulting +agreement with an intermediary designated by the Iranian Official. The payments that would be +made to an intermediary pursuant to the consulting agreement were for the purpose of inducing +the Iranian Official to use his influence to assist in obtaining NIOC’s signature to the Sirri A and +E development agreement. +7. During the course of its unlawful scheme, Total, acting through a senior executive +and others, corruptly made certain payments and took certain acts for the purpose of inducing the +Iranian Official to use his influence to assist Total, including the following payments and acts +concerning Sirri A and E. +8. On July 13, 1995, Total signed a contract with NIOC granting Total development +rights over the Sirri A and E oil fields (the “Sirri A/E Development Agreement”). +9. On July 10, 1995, three days prior to the announcement of the Sirri A/E +Development Agreement, Total International Ltd. (“Total International”), a Bermuda-registered +subsidiary of Total, entered into a Consulting and Services Agreement (the “Umbrella +Agreement”) with Intermediary One, acting at the direction of the Iranian Official. Total made +all payments under the Umbrella Agreement at the direction of the Iranian Official to his +designated intermediary. The Umbrella Agreement had no specific terms for payment, or other +consideration, but instead provided that the parties would, from time to time, enter into +Consulting Services Requests, which the parties understood would detail the amounts of the +unlawful payments that Total would pay at the direction of the Iranian Official. Moreover, and +despite the Umbrella Agreement’s reference to the provision of “economic and marketing +research and support services” to Total by Intermediary One, Total International entered into the +Umbrella Agreement with Intermediary One as a mechanism for Total to pay at the direction of +the Iranian Official millions of dollars in unlawful payments to Intermediary One, for the +purpose of inducing the Iranian Official to use his influence in connection with NIOC’s entering +into the Sirri A/E Development Agreement. +10. Also on July 10, 1995, the parties entered into the first Consulting Services +Request (the “First Consulting Services Request”), providing for a series of payments from Total +to Intermediary One. That same day, Total International made a $500,000 payment from an +account held at a United States bank in New York City to an account at a Swiss bank. Over the +next two-and-a-half years, pursuant to the First Consulting Services Request, Total made an +additional five payments to intermediaries totaling approximately $16 million from accounts in +Switzerland to an account held at a Swiss bank, at the direction of the Iranian Official. +4 + +B. South Pars +11. During the course of its unlawful scheme, Total and others corruptly made certain +payments and took certain acts for the purpose of inducing the Iranian Official to use his +influence to assist Total, including the following payments and acts concerning South Pars: +12. In 1997, Total began negotiating with NIOC to develop phases 2 and 3 of the +South Pars gas field, a joint venture with a number of other multinational oil and gas companies. +As with the Sirri A and E transaction, Total agreed to make unlawful payments to an +intermediary designated by the Iranian Official for the purpose of inducing the Iranian Official to +use his influence in obtaining NIOC’s approval regarding South Pars. +13. On June 12, 1997, Total entered into a letter agreement (the “Letter Agreement”) +with Intermediary One to amend the First Consulting Services Request to provide for an +accelerated payment of approximately $10 million from Total. In addition, on July 14, 1997, +Total International entered into a second Consulting Services Request (the “Second Consulting +Services Request”). This agreement memorialized an approximately $10 million payment in +connection with the development of the Sirri A and E fields. +14. On July 13, 1997, Total International entered into an Assignment Agreement (the +“Assignment Agreement,” and together with the Umbrella Agreement, the First Consulting +Services Request, the Letter Agreement, and the Second Consulting Services Request, the +“Consulting Agreements”) with Intermediary One and a limited liability company established in +the British Virgin Islands (“Intermediary Two”). The Assignment agreement assigned +Intermediary One’s interests in the other Consulting Agreements to Intermediary Two. +Intermediary One was replaced with Intermediary Two. +15. On or about September 28, 1997, Total executed a contract with NIOC granting +Total a 40% interest in developing phases 2 and 3 of the South Pars gas field. +16. For a period of seven years, from September 1997 through November 2004, Total +made at least 12 payments exceeding $44 million to Intermediary Two for the purpose of +inducing the Iranian Official to use his influence in connection with Total’s efforts to obtain and +retain business related to the South Pars project. +C. Total’s Steps to Conceal the Payments +17. From the inception of Total’s relationship with the Iranian Official Total +mischaracterized the expenses under the Consulting Agreements as “business development +expenses” when they were, in fact, unlawful payments for the purpose of inducing the Iranian +Official to use his influence in connection with granting rights to Total for the development of +the Sirri A and E and South Pars fields. Total improperly characterized the unlawful consulting +agreements as legitimate consulting agreements. +18. Total ceased making payments to the Iranian Official’s designated intermediary in +approximately November 2004. +5 + +FCPA Violations +Exchange Act Section 30A Violations +19. Total violated the anti-bribery provisions of the federal securities laws contained +in the FCPA when it arranged for the payments to the Iranian Official’s designated intermediary. +The payments were intended to, and did, induce the Iranian Official to use his influence to secure +the award to Total of development interests in Sirri A and E and the South Pars Project that, +combined, netted Total approximately $150 million in profits. +20. As a result of the conduct described above, Total 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, in order to obtain or retain business, from giving, or authorizing the +giving of, anything of value to any foreign official for 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 government or +foreign governmental instrumentality to influence any act or decision of such government or +instrumentality. +Books and Records Violations +21. Total failed to properly account for the illegal payments and failed to accurately +describe the Consulting Agreements in its books and records. Instead, Total improperly +characterized the payments it made as legitimate payments for “business development expenses,” +and improperly characterized the Consulting Agreements as ordinary consulting agreements. +22. As a result of the conduct described above, Total 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 +disposition of their assets. +Internal Controls Violations +23. In entering into the Consulting Agreements, Total circumvented its own internal +controls. Total concealed the Consulting Agreements’ true nature and participants. Total had +inadequate systems for reviewing these documents and lacked controls sufficient to provide +reasonable assurances that the Consulting Agreements complied with applicable U.S. securities +laws. +24. As a result of the conduct described above, Total 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 in accordance with management’s general or specific authorization; transactions are +recorded as necessary to permit preparation of financial statements in conformity with generally +accepted accounting principles or any other 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 +6 + +compared with the existing assets at reasonable intervals and appropriate action is taken with +respect to any differences. +IV. + +UNDERTAKINGS +Respondent undertakes to: +1. To engage an independent compliance consultant that is a French national or +French law or accounting firm (the “Compliance Consultant”) with demonstrated ability in +helping companies comply with the FCPA, 15 U.S.C. §§ 78dd-1, et seq. and not unacceptable to +the staff of the Commission within 60 calendar days of the issuance of this Order. The +Compliance Consultant will, for a period of three years from the date of its engagement (the +“Term of the Engagement”), evaluate, in the manner set forth in this Order (unless any specific +provision therein is expressly determined by any French Authority identified by the Commission +(the “French Authority”) to violate French law), the effectiveness of Total’s internal controls, +record-keeping, and financial reporting policies and procedures as they relate to Total’s current +and ongoing compliance with the books and records, internal accounting controls and anti- +bribery provisions of the FCPA, codified in Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act [15 U.S.C. § 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)], Rule 13b2-1 thereunder +[17 C.F.R. § 240.13b2-1], and other applicable counterparts (collectively, the “anti-corruption +laws”) and take such reasonable steps as, in its view, may be necessary to fulfill the foregoing +mandate (the “Mandate”). +2. The Mandate shall include an assessment of Total’s Board of Directors’ and +senior management’s commitment to an effective implementation of a corporate compliance +program against violations of the anti-corruption laws and its compliance code. +3. Total shall cooperate fully with the Compliance Consultant and the Compliance +Consultant shall have the authority to take such reasonable steps as, in its views, may be +necessary to be fully informed about Total’s compliance program within the scope of the +Mandate, in accordance with the principles set forth herein and applicable law, including +applicable data protections and labor laws and regulations, such as, among others, Article 1 of +French Law No. 68-768 of July 26, 1968, as amended by Law No. 80-538 of July 16, 1980 (the +“Blocking Statute”). To that end, Total shall: (1) facilitate the Compliance Consultant’s access +to Total’s documents and other information and resources, (2) not limit such access, except as +provided in this paragraph, and (3) provide guidance on applicable local law (such as relevant +data protection and labor laws) to allow the Compliance Consultant to fulfill its Mandate. Total +shall provide the Compliance Consultant with access to all information, documents, records, +facilities, and/or employees, as reasonably requested by the Compliance Consultant, that fall +within the scope of the Mandate of the Compliance Consultant. +4. The Commission and Total agree that the retention of the Compliance Consultant +does not establish an attorney-client, auditor-client, or similar relationship between Total and the +Compliance Consultant which would otherwise prevent the Compliance Consultant from +fulfilling its Mandate in accordance with this Order. +7 + +5. In the event that Total seeks to withhold from the Compliance Consultant access +to information, documents, records, facilities, and/or employees of Total that may be subject to a +claim of attorney-client privilege, the attorney work-product doctrine, or similar legal +relationships, or where Total reasonably believes production would otherwise be inconsistent +with applicable law, Total shall work cooperatively with the Compliance Consultant to resolve +the matter to the satisfaction of the Compliance Consultant. If the matter cannot be resolved, at +the request of the Compliance Consultant, Total shall promptly provide written notice to the +Compliance Consultant and to the French Authority. Such notice shall include a general +description of the nature of the information, documents, records, facilities, and/or employees that +are being withheld, as well as the basis for the claim. The French Authority may then transmit +this written notice in accordance with French law to the Commission. The Commission staff +may then consider whether to make a further request for access to such information, documents, +records, facilities, and/or employees, to be provided by Total to the French Authority. To the +extent Total has provided information to the Commission staff in the course of the investigation +leading to this action pursuant to a non-waiver of privilege agreement, Total and the Compliance +Consultant may agree to production of such information to the Compliance Consultant pursuant +to a similar non-waiver agreement. +6. Except as provided in paragraphs 4 and 5 herein, Total shall not withhold from +the Compliance Consultant any information, documents, records, facilities, and/or employees on +the basis of an attorney-client privilege, work-product claim, or other similar legal relationship. +7. To carry out the Mandate, during the Term of the Engagement, Total shall require +the Compliance Consultant to conduct a yearly review and prepare a yearly report for three +years, for a total of three reviews and three reports. The yearly reports will likely include +proprietary, financial, confidential, and competitive business information. Moreover, public +disclosure of the reports could discourage cooperation or impede pending or potential +government investigations. For these reasons, among others, the yearly reports and the contents +thereof are intended to remain and shall remain non-public, except as otherwise agreed to by the +parties in writing, or except 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 is otherwise required by law. +8. With respect to each yearly review, after consultation with Total, Total shall +require the Compliance Consultant to prepare a written work plan that shall be submitted no +fewer than 60 calendar days prior to commencing each review to Total and to the Commission +unless, in the Compliance Consultant’s view, transmittal of such work plan would violate +applicable laws, in which case it shall be transmitted to Total and the French Authority. In such +case, the French Authority may then transmit such information in accordance with French law to +the Commission. Total and the Commission shall have no more than 30 calendar days after +receipt of the written work plan to provide comment to the Compliance Consultant about the +work plan. The Compliance Consultant’s work plan for the initial review shall include such +steps as are reasonably necessary to conduct an effective initial review in accordance with the +Mandate, including developing an understanding, to the extent the Compliance Consultant deems +appropriate, of the facts and circumstances surrounding any violations that may have occurred +before the entry of the Order, but in developing such understanding the Compliance Consultant +is to rely to the extent possible on available information and documents provided by Total. It is +8 + +not intended that the Compliance Consultant will conduct its own inquiry into those historical +events. In developing each work plan and in carrying out the reviews pursuant to such plans, the +Compliance Consultant is encouraged to coordinate with Total personnel, including auditors and +compliance personnel. To the extent the Compliance Consultant deems appropriate, it may rely +on Total’s processes, on the results of studies, reviews, audits, and analyses conducted by or on +behalf of Total, and on sampling and testing methodologies. The Compliance Consultant is not +expected to conduct a comprehensive review of all business lines, all business activities, or all +markets. Any disputes between Total and the Compliance Consultant with respect to the work +plan shall be decided by the Commission staff in its sole discretion. The Compliance Consultant +will send each report to the French Authority, which may forward such information in +accordance with French law to the Commission. +9. The initial review shall commence no later than 120 calendar days from the date +of the engagement of the Compliance Consultant (unless otherwise agreed by Total, the +Compliance Consultant, and the Commission staff), and Total shall require the Compliance +Consultant to issue a written report within 120 calendar days of initiating the initial review, +setting forth the Compliance Consultant’s assessment and making recommendations reasonably +designed to improve the effectiveness of Total’s program for ensuring compliance with the anti- +corruption laws. The Compliance Consultant is encouraged to consult with Total concerning its +findings and recommendations on an ongoing basis, and to consider and reflect Total’s +comments and input to the extent the Compliance Consultant deems appropriate. The +Compliance Consultant need not in its initial or subsequent reports recite or describe +comprehensively Total’s history or compliance policies, procedures, and practices, but rather +may focus on those areas with respect to which the Compliance Consultant wishes to make +recommendations for improvement or which the Compliance Consultant otherwise concludes +merit particular attention, if any. Total shall require the Compliance Consultant to provide the +report to the Managing Board of Total and contemporaneously transmit copies to the French +Authority. The French Authority may then transmit such information in accordance with French +law to the Commission. After consultation with Total, the Compliance Consultant may extend +the time period for issuance of the report for up to 60 calendar days with prior written approval +of the Commission staff. +10. Within 120 calendar days after receiving the Compliance Consultant’s report, +Total shall adopt all recommendations in the report unless within 60 calendar days after +receiving the report, Total notifies the Compliance Consultant and the Commission staff in +writing of any recommendations Total considers unduly burdensome, inconsistent with local or +other applicable law or regulation, impractical, unduly expensive, or otherwise inadvisable. It +shall not be deemed unduly burdensome if information otherwise protected by the Blocking +Statute, may be provided to the Commission in accordance with French law via the French +Authority or in some other manner. With respect to any recommendation Total considers unduly +burdensome, inconsistent with local or other applicable law or regulation, impractical, unduly +expensive, or otherwise inadvisable, Total need not adopt that recommendation within 120 +calendar days after receiving the Compliance Consultant’s report, but shall propose in writing to +the Compliance Consultant an alternative policy, procedure, or system designed to achieve the +same objective or purpose. As to any recommendation on which Total and the Compliance +Consultant do not agree, the parties shall attempt in good faith to reach an agreement within 45 +calendar days after Total serves written notice. In the event Total and the Compliance +9 + +Consultant are unable to agree on an acceptable alternative proposal, Total shall promptly +consult with the Commission staff, which will make a determination as to whether Total should +adopt the Compliance Consultant’s recommendation or an alternative proposal, and Total shall +abide by that determination. During the time period in which a Commission determination is +pending, Total shall not be required to implement any contested recommendation. With respect +to any recommendation the Compliance Consultant determines cannot reasonably be +implemented within 120 calendar days after receiving the report, the Compliance Consultant +may extend the time period for implementation with prior written approval of the Commission +staff. +11. Total shall require the Compliance Consultant to undertake two follow-up reviews +to carry out the Mandate. Within 120 calendar days of initiating each follow-up review, Total +shall require the Compliance Consultant to: (a) complete the review; (b) certify whether the +compliance program of Total, including its policies and procedures, is reasonably designed and +implemented to detect and prevent violations within Total of the anti-corruption laws; and (c) +report on the Compliance Consultant’s findings in the same fashion as set forth in Paragraph 8 +with respect to the initial review. The second review shall commence one year after the initial +review commenced. The third review shall commence two years after the first review +commenced. After consultation with Total, the Compliance Consultant may extend the time +period for these follow-up reviews for up to 60 calendar days with prior written approval of the +Commission staff. +12. In undertaking the assessments and reviews in Paragraphs 7 and 11, Total shall +require the Compliance Consultant to formulate conclusions based on, among other things: (a) +inspection of relevant documents, including Total’s current anti-corruption policies and +procedures; (b) on-site observation of selected systems and procedures of Total at sample sites, +including internal controls and record-keeping and internal audit procedures; (c) meetings with +and interviews of relevant employees, officers, directors, and other persons at mutually +convenient times and places; and (d) analyses, studies, and testing of Total’s compliance +program with respect to anti-corruption laws. +13. Should the Compliance Consultant, during the course of its engagement, discover +that questionable or corrupt payments or questionable or corrupt transfers of property or interests +may have been offered, promised, paid, or authorized by any entity or person within Total, or +any entity or person working directly or indirectly for Total, or that related false books and +records may have been maintained relating to Total either (a) after the date of this Order or (b) +that have not been adequately dealt with by Total (collectively “improper activities”), Total shall +require the Compliance Consultant to promptly report such improper activities to Total’s General +Counsel or Audit Committee for further action. If the Compliance Consultant believes that any +improper activity or activities may constitute a significant violation of law, Total shall require +the Compliance Consultant also to report such improper activity in writing to the French +Authority. The French Authority may then transmit such information in accordance with French +law to the Commission. Total shall require the Compliance Consultant to disclose improper +activities in its discretion directly to the French Authority, and not to the General Counsel or +Audit Committee, if the Compliance Consultant believes that disclosure to the General Counsel +or Audit Committee would be inappropriate under the circumstances. Total shall require the +Compliance Consultant to address in its reports the appropriateness of Total’s response to all +10 + +improper activities. Further, in the event that Total or any entity or person working directly or +indirectly within Total refuses to provide information necessary for the Compliance Consultant +to perform its duties, if the Compliance Consultant believes that such refusal is without just +cause, Total shall require the Compliance Consultant to disclose that fact in writing to the French +Authority, with appropriate notice to the Commission. Total shall not take any action to retaliate +against the Compliance Consultant for any such disclosures. The Compliance Consultant may +report to the French Authority any criminal or regulatory violations by Total or any other entity +or person discovered in the course of performing its duties. The French Authority may then +transmit such information in accordance with French law to the Commission. +14. Total shall require the Compliance Consultant to enter into an agreement with +Total that provides that for the Term of the Compliance Consultancy and for a period of two +years from completion of the engagement, the Compliance Consultant shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with Total, or +any of its present or former affiliates, directors, officers, employees, or agents acting in their +capacity. The agreement will also provide that the Compliance Consultant will require that any +firm with which it is affiliated or of which it is a member shall not, without prior written consent +of the Commission staff, enter into any employment, consultant, attorney-client, auditing, or +other professional relationship with Total or any of its present or former affiliates, directors, +officers, employees, or agents acting in their capacity as such, and any person engaged to assist +the Compliance Consultant in the performance of its duties under this Order for the Term of the +Engagement and for a period of two years thereafter. To ensure the independence of the +Compliance Consultant, Total shall not have the authority to terminate the Compliance +Consultant during the Term of the Engagement without the prior written approval of the +Commission staff. +15. At least annually, and more frequently if appropriate, representatives from Total +and the Commission staff will meet to discuss the consultancy and any suggestions, comments, +or improvements Total may wish to discuss with or propose to the Commission staff. +16. Total will use its best efforts to ensure that any information that might be +protected by the Blocking Statute or by other laws that becomes the subject of the Compliance +Consultant’s reviews or reports is provided to the Commission in accordance with French law +via the French Authority or in some other appropriate manner. +17. 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. +18. Total shall certify, in writing, compliance with the undertakings set forth above. +The certification shall identify the undertakings, provide written evidence of compliance in the +form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting material shall be +submitted to Andrew M. Calamari, Regional Director, New York Regional Office, with a copy to +the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the +date of the completion of the undertakings. +11 + +V. +In view of the foregoing, the Commission deems it appropriate to impose the civil +remedies agreed to in Respondent Total’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent Total shall cease and +desist from committing or causing any violations and any future violations of +Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; +B. Respondent shall comply with the undertakings enumerated in Section IV above; +and +C. Respondent shall, within ten days of the entry of this Order, pay disgorgement of +$153 million to the United States Treasury. If timely payment is not made, +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 +Total 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 Andrew M. Calamari, Regional +Director, New York Regional Office, Securities and Exchange Commission, 3 World Financial +Center, Suite 400, New York, NY 10281. + +By the Commission. + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3462.txt b/raw/aaer/2013/AAER-3462.txt new file mode 100644 index 0000000000000000000000000000000000000000..d6fd77dba4deee076af8a49ab9fb10cbba382486 --- /dev/null +++ b/raw/aaer/2013/AAER-3462.txt @@ -0,0 +1,1387 @@ + + + + + + + + + + + + + + + + SEC.gov | PACCAR 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\/514101","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 + + + PACCAR Inc, et al. + + + + + + + + + + + + PACCAR Inc, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22711 / June 3, 2013 + Accounting and Auditing Enforcement Release No. 3462 / June 3, 2013 + Securities and Exchange Commission v. PACCAR Inc, et al. , Civil Action No. 2:13-cv-00953 (W.D. Wash. filed June 3, 2013) + + SEC Charges Fortune 200 Company for Accounting Deficiencies + + + The Securities and Exchange Commission today charged a Bellevue, Wash.-based commercial truck manufacturer and a subsidiary for various accounting deficiencies that clouded their financial reporting to investors in the midst of the financial crisis. + The SEC alleges that PACCAR's internal accounting controls included ineffective procedures that kept the company from adhering to various accounting rules. PACCAR failed to report the operating results of its aftermarket parts business separately from its truck sales business as required under segment reporting requirements, which are in place to ensure that investors gain the same insight into a company as its executives. PACCAR and its subsidiary also failed to provide complete information about their respective loan and lease portfolios, and PACCAR overstated some loan and lease originations and collections at two foreign subsidiaries in its statement of cash flows. + PACCAR and its subsidiary PACCAR Financial Corp. agreed to settle the SEC's charges. + According to the SEC's complaint filed in federal court in Seattle, PACCAR is a Fortune 200 company that designs, manufactures, and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt, and DAF nameplates. From 2008 through the third quarter of 2012, PACCAR failed to report the results for its parts business as a separate segment from its truck sales as required under Generally Accepted Accounting Principles (GAAP). For example, PACCAR's 2009 annual report showed $68 million in income before taxes for its truck segment. However, PACCAR documents and board materials reviewed by senior executives depicted the trucks business with a $474 million loss and the parts business with $542 million profit to arrive at the net income before taxes of $68 million. By at least 2008, PACCAR should have been reporting aftermarket parts as a separate segment in its SEC filings, but failed to do so until year-end 2012. + The SEC's complaint further alleges that PACCAR and PACCAR Financial Corp. failed to maintain accurate books and records regarding their impaired loans and leases, causing them to improperly identify and disclose loans and leases for impairment. As a result, they understated the amounts of their impaired receivables and the specific reserve associated with the receivables in footnotes to their respective 2009 Form 10-K filings. PACCAR understated the amount of its impaired receivables by 65 percent and the amount of the specific reserve associated with the receivables by 78 percent. PACCAR Financial Corp. understated the amounts by 64 percent and 37 percent. As a result of these deficiencies, PACCAR also made inaccurate statements to the SEC's Division of Corporation Finance regarding its processes for calculating the specific reserves on its impaired receivables. + According to the SEC's complaint, PACCAR also overstated equal and offsetting amounts in two lines within its statement of cash flows in the second and third quarters of 2009. PACCAR identified these errors during the first quarter of 2010 and reported corrected figures in its second and third quarter filings in 2010. + The SEC's complaint charges PACCAR with violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 12b-20, 13a-1, and 13a-13 thereunder, and charges PACCAR Financial Corp. with violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Without admitting or denying the charges, they agreed to the entry of a permanent injunction, and PACCAR agreed to pay a $225,000 penalty. The settlement, which is subject to court approval, takes into account that PACCAR and PACCAR Financial Corp. have implemented a number of remedial measures to enhance their internal accounting controls and improve their compliance with GAAP. + The SEC's investigation was conducted by Jason Habermeyer and Cary Robnett of the SEC's San Francisco Regional Office, and Peter J. Rosario of the SEC's Washington D.C. office. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + China Natural Gas, Inc. and Qinan Ji + + + + + + + + + + + + China Natural Gas, Inc. and Qinan Ji + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22719 / June 7, 2013 + Accounting and Auditing Enforcement Release No. 3463 / June 7, 2013 + Securities and Exchange Commission v. China Natural Gas, Inc. and Qinan Ji , Civil Action No. China Natural Gas, Inc. and Qinan Ji + + China Natural Gas and Executive Settle Fraud Charges + + + The Securities and Exchange Commission today announced that on June 5, 2013, the U.S. District Court for the Southern District of New York entered settled final judgments as to defendants China-based China Natural Gas Inc. and its chairman and former CEO Qinan Ji. The defendants have agreed to pay penalties to settle fraud charges the SEC brought against them last year for secretly loaning company funds to benefit Ji's son and nephew while failing to disclose the true nature of the loans. + As alleged in the SEC's complaint filed on May 14, 2012, China Natural Gas failed to disclose in 2010 the related-party nature of two loans totaling $14.3 million, which were made to benefit a real estate company that was 90 percent owned by Ji's son and 10 percent owned by Ji's nephew. Ji approved both loans without obtaining prior authorization from the board or informing the CFO, and he repeatedly lied to the board, the auditors, investors, and the company's internal investigators to conceal the related-party nature of the loans. The SEC also alleged that in the fourth quarter of 2008, China Natural Gas paid $19.6 million to acquire a natural gas company, but did not timely and properly report the transaction in its SEC filings. + To settle the SEC's charges, China Natural Gas agreed to pay a penalty of $815,000, and Ji agreed to pay a penalty of $100,000. Ji also agreed to reimburse China Natural Gas his trading profit of $77,479. China Natural Gas consented to the entry of a final judgment enjoining it from violating Section 17(a)(2) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and 14(a) of the Securities Exchange Act of 1934 and Exchange Act Rules 12b-20, 13a-1, 13a-11, 13a-13 and 14a-9. Ji consented to the entry of a final judgment enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b), 13(b)(5) and 14(a) of the Exchange Act and Exchange Act Rules 10b-5, 13a-14, 13b2-1, 13b2-2 and 14a-9, and Section 304 of the Sarbanes-Oxley Act of 2002, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, barring him from serving as an officer or director of a public company for 10 years. + For more information, see Litigation Release No. 22368 (May 14, 2012); + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3464.txt b/raw/aaer/2013/AAER-3464.txt new file mode 100644 index 0000000000000000000000000000000000000000..4d47cd4af0ecc425efa2611286bd18133d6e6e91 --- /dev/null +++ b/raw/aaer/2013/AAER-3464.txt @@ -0,0 +1,458 @@ + + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69765 / June 14, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3464 / June 14, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15358 + + + +In the Matter of + +Rosenberg Rich Baker Berman +& Company and Brian Zucker, +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 Rosenberg +Rich Baker Berman & Company (“RRBB”) and Brian Zucker (“Zucker”) pursuant to Sections 4C1 +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that the Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before the Commission in a ny 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 each submitted an +Offer of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +This matter concerns violations of the auditor independence rules by RRBB and +Zucker. RRBB partner Brian Zucker performed Financial and Operations Principal (“FINOP”)4 +services for a broker-dealer client, (the “Broker-Dealer”), while his firm was serving as the +Broker-Dealer’s auditor. Zucker also arranged for RRBB to pay a contractor who was serving as +the Broker-Dealer’s FINOP (the “Designated FINOP”) and directed an RRBB staff accountant to +provide FINOP services to the Broker-Dealer. As a consequence of this conduct, Zucker and +RRBB engaged in improper professional conduct, violated the auditor independence rules, and +caused the Broker-Dealer’s failure to file an annual report audited by an independent accountant. +B. RESPONDENTS + +1. Respondent RRBB, a professional corporation, is an accounting and auditing firm +that also provides tax and management consulting services. RRBB has 10 partners and 50 +professional staff located in two New Jersey based offices. In October 2011, RRBB merged with +Zucker & Associates LLP and CFO Partners. Following the merger, RRBB provided FINOP +services through a group it called CFO Financial Partners LLC. + + +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 FINOPs are responsible for broker-dealer compliance with applicable net capital rules and have final +approval and responsibility for the accuracy of financial reports submitted to any securities industry regulatory body. +Moreover, FINOPs are charged with the supervision and/or performance of broker-dealer responsibilities under all +financial responsibility rules promulgated pursuant to the Exchange Act and are responsible for the overall +supervision of and responsibility for the individuals who are involved in the administration of and maintenance of +the broker-dealer’s back office operations. See FINRA Rule 1022(b). + 3 + +2. Respondent Zucker, a CPA licensed in New York and New Jersey, is an equity +partner at RRBB. Prior to October 2011, Zucker owned an entity called Zucker & Associates +LLP, which provided FINOP and CFO services to broker-dealers. In October 2011, Zucker & +Associates LLP merged with RRBB. At RRBB, Zucker provides FINOP and CFO services for +broker-dealers and hedge funds and oversees individuals at RRBB who provide such services. +He does not perform financial statement audits at RRBB. Zucker holds Series 7, 24, 53, 79, and +99 licenses. Zucker 51 years old, resides in Wall Township, New Jersey. + +C. FACTS + +Zucker’s Relationship with the Broker-Dealer and His Firm’s Merger with +RRBB + +3. In late 2008, Zucker began working as the Broker-Dealer’s FINOP. At that time, +Zucker owned Zucker & Associates LLP, a firm that provided outsourced FINOP and CFO +services to broker-dealers. In 2010 the Designated FINOP became the Broker-Dealer’s FINOP. +Whereas the Broker-Dealer had paid Zucker $1,250 per month when he was the firm’s FINOP, +Zucker & Associates began billing the Broker-Dealer $2,500 per month, which it split evenly +between Zucker and the Designated FINOP. + +4. In October 2011, Zucker & Associates merged with RRBB, and Zucker became +one of RRBB’s equity partners. Among Zucker’s responsibilities at RRBB was to lead a newly- +created group at the firm called CFO Financial Partners LLC that provided FINOP and CFO +services to broker-dealers and hedge funds. + +5. During the merger, one of RRBB’s co-managing partners told Zucker that RRBB +could not be FINOP and auditor to the same client at the same time. Zucker and the co- +managing partner discussed the fact that Zucker & Associates and RRBB had two overlapping +clients for whom Zucker served as FINOP and for which RRBB served as auditor. They agreed +that RRBB would terminate their auditor relationship with the clients so that Zucker could +remain FINOP for those clients. + +6. The co-managing partner participated in a second conversation with Zucker and +the head of RRBB’s audit department in or around October or November 2011 in which they told +Zucker that RRBB could not audit entities for whom two independent contractors who were +joining RRBB from Zucker & Associates were acting as FINOPs. + +7. In connection with this discussion, the co-managing partner and the head of +RRBB’s audit department provided Zucker with relevant guidance on the independence rules. + +RRBB Becomes the Broker-Dealer’s Auditor + +8. In November 2011, the Broker-Dealer hired RRBB as its independent auditor for +its fiscal year 2011 audit. + 4 + +9. Though he did not ultimately sign the audit opinion, Zucker was listed on the +Broker-Dealer’s engagement letter as the audit engagement partner. Zucker was also the +relationship and billing partner on the Broker-Dealer engagement. RRBB also billed +approximately two hours of Zucker’s time to the Broker-Dealer audit. + +10. Between February and April 2012, members of the audit engagement team kept +Zucker updated on the progress of the audit. Zucker sent e-mails encouraging the audit +engagement team and the Broker-Dealer’s CFO to keep the audit moving forward amid delays +and difficulty pulling source documents together. + +The Designated FINOP’s Role After RRBB Becomes the Broker-Dealer’s Auditor + +11. During the audit engagement period, the Designated FINOP consulted with and +obtained advice from Zucker about his FINOP work at the Broker-Dealer just as he had before +Zucker & Associates merged with RRBB and before RRBB took over the Broker-Dealer audit +engagement. + +12. In November 2011, Zucker also arranged for RRBB to handle billing for the +Designated FINOP, telling the Designated FINOP to invoice RRBB for his FINOP work at the +Broker-Dealer. RRBB collected the FINOP payments from the Broker-Dealer and then paid the +Designated FINOP for his work just as Zucker & Associates had previously done. + +13. Also in November 2011, following discussions between Zucker, RRBB’s co- +managing partner and the head of RRBB’s audit department, RRBB decided to stop +administering the Designated FINOP’s billings because of the perception it created that Zucker, +and thereby RRBB, was not independent. However the billing arrangement continued until +March 2012 when Zucker directed the Designated FINOP to start invoicing the Broker-Dealer +directly. + +Zucker Performs and Directs an RRBB Staff Accountant to Perform FINOP Work for the +Broker-Dealer + +14. From January to March 2012, the Designated FINOP was on vacation or +otherwise unavailable on at least two occasions when the Broker-Dealer needed to file reports +with FINRA or when there were net capital deficiency issues. + +15. When that happened, Zucker personally performed FINOP services for the +Broker-Dealer. In January 2012, Zucker filed a Financial and Operational Combined Uniform +Single (“FOCUS”) report for the Broker-Dealer. In February 2012, Zucker advised the Broker- +Dealer’s CFO on what was allowable for net capital purposes. In March 2012, Zucker calculated +the Broker-Dealer’s net capital and filed a notification with FINRA that the Broker-Dealer had a +net capital deficiency. That same day, Zucker e-mailed individuals at FINRA regarding the +Broker-Dealer’s net capital deficiency, stating that he was “the firm’s ‘acting FINOP’ in [the +Designated FINOP’s] absence.” + 5 + +16. At the end of March 2012, Zucker directed an RRBB staff accountant to perform +FINOP work for the Broker-Dealer. During the audit and professional engagement period, the +RRBB staff accountant prepared net capital calculations, filed FOCUS reports, and filed at least +one net capital deficiency notice for the Broker-Dealer. In late March 2012, in response to a +request from the Broker-Dealer’s CFO to Zucker and the RRBB staff accountant to conduct a net +capital calculation for FINRA, the RRBB staff accountant confirmed that he did the calculation, +then engaged in an e-mail exchange with FINRA regarding that calculation. In April 2012, the +RRBB staff accountant filed an amended FOCUS report for the Broker-Dealer. + +The Broker-Dealer Files its Annual Audited Report for Fiscal Year 2011 + +17. On April 20, 2012, the Broker-Dealer filed its Annual Audited Report for fiscal +year 2011. Included in the report was RRBB’s unqualified audit report, dated April 20, 2012, +which represented that RRBB “conducted our audit in accordance with auditing standards +generally accepted in the United States of America.” + +18. Shortly after this filing, the Broker-Dealer terminated the Designated FINOP, and +on May 2, 2012, the RRBB staff accountant, officially became the Broker-Dealer’s FINOP. + +19. In May 2012, FINRA informed the Broker-Dealer that it did not consider the +firm’s annual fiscal year 2011 audit filed by the Broker-Dealer as having been filed because the +audit was not conducted by an independent public accountant. + +20. In response to FINRA raising the independence issue, RRBB resigned as the +Broker-Dealer’s auditor, and the Broker-Dealer hired another audit firm to conduct a new audit +for fiscal year 2011. The new audit opinion was filed in June 2012, along with a new FOCUS +report. After the new auditor performed its work there were no substantive changes to the audit +report or the FOCUS report as prepared by RRBB. + +Violations + +21. Rule 17a-5(d)(1) under the Exchange Act requires that, “[e]very broker or dealer +registered pursuant to section 15 of the Act shall file annually, on a calendar or fiscal year basis, +a report which shall be audited by an independent public accountant.” Rule 17a-5(f)(3) further +states that, for such audits, “[a]n accountant shall be independent in accordance with the +provisions of Rule 2-01(b) and (c) of Regulation S-X.” Rule 17a-5(g) requires that “[t]he audit +shall be made in accordance with generally accepted auditing standards” and Rule 17a-5(i) +requires that “[t]he accountant's report shall . . . [s]tate whether the audit was made in accordance +with generally accepted auditing standards.” Generally Accepted Auditing Standards (“GAAS”) +requires auditors to maintain strict independence from their audit clients; an auditor “must be +free from any obligation to or interest in the client, its management or its owners.” See +Statement on Auditing Standard No. 1, Section 220.03. Accordingly, if an auditor’s report states +that its audit was in accordance with GAAS when the auditor was not independent, then it has +violated Rule 17a-5(i). + 6 +22. Regulation S-X Rule 2-01(c)(4) provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Regulation S-X Rule 2-01(c)(4)(i) provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services +will not be subject to audit procedures during an audit of the audit client's +financial statements, including: +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client's financial statements. + +23. Regulation S-X Rule 2-01(c)(4)(vi) defines an additional area of prohibited non- +audit services as “[a]cting, temporarily or permanently, as a director, officer, or employee of an +audit client, or performing any decision-making, supervisory, or ongoing monitoring function for +the audit client.” FINOPs perform management functions at broker-dealers and are specifically +charged with providing supervisory and monitoring functions. FINOPs are responsible for the +broker-dealer’s compliance with applicable net capital rules and have final approval and +responsibility for the accuracy of financial reports submitted to any securities industry regulatory +body. Moreover, FINOPs are charged with the supervision and/or performance of a broker- +dealer’s responsibilities under all financial responsibility rules promulgated pursuant to the +Exchange Act and are responsible for the overall supervision of and responsibility for the +individuals who are involved in the administration of and maintenance of a broker-dealer’s back +office operations. +24. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). + +25. Zucker and RRBB provided FINOP related services to the Broker-Dealer, including +Zucker’s personal provision of FINOP services, Zucker’s oversight of the RRBB staff accountant’s +FINOP work, and through Zucker and RRBB’s payment to and consultation with the Designated +FINOP. Regulation S-X Rules 2-01(c)(4)(i) and 2-01(c)(4)(vi) prohibited these services given that +RRBB was engaged as the Broker-Dealer’s independent auditor. + + 7 +26. RRBB’s fiscal year 2011 audit report for the Broker-Dealer falsely stated that its +audit of the Broker-Dealer’s financial statements was conducted in accordance with GAAS. +RRBB therefore violated Exchange Act Rule 17a-5(i). +27. Zucker caused RRBB’s violation of Exchange Act Rule 17a-5(i). Zucker +contributed to this violation through his own performance of FINOP duties as well as through his +directing of the RRBB staff accountant to perform FINOP work and his consultations with the +Designated FINOP while RRBB was handling the Designated FINOP’s billing during the audit +engagement period. Based on his communications with RRBB partners about the independence +rules, his review of AICPA independence guidance, and his understanding that RRBB dropped +audit clients so that he could continue to provide those clients FINOP services, Zucker knew or +should have known that he was contributing to RRBB’s violation of Exchange Act Rule 17a-5(i). +28. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing +of scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +29. Zucker and RRBB caused the Broker-Dealer’s violation of Exchange Act 17(a) +and Rule 17a-5. Zucker personally performed FINOP services for the Broker-Dealer, arranged +for RRBB to pay the Designated FINOP for serving as the Broker Dealer’s FINOP and directed +the RRBB staff accountant to provide FINOP services to the Broker-Dealer. Zucker and RRBB +knew or should have known that they were contributing to the Broker-Dealer’s violation of +Section 17(a) and Rule 17a-5. +30. RRBB also caused the Broker-Dealer’s violation of Exchange Act 17(a) and Rule +17a-5 by falsely stating in its fiscal year 2011 audit report for the Broker-Dealer that its audit +was conducted in accordance with GAAS. +31. Rule 102(e) of the Commission’s Rule of Practice allows the Commission to +censure a person, or deny such person, temporarily or permanently, the privilege of appearing or +practicing before the Commission if it finds that such person has engaged in “improper +professional conduct.” Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines +improper professional conduct, in part, as: “a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances in which the +registered public accounting firm or associated person knows, or should know, that heightened +scrutiny is warranted.” Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + 32. Questions regarding an auditor’s independence always warrant heightened +scrutiny. See Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. +57,164, at 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined +the “highly unreasonable” standard as + + 8 +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree +of the departure from professional standards and not the intent of the accountant. + +Id. at 57,167; see also PeopleSoft Initial Decision Release No. 249, at 60 (April 16, 2004). + + 33. Because of the conduct set forth above, Zucker engaged in highly unreasonable +conduct that resulted in a violation of applicable professional standards when he knew or should +have known that heightened scrutiny was required. + + 34. As a consequence of Zucker’s conduct, and by affirming, in violation of +Exchange Act Rule 17a-5(i), that its fiscal year 2011 audit for the Broker-Dealer was conducted +in accordance with GAAS when RRBB was not in fact independent during the audit engagement +period, RRBB also engaged in highly unreasonable conduct that resulted in a violation of +applicable professional standards when it knew or should have known that heightened scrutiny +was required. + +35. Based on the foregoing, the Commission finds that RRBB engaged in improper +professional conduct pursuant to Exchange Act Section 4C and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +36. Based on the foregoing, the Commission finds that RRBB committed a violation of +Exchange Act Rule 17a-5(i) and caused the Broker-Dealer’s violation of Section 17(a) and Rule +17a-5 promulgated thereunder. + +37. Based on the foregoing, the Commission finds that Zucker engaged in improper +professional conduct pursuant to Exchange Act Section 4C and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +38. Based on the foregoing, the Commission finds that Zucker caused RRBB’s +violation of Exchange Act Rule 17a-5(i) and caused the Broker-Dealer’s violation of Section 17(a) +and Rule 17a-5 promulgated thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents RRBB and Zucker’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. RRBB is hereby censured. + + 9 +B. RRBB shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. RRBB shall, within seven days of the entry of this Order, pay disgorgement of +$12,000 and a civil monetary penalty in the amount of $25,000 to the United States Treasury. If +timely payment is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 +and 31 U.S.C. 3717. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request;5 +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/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 +RRBB as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission,100 F St., NE, Washington, DC 20549. + +D. Zucker shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + +E. Zucker is denied the privilege of appearing or practicing before the Commission as +an accountant. + + F. After one-year from the date of this order, Zucker may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his/her practice before the +Commission will be reviewed either by the independent audit committee of the public company + +5 The minimum threshold for transmission of payment electronically is $50,000.00 as of April 1, 2012. This +threshold will be increased to $1,000,000 by December 31, 2012. For amounts below the threshold, respondents +must make payments pursuant to option (2) or (3) above. + 10 +for which he/she works or in some other acceptable manner, as long as he/she practices before +the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Zucker, 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) Zucker, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any criticisms of +or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Zucker 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) Zucker 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. + +G. The Commission will consider an application by Zucker 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 Zucker’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3465.pdf b/raw/aaer/2013/AAER-3465.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5c14146cf175c7b51e458576e95866a3dfb91be0 Binary files /dev/null and b/raw/aaer/2013/AAER-3465.pdf differ diff --git a/raw/aaer/2013/AAER-3465.txt b/raw/aaer/2013/AAER-3465.txt new file mode 100644 index 0000000000000000000000000000000000000000..e7f709f07b05c8beaa681e2b743db408af0584d5 --- /dev/null +++ b/raw/aaer/2013/AAER-3465.txt @@ -0,0 +1,157 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69860 / June 26, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3465 / June 26, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15365 + + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE +Bruce W. Tomlinson, 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 Bruce +W. Tomlinson (“Respondent” or “Tomlinson”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Tomlinson, age 53 and a resident of Los Altos, California, was the vice +president, principal accounting officer, and controller of InterMune, Inc. (“InterMune”), from 2008 +to June 2012. He has been licensed as a certified public accountant in the State of California since +1988. His license is currently inactive. + + 2. InterMune, a Delaware corporation headquartered in Brisbane, California, is +a pharmaceutical development company. At all relevant times, InterMune’s common stock was +registered with the Commission under Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”) and traded on The NASDAQ Stock Market. During the relevant period, options +in the common stock of InterMune traded on the Chicago Board Options Exchange, the +Philadelphia Stock Exchange, the Boston Stock Exchange, the International Securities Exchange, +the American Stock Exchange, and the New York Stock Exchange’s Arca System. + + 3. On June 6, 2013, the Commission filed a complaint against Tomlinson in +SEC v. Bruce W. Tomlinson (Case No. 3:13-cv-02549-JCS) in the United States District Court for +the Northern District of California. On June 20, 2013, the court entered a consent final judgment +against Tomlinson permanently enjoining him from future violations of Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, ordering him to pay a civil penalty of $616,000, and +barring him for a period of five years from serving as an officer or director of any issuer that has a +class of securities registered pursuant to Exchange Act Section 12 or that is required to file reports +pursuant to Exchange Act Section 15(d). + + 4. The complaint alleges that Tomlinson engaged in insider trading by tipping a +friend and former business associate, Michael Sarkesian (“Sarkesian”), to material nonpublic +information in advance of a December 17, 2010 announcement that the European Medicines +Agency’s (“EMA”) Committee for Medicinal Products for Human Use (“CHMP”) had +recommended that a European Union (“EU”) commission approve InterMune’s Marketing +Authorization Application (“MAA”) for marketing its drug, Esbriet, in the EU. The complaint +alleges that by mid-November 2010, in the course of his employment, Tomlinson had become privy + 3 +to material non-public information about the increasing probability that the CHMP would render a +positive opinion and faster than had been publicly anticipated by InterMune. Tomlinson allegedly +tipped Sarkesian that, amongst other things, the European regulatory review process appeared “to be +moving faster and better” than anticipated and that this impacted on “Company wide strategic +decisions.” According to the complaint, on December 7 and 8, 2010, in advance of the December +17, 2010 announcement, Sarkesian directed the purchase of 400 out-of-the-money InterMune call +options which resulted in imputed profits of $616,000. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Tomlinson’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Tomlinson is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + 4 + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3466.txt b/raw/aaer/2013/AAER-3466.txt new file mode 100644 index 0000000000000000000000000000000000000000..fe3f401250eef465929856b43a473024603ed4d6 --- /dev/null +++ b/raw/aaer/2013/AAER-3466.txt @@ -0,0 +1,1373 @@ + + + + + + + + + + + + + + + + SEC.gov | JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. + + + + + + + + !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\/514216","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 + + + JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. + + + + + + + + + + + + JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22735 / June 27, 2013 + Accounting and Auditing Enforcement Release No. 3466 / June 27, 2013 + Securities and Exchange Commission v. JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. , Civil Action No. C.A. No. 1:12-cv-10012 (District of Massachusetts, Complaint filed January 4, 2012) + + Court Enters Final Judgments Against JBI, Inc. and Former Officer in Accounting Fraud Case + + + + The Securities and Exchange Commission announced today that a Massachusetts federal court entered final judgments by consent on June 26, 2013 and March 20, 2013, respectively, against John W. Bordynuik ("Bordynuik") and JBI, Inc. ("JBI"), two defendants in a fraud action filed by the Commission in 2012.  The Commission alleged in its complaint that JBI, its then CEO, John Bordynuik, and its former CFO, Ronald Baldwin, Jr. ("Baldwin"), engaged in a scheme to commit securities and accounting fraud in 2009.  In the consent judgments, the Court ordered JBI to pay $150,000 and Bordynuik to pay $110,000 in civil monetary penalties. + + The Commission filed its action on January 4, 2012, alleging that during two reporting periods in 2009 and in contravention of Generally Accepted Accounting Principles ("GAAP"), JBI stated materially false and inaccurate financial information on its financial statements.  The Complaint alleged that the defendants misrepresented and overstated the actual value of certain assets, known as media credits, by almost 1,000%, in an effort to bolster its balance sheet.  JBI then used the overvalued financial statements in two private capital raising efforts (Private Investment in Public Equity or PIPES) that raised over $8.4 million from unwitting investors in these PIPES just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of the media credits and other assets on the balance sheet.  According to the complaint, Bordynuik was aware of, or was reckless in not being aware of, GAAP concerns surrounding the reported value of the media credits in advance of the company's periodic reports that included the financial statements filed with the Commission, yet falsely certified that the company's financial statements for those reporting periods were filed in conformity with GAAP.  + + Without admitting or denying the allegations in the Commission's complaint, JBI and Bordynuik consented to final judgments entered by the Court.  The final judgment against JBI permanently enjoined the company from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and ordered JBI to pay a civil monetary penalty of $150,000.  The final judgment against Bordynuik permanently enjoined him from violating Section 17(a) of 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, 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 ordered him to pay a civil penalty of $110,000.  Bordynuik also was barred for five years (from March 18, 2013) from acting as an officer or director of a public company.  The case against the remaining defendant (Baldwin) remains pending. + + For further information, see Lit. Release No. 22220 (Jan. 4, 2012). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3468.pdf b/raw/aaer/2013/AAER-3468.pdf new file mode 100644 index 0000000000000000000000000000000000000000..db09452fb7990bf4d82c39e917286ba657ac2007 Binary files /dev/null and b/raw/aaer/2013/AAER-3468.pdf differ diff --git a/raw/aaer/2013/AAER-3468.txt b/raw/aaer/2013/AAER-3468.txt new file mode 100644 index 0000000000000000000000000000000000000000..994b7ffc8828f59d61b60af9b87b01304dff334b --- /dev/null +++ b/raw/aaer/2013/AAER-3468.txt @@ -0,0 +1,90 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69885 / June 28, 2013 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 3619 / June 28, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3468 / June 28, 2013 +Admin. Proc. File No. 3-14565 + + +In the Matter of + +LPB CAPITAL +D/B/A FAMILY OFFICE GROUP, LLC +and GARY J. PAPPAS +c/o Mary Pappas +5 Brookhaven Road +Pinehurst, NC 28374 +and +c/o Corporation Service Company +2711 Centerville Road, Suite 400 +Wilmington, DE 19808 + + + + + + + +ORDER DISMISSING +PROCEEDINGS + +On September 27, 2011, the Commission instituted administrative and cease-and-desist +proceedings against LPB Capital d/b/a Family Office Group, LLC, formerly registered with the +Commission as an investment adviser, under Sections 203(e) and 203(k) of the Investment +Advisers Act of 1940.1 The Commission also instituted administrative and cease-and-desist +proceedings against Gary J. Pappas, the firm's founder and former majority owner, chief +executive officer, and chief compliance officer, under Advisers Act Sections 203(f) and 203(k) +and Rule 102(e)(1)(iii) of the Commission's Rules of Practice.2 The Order Instituting +Proceedings alleges, among other things, that Family Office Group and Pappas overstated the +firm's assets under management and violated antifraud provisions. + +1 15 U.S.C. §§ 80b-3(e), 80b-3(k). +2 Id., §§ 80b-3(f), 80b-3(k); 17 C.F.R. § 201.102(e)(1)(iii). +2 + + + +Following the institution of proceedings, the Commission authorized the staff to accept a +settlement offer pursuant to which the respondents agreed to: (i) a cease-and-desist order; (ii) the +revocation of Family Office Group's registration with the Commission; (iii) a full collateral bar +against Pappas from association with any investment adviser, broker, dealer, municipal securities +dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, +with the right to reapply after five years; and (iv) a denial of Pappas's privilege of appearing or +practicing before the Commission as an accountant with the right to reapply after five years. +Based on Pappas's sworn financial declaration and supporting documentation and Family Office +Group's status as a defunct entity with no assets, the settlement did not impose disgorgement or +civil penalties. + +Subsequently, Commission staff learned that Pappas had died in July 2012. Before his +death, Pappas and Family Office Group had submitted a Form ADV-W to withdraw and +terminate the firm's investment adviser registration with the Commission. The respondents also +had submitted withdrawals terminating Family Office Group's investment adviser registration in +two states. + +On May 21, 2013, the Division of Enforcement filed a motion to dismiss the proceedings +instituted against the respondents, stating that "[i]n light of Pappas'[s] demise and his estate +having no assets to pay disgorgement or penalties, there is no further relief that can be obtained +against him or his estate." The Division also stated that "Family Office [Group] is a defunct +entity that is non-operational, is not in good standing, has no assets, and has already withdrawn +and terminated its Commission and state registrations." Family Office Group has not responded +to the Division's motion. + +It is appropriate to grant the Division's motion in light of Pappas's death and Family +Office Group's status. + +Accordingly, IT IS ORDERED that the proceedings against LPB Capital d/b/a Family +Office Group, LLC and Gary J. Pappas be dismissed. + +By the Commission. + + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3469.pdf b/raw/aaer/2013/AAER-3469.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8033f96a9cb6ed1a950ce68cc32f39071842429b Binary files /dev/null and b/raw/aaer/2013/AAER-3469.pdf differ diff --git a/raw/aaer/2013/AAER-3469.txt b/raw/aaer/2013/AAER-3469.txt new file mode 100644 index 0000000000000000000000000000000000000000..313e6f42b65a39c479d05edc058ccb2d83f88ece --- /dev/null +++ b/raw/aaer/2013/AAER-3469.txt @@ -0,0 +1,146 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69886 / June 28, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3469 / June 28, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15191 + +In the Matter of + +BRIAN D. FOX + c/o Box 8076 Stn A +Calgary, Alberta T2H 0H6 + Canada + + + + + + + +ORDER DENYING PETITION TO LIFT TEMPORARY +SUSPENSION AND DIRECTING HEARING ON THE PETITION + +I. +Brian D. Fox has petitioned us to lift an order issued pursuant to Rule 102(e)(3) of our +Rules of Practice temporarily suspending him from appearing or practicing before the +Commission. Fox failed to file his Petition with the Secretary as our Rules of Practice require +and the Office of the Secretary only received it after the time period specified by our Rules to +challenge the Order had expired. As discussed below, we have determined to waive the +requirements of Rules 102(e)(3)(ii) and 151(b), and to treat the Petition as timely filed as of May +31, 2013. We also deny the Petition to lift the suspension and direct that the matter be scheduled +for a hearing before an administrative law judge. +II. +On November 2, 2012, the U.S. District Court for the Northern District of Oklahoma +entered judgment against Fox, permanently enjoining him from future violations, direct or +indirect, of certain provisions of the Securities Exchange Act of 1934 and specified rules +thereunder.1 The Judgment, which Fox has appealed,2 further prohibited him from acting as an + +1 SEC v. Fox, No. 4:11-CV-0211-CVE-PJC, ECF No. 53 (N.D. Okla. Nov. 2, 2012) (among other things, +entering injunction with respect to violations of 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 thereunder). +2 See Fox v. SEC, No. 13-5013 (10th Cir. appeal filed Jan. 31, 2013). +2 + +officer or director of any issuer that has a class of securities registered pursuant to Section 12 of +the Exchange Act or is required to file reports pursuant to Section 15(d) of the Exchange Act. +As its basis, the Judgment states that Fox had previously consented to permanent injunctive relief +and an officer-and-director bar and that the Court had found his consent valid and enforceable. +On January 29, 2013, we entered an Order Instituting Public Administrative Proceedings +and Imposing Temporary Suspension Pursuant to Rule 102(e)(3) of the Commission's Rules of +Practice.3 In the Order, we found that Fox had misled the investing public by fraudulently +inflating the revenue and assets and fraudulently omitting major liabilities of Powder River +Petroleum International, Inc. in its Commission filings, and by making other false and +misleading public disclosures. We also found that a court of competent jurisdiction had +permanently enjoined Fox from violating the Federal securities laws within the meaning of Rule +102(e)(3)(i)(A) and, in view of this finding, deemed it appropriate and in the public interest that +Fox be temporarily suspended from appearing or practicing before the Commission. The Order +further provided that Fox could file a petition with the Commission to lift the temporary +suspension within thirty days after service of the Order, and that, if he failed to do so, the +suspension would become permanent. +Fox subsequently prepared a petition seeking the removal of the temporary suspension or, +in the alternative, seeking a hearing with respect to it.4 On or before February 28, 2013, the +Commission's Fort Worth Regional Office received a service copy of the Petition. An +attachment to the Petition states that, in addition to the copy sent to the Fort Worth Regional +Office, Fox also planned to deliver a copy to our Headquarters at its general address, with no +indication it was otherwise directed to the Secretary as required under our rules. The Office of +Secretary did not receive that copy. Instead, the Office first received actual notice and a copy of +Fox's Petition from Fort Worth on May 31, 2012, following a routine inquiry from staff in Fort +Worth. +III. +Rule 102(e)(3)(ii) of our Rules of Practice provides that any person challenging a +temporary suspension from appearing and practicing before the Commission must do so within +thirty days after service of the order by "petition[ing] the Commission to lift the temporary +suspension."5 Under Rule 151(b) of the Rules of Practice, "[f]iling of papers with the +Commission shall be made by filing them with the Secretary."6 In turn, Rule 151(d) requires that +"[p]apers filed with the Commission" by mail "shall be accompanied by a certificate stating," + +3 Brian D. Fox, Order Instituting Public Administrative Proceedings and Imposing Temporary Suspension +Pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, Exchange Act Release No. 68754, 2013 WL +325332 (Jan. 13, 2013). +4 See Petition Opposing Temporary Order Instituting Public Administrative Proceedings and Imposing +Temporary Suspension Pursuant to Rule 102(e)(3) of Commission's Rules of Practice (the "Petition"). +5 17 C.F.R. § 201.102(e)(3)(ii); see also Rule of Practice 102(e)(3)(iii), 17 C.F.R. § 201.102(e)(3)(iii) +(referencing requirement of "the filing of a petition" under Rule 102(e)(3)(ii)). +6 17 C.F.R. § 201.151(b). +3 + +among other things, "the mailing address . . . to which service was made . . . ."7 In an attachment +to his Petition, Fox indicated that he planned to deliver the Petition to the Commission at the +Headquarters general address without reference to the Secretary. As noted above, the first notice +and copy of the Petition that the Office of the Secretary received was the one forwarded by the +Fort Worth Regional Office on May 31, 2013. Because Fox did not file his Petition with the +Office of Secretary within thirty days of service of the Order he challenges – indeed, has never +properly directed his Petition to the Secretary – we could treat his Petition as never properly filed +in a timely manner under our Rules of Practice. +Nonetheless, under the circumstances, we deem it appropriate to waive compliance with +Rules 102(e)(3)(ii) and 151(b) to the extent necessary to allow consideration of the Petition. +Under Rule 100(c), we may "by order direct, in a particular proceeding, that an alternative +procedure shall apply or that compliance with an otherwise applicable rule is unnecessary" based +upon our determination "that to do so would serve the interests of justice and not result in +prejudice to the parties to the proceeding."8 Under the circumstances, including the fact that Fox +is acting pro se and appears to have made an effort, albeit flawed, to file a copy of the Petition, +we find that it would serve the interests of justice and would not prejudice Fox or the Division of +Enforcement to waive compliance with Rules 102(e)(3)(ii) and 151(b) to the extent necessary to +treat Fox's Petition as timely filed on May 31, 2013, when the Office of the Secretary received it. +We thus address Fox's request that we remove his temporary suspension. Rule +102(e)(3)(i)(a) permits the Commission to suspend any accountant or other professional or expert +who has been "[p]ermanently enjoined . . . from violating or aiding and abetting the violation of +any provision of the Federal securities laws or of the rules and regulations thereunder."9 At this +stage, it appears that the findings made in the injunctive proceeding and the injunction issued +against Fox "justify the continuance of his suspension until it can be determined what, if any, +action may be appropriate to protect the Commission's processes."10 As provided in Rule +102(e)(3)(iii),11 therefore, we will set the matter down for public hearing. We express no opinion +as to the merits of Fox's arguments.12 +Accordingly, IT IS ORDERED that Fox's Petition be treated as, and is, timely filed as of +May 31, 2013; it is further +ORDERED that this proceeding be set down for public hearing before an administrative +law judge in accordance with Rule of Practice 110. As specified in Rule of Practice + +7 17 C.F.R. § 201.151(d). +8 17 C.F.R. § 201.100(c). +9 17 C.F.R. § 201.102(e)(3)(i)(a). +10 Williams D. Shovers, Exchange Act Release No. 59874, 2009 WL 1271170, at *2 (May 6, 2009). +11 17 C.F.R. § 201.102(e)(3)(iii). +12 On June 14, 2013, the Division of Enforcement filed a response to Fox's Petition. Such a response is not +contemplated by the operative Rule of Practice, 102(e)(3), and, in any event, we did not consider it in reaching this +decision. +4 + +102(e)(3)(iii), the hearing in this matter shall be expedited in accordance with Rule of Practice +500; it is further +ORDERED that the administrative law judge shall issue an initial decision no later than +210 days from the date of service of this order; and it is further +ORDERED that the temporary suspension of Brian D. Fox, entered on January 29, 2013, +remain in effect pending a hearing and decision in this matter. +By the Commission + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3470.pdf b/raw/aaer/2013/AAER-3470.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3d6d5049123f83b52077535200384ae126555a47 Binary files /dev/null and b/raw/aaer/2013/AAER-3470.pdf differ diff --git a/raw/aaer/2013/AAER-3470.txt b/raw/aaer/2013/AAER-3470.txt new file mode 100644 index 0000000000000000000000000000000000000000..12755f35a82e2f66c669d8d5ba4a4151dbee853e --- /dev/null +++ b/raw/aaer/2013/AAER-3470.txt @@ -0,0 +1,417 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69922 / July 2, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3470 / July 2, 2013 +Admin. Proc. File No. 3-14171 + + +In the Matter of + +JAMES M. SCHNEIDER, CPA +c/o W. Neil Eggleston +Kirkland & Ellis LLP +655 Fifteenth Street, N.W. +Washington, D.C. 20005 + + + +ORDER DENYING MOTION OR +IN THE ALTERNATIVE +APPLICATION TO MODIFY +COMMISSION ORDER IMPOSING +REMEDIAL SANCTION + + James M. Schneider is a certified public accountant and the former chief financial officer +of Dell, Inc. On July 22, 2010, we filed a civil injunctive action against Dell, Schneider, and +other Dell executives for fraud and various reporting and recordkeeping violations. +1 Schneider +subsequently agreed to be permanently enjoined by a U.S. district court from future violations of, +among other things, the antifraud provisions of the federal securities laws. He also agreed to the +Commission's filing a follow-on administrative proceeding against him, pursuant to which +Schneider consented to our suspending him from appearing or practicing before the Commission +as an accountant, with the right to apply for reinstatement after five years. Schneider now asks +the Commission to clarify that suspension order "to prevent the existing order from being +construed by the Staff of the Commission as barring activities that are outside the scope of [our +Rule of Practice Rule 102(e)(3)(i)]."2 In particular, Schneider asks us to clarify that our Rule + +1 SEC v. Dell Inc., No. Civ. 1:10-cv-01245 (D.D.C. July 22, 2010), available at http://www.sec.gov/litigation/ +complaints/2010/comp21599.pdf. +2 Respondent's Mot. Under SEC Rule[ ] of Practice 154 or in the Alternative Appl. for Modification of Comm'n +Order Imposing Remedial Sanctions Against James M. Schneider at 1 ("Respondent's Mot.") (citing 17 C.F.R. +§ 201.102(e)(3)(i) (providing that the Commission may suspend from practicing before it any accountant who has +been "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 + +102(e) order "does not preclude Mr. Schneider from serving on the audit committee of a +Commission registrant or as the CFO of a public company, so long as he does not serve as the +principal accounting officer."3 For the reasons below, we deny Schneider's motion. +I. +A. Schneider consented to a suspension from appearing or practicing before the +Commission as an accountant after the Commission instituted civil proceedings +against him. + On July 22, 2010, we instituted civil proceedings against Dell and certain of its +executives, including Schneider, in the United States District Court for the District of Columbia. +Among other violations, the complaint alleged that Dell, Schneider, and other Dell executives +engaged in fraud by failing to disclose material information and using an accounting scheme to +create the false appearance that the company was consistently meeting Wall Street earnings +targets and reducing its operating expenses. According to the complaint, Dell had failed to +disclose large "exclusivity payments" that Intel Corporation made to Dell not to use processors +made by Intel's rival, Advanced Micro Devices, Inc. ("AMD"). The complaint alleged that, +without these payments, Dell would have missed analysts' consensus earnings-per-share +estimates for every quarter from fiscal years 2002 through 2006. Although these payments +amounted to 76% of Dell's operating income by the first quarter of fiscal year 2007, "Dell did not +disclose the existence, much less the magnitude, of the Intel exclusivity payments."4 + In May 2006, Dell announced its intention to use AMD's processors in some of its +products. Intel responded by cutting its exclusivity payments, and Dell subsequently reported a +36% drop in its operating income. "In dollar terms," the complaint explained, "the reduction in +Intel exclusivity payments was equivalent to 75% of the decline in Dell's operating income."5 +But Schneider falsely told analysts and investors in a quarterly earnings call that the drop in the +company's operating results "was attributable to Dell pricing too aggressively in the face of +slowing demand and to component costs declining 'less than we anticipated.'"6 + According to the complaint, Schneider also "engaged in a wide-ranging accounting fraud +by maintaining a series of 'cookie jar' reserves that [the company] used to cover shortfalls in +operating results from FY02 to FY05."7 These manipulations, the complaint explained, "were +undertaken to meet consensus earnings targets or to misstate materially important financial + +3 Respondent's Mot. ¶ 29. +4 Compl. ¶ 69. +5 Id. ¶ 3. +6 Id. ¶ 63 (quoting statements that were in a script circulated before the earnings call to certain Dell personnel). +7 Id. ¶ 4. +3 + +metrics."8 This manipulation "not only materially misstated Dell's financial results, but caused +material misstatements in Dell's annual and quarterly reports filed with the Commission during +the period."9 For example, in the second quarter of 2004, a Dell finance director told Schneider +that Dell's Europe, Middle East, and Asia ("EMEA") unit "was having difficulty meeting its +$159 million operating income target."10 Schneider replied, "We need $175m. You need to tell +me how we will get it. I suggest you not be too proud and see what [a vice president of +marketing] has socked away." +11 The finance director complied with Schneider's request and +released $16 million that had been put away. "The release of this cookie jar reserve," the +complaint explained, "allowed the EMEA segment to report eight consecutive quarters of +increasing operating income." +12 Without the reserve, "EMEA's operating income in Q1FY05 +would have declined by about 12.5% from the prior quarter, rather than increased by 3.1%."13 + The complaint concluded that, because of this misconduct, Schneider violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933,14 Section 13(b)(5) of the Securities +Exchange Act of 1934,15 and Exchange Act Rules 13a-14, 13b2-1, and 13b2-2.16 It also alleged +that Schneider aided and abetted Dell's violations of Exchange Act Sections 13(a), + + +8 Id. ¶ 84. +9 Id. +10 Id. ¶ 110. +11 Id. +12 Id. ¶ 111. +13 Id. +14 15 U.S.C. §§ 77q(a)(2) (prohibiting any person from "obtain[ing] money or property by means of any untrue +statement of a material fact or any omission to state a material fact"), 77q(a)(3) (prohibiting any person from +"engag[ing] in any transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser"). +15 Id. § 78m(b)(5) (providing that "[n]o person shall knowingly circumvent or knowingly fail to implement a +system of internal accounting controls or knowingly falsify any book, record or account . . ."). +16 17 C.F.R. §§ 240.13a-14 (requiring CFOs to certify in periodic reports that, based on personal knowledge, the +report does not contain any untrue statement of material fact or omit any material fact), 240.13b2-1 (providing, in +part, that "[n]o person shall directly or indirectly, falsify or cause to be falsified, any book, record or account . . ."), +240.13b2-2 (prohibiting any officer or director of an issuer from making or causing to be made any materially false +or misleading statement in connection with the preparation of reports and documents required by the Exchange Act ). +4 + +13(b)(2)(A), and 13(b)(2)(B)17 and Rules 12b-20, 13a-l, and 13a-13.18 Without admitting or +denying the allegations, Schneider consented to a permanent injunction, disgorgement, and civil +penalties.19 + On December 22, 2010, Schneider consented to our initiating administrative follow-on +proceedings against him pursuant to our Rule of Practice 102(e)(3)(i).20 In connection with an +order instituting and settling those proceedings, Schneider consented to being "suspended from +appearing or practicing before the Commission as an accountant" with a right to reapply after +five years.21 +B. Schneider continued to serve as a member of a public company's audit committee +after the Commission imposed a bar. + At the time we instituted the civil injunctive proceedings, Schneider was serving as a +director and audit committee member at three publicly held companies. Schneider subsequently +resigned from two of those companies, but he continued to serve as an audit committee member +at General Communications, Inc. ("GCI"), an Alaska-based communications provider listed on +NASDAQ. According to GCI's proxy statement filed with the Commission on May 12, 2011, +Schneider was chair of GCI's audit committee and was designated as an audit committee +financial expert.22 Schneider's name, as chair of the audit committee, also appeared on GCI's +audit committee report, which the company included in its proxy statement.23 In its filing, GCI +stated that the company's audit committee reviewed GCI' s financial statements, discussed the +financial statements and the accounting principles applied in those financial statements with + +17 15 U.S.C. §§ 78m(a) (requiring issuers to file periodic reports in accordance with Commission rules), +78m(b)(2)(A) (requiring issuers to make and keep books, records, and accounts that, in reasonable detail, accurately +and fairly reflect their transactions and dispositions of assets), 78m(b)(2)(B) (requiring issuers to devise and +maintain internal accounting controls sufficient to provide reasonable assurances that tr ansactions are recorded as +necessary to permit preparation of financial statements in accordance with Generally Accepted Accounting +Principles and to maintain accountability for assets). +18 17 C.F.R. §§ 240.12b-20 (requiring issuers to provide any additional material information necessary to make +required statements, in the light of the circumstances under which they are made, not misleading ), 240.13a-l +(requiring issuers to file annual reports), 240.13a-13 (requiring issuers to file quarterly reports). +19 SEC v. Dell, No. Civ. 1:10-cv-01245 (D.D.C. Oct. 13, 2010) (imposing final judgment as to Schneider). +20 James M. Schneider, CPA, Securities Exchange Act Release No. 63600, 2010 SEC LEXIS 4422 , at *6 (Dec. +22, 2010). +21 Id. In consenting to the suspension, Schneider neither admitted nor denied our findings, except as to the +Commission's jurisdiction over him, the subject matter of the proceedings, the Commission 's having filed a +complaint against him, and the district court's having permanently enjoined him from violating certain securities +laws. +22 Gen. Commc'ns, Inc., Definitive Proxy Statement (Form Def 14A) 23–24 (May 12, 2011); see Regulation S-K, +Item 407, 17 C.F.R. § 229.407(d)(5) (defining "audit committee financial expert"). +23 Gen. Commc'ns, Inc., Definitive Proxy Statement 75. +5 + +GCI's auditor, and recommended to GCI's board that the financial statements be filed with the +Commission. + On August 5, 2011, Commission staff notified GCI and Schneider's counsel that +Schneider was violating the terms of the Commission's Rule 102(e) order by serving on GCI's +audit committee. Schneider resigned from GCI's audit committee and then filed the present +motion seeking clarification of our Rule 102(e) order. +II. +A. Schneider seeks a ruling that our Rule 102(e) order does not preclude Schneider +from serving in certain positions, such as a CFO or audit committee member. + Schneider asks us to "issue an order clarifying that the Rule 102(e) Order does not +prohibit him from accepting non-accountant positions, such as positions on an audit committee +or as a non-accountant CFO."24 He argues that the reason for such a clarification is "to prevent +the existing order from being construed by the Staff of the Commission as barring activities +outside the scope of [Rule 102(e)]."25 In support, Schneider argues that the staff has already once +exceeded its authority under our order by demanding that he resign from GCI's audit +committee.26 + Schneider contends that Commission staff has not cited any authority, nor is he aware of +any, that "would have given [him] notice that," by agreeing to the Rule 102(e) order, he would be +prohibited from "serv[ing] on an audit committee or as the CFO of a public company so long as +he did not act as the principal accounting officer."27 Schneider concedes that he "theoretically +could attempt to accept such a position and require the Staff to bring an enforcement action," but +argues that "the Staff's past conduct with GCI demonstrates that any issuer that would appoint +Mr. Schneider to its audit committee or as its CFO is likely to be threatened with an enforcement +action."28 Because of this, Schneider argues, a clarification of our order is necessary. + The Division opposes Schneider's motion, arguing that Schneider had fair notice that our +Rule 102(e) order would prohibit him from serving on a public company's audit committee or as +a CFO. The Division contends that such a prohibition is consistent with Rule 102(e)'s remedial +purpose of ensuring that accountants, "on whom the Commission relies heavily in the +performance of its statutory duties, perform their tasks diligently and with a reasonable degree of + +24 Respondent's Reply to Br. of the Div. of Enforcement in Opp'n to Respondent's Mot. ("Respondent's Reply") +at 3. +25 Respondent's Mot. at 1. +26 Id. ¶ 19. +27 Id. ¶ 26. +28 Id. ¶ 28. +6 + +competence."'29 The Division further concludes that Schneider's request is not ripe for review +"because Schneider fails to present any specific job functions for Commission review, and the +staff stands ready to provide specific guidance when necessary [about any future role Schneider +may wish to take]."30 +B. Schneider's proposed clarification is inconsistent with our order and the rule on +which it is based. + Schneider seeks a ruling from us that our Rule 102(e) order does not prohibit him from +"accepting non-accountant positions, such as positions on an audit committee or as a non- +accountant CFO." +31 We find no basis for granting this request. As explained below, the +applicability of our order depends on the particular tasks and responsibilities involved with any +future position that Schneider may seek to undertake. Schneider's proposed clarification, by +comparison, would exempt entire job titles from our order, regardless of what tasks or +responsibilities those positions entailed. Granting such a request would undermine the remedial +purpose of our order and the rule on which it is based. + We barred Schneider from appearing or practicing before us as an accountant pursuant to +our authority under Rule 102. That rule defines "practicing before the Commission" as including, +but not limited to, "[t]ransacting any business with the Commission" and "[t]he preparation of +any statement, opinion or other paper by any . . . accountant . . . filed with the Commission in +any registration statement, notification, application, report or other document with the consent of +such . . . accountant." +32 Determining whether a particular position fits within that definition +involves a "fact-specific inquiry" into the conduct involved when serving in such a position.33 As +a U.S. district court recently explained, someone who is appearing or practicing before the +Commission as an accountant includes persons who "'participate[d] in the preparation of' +financial statements filed with the Commission by, for example, 'creat[ing],' 'compil[ing]' or + +29 Br. of the Div. of Enforcement in Opp'n to Respondent's Mot. at 12 (quoting Michael C. Pattison, CPA, +Exchange Act Release No. 67900, 2012 SEC LEXIS 2973, at *16 (Sept. 20, 2012)). +30 Id. at 19. +31 Respondent's Reply at 3. +32 17 C.F.R. § 201.102(f). Because we barred Schneider pursuant to our authority under Rule 102, that rule's +definitions apply to our order. Cf. Charles E. Gaecke, Investment Advisers Act Release No. 2681, 2007 SEC LEXIS +2809, at *9 (Dec. 4, 2007) (stating that, because "we issued the Bar Order pursuant to our authority under the +Advisers Act . . . the definition of 'investment adviser' in the Advisers Act applies when that term is used in the Bar +Order"). +33 Br. of the Div. of Enforcement in Opp'n to Respondent's Mot. at 18 (quoting SEC v. Brown , 878 F. Supp. 2d +109, 127 (D.D.C. 2012)). +7 + +'edit[ing]' information or data incorporated into those documents and consenting to their +incorporation."34 + Nothing in this definition discusses, let alone exempts, specific job titles, such as CFO or +audit committee member. This is by design. As we recognized in our release adopting the 1998 +amendments to Rule 102(e), the Commission's limited resources mean that the Commission and +the investing public must "rely heavily on accountants to assure corporate compliance with +federal securities law and disclosure of accurate and reliable financial information."35 +Accountants play "a particularly important role . . . in preparing and certifying the accuracy of +financial statements of public companies that are so heavily relied upon by the public in making +investment decisions."36 This process is impaired if incompetent or unethical accountants are +permitted to participate in the preparation of financial statements certified and filed with the +Commission.37 We therefore promulgated Rule 102(e) to ensure that these professionals on +whom we rely so heavily "'perform their tasks diligently and with a reasonable degree of +competence.'"38 + These remedial purposes would be undermined if we were to hold that Schneider could +avoid the prohibition in our Rule 102(e) order by accepting a position based only on that +position's title or on whether non-accountants could accept such a position.39 Incompetent or + +34 Brown, 878 F. Supp. 2d at 125 (quoting Robert W. Armstrong III, Exchange Act Release No. 51920, 2005 SEC +LEXIS 1497, at *47–48 (June 24, 2005) (finding that the controller of a public company's subsidiary appeared and +practiced before the Commission as an accountant)); accord SEC v. Prince, No. 09-1423, 2013 U.S. Dist. LEXIS +62691, at *99 (D.D.C. May 2, 2013) (quoting Armstrong and finding that a public company employee, serving as +"Director of Mergers and Acquisitions," violated a Rule 102(e) order by appearing and practicing before the +Commission as an accountant). +35 Amendment to Rule 102(e) of the Commission's Rules of Practice, 63 Fed. Reg. 57,164, 57,165 (Oct. 26, 1998). +36 Marrie v. SEC, 374 F.3d 1196, 1200–01 (D.C. Cir. 2004) (noting the reason for the Commission's adoption of +the amendments to Rule 102(e)); accord Amendment to Rule 102(e), 63 Fed. Reg. at 57,165 (stating that, because of +the Commission's limited resources, it "must rely on the competence and independence of . . . the accountants who +prepare . . . financial statements). +37 See Armstrong, 2005 SEC LEXIS 1497, at *48 (concluding that the "disciplining [of] accountants pursuant to +Rule 102(e) for effecting a fraudulent scheme by computing the figures and providing the information incorporated +into Commission filings furthers the Rule's remedial purpose of protecting the integrity of the Commission's +processes"). +38 Marrie, 374 F.3d at 1200 (quoting Touche Ross & Co. v. SEC, 609 F.2d 570, 582 (2d Cir. 1979)); accord +Gregory M. Dearlove, CPA, Exchange Act Release No. 57244, 2008 SEC LEXIS 223, at *107 (Jan. 31, 2008) +(noting that the Commission adopted Rule 102(e) "to ensure the Commission's 'processes continue to be protected, +and that the investing public continues to have confidence in the integrity of the financial reporting process '" +(quoting Amendment to Rule 102(e), 63 Fed. Reg. at 57,164)), petition denied, 573 F.3d 801 (D.C. Cir. 2009). +39 Cf. Armstrong, 2005 SEC LEXIS 1497, at *46 (finding that controller of a registrant's subsidiary was +appearing or practicing before the Commission despite not signing the financial statements filed with the +Commission because to find otherwise "would allow accountants to escape discipline under Rule 102(e) simply by +instructing someone else to draft, sign, and file fraudulent documents"). +8 + +unethical accountants pose a risk to our process regardless of what title they hold—or whether or +not they are even licensed accountants. Accountants, we have explained, "often serve as +corporate officers, and the integrity of the Commission's processes is threatened when they +execute fraudulent schemes by providing falsified financial information just as when licensed +accountants engage in this conduct."40 This interpretation of Rule 102(e)'s remedial purpose, we +have noted, also accords with cases in which we have denied the privilege of appearing or +practicing before the Commission to incompetent or unethical accountants serving in a variety of +positions, including the very ones that Schneider seeks to carve out of our order.41 And a U.S. +district court recently found that someone serving in a "general advisory role" with the title +"Director of Mergers and Acquisitions" violated a Rule 102(e) order prohibiting him from +appearing or practicing before the Commission as an accountant. +42 The court found that, even +though the company established procedures designed to ensure that this person "would not be +involved with the accounting department and accounting data," he violated the Rule 102(e) order +by preparing financial data and determining how particular data should be treated in the +company's financial statements.43 + This breadth of ways in which accountants can threaten our processes highlights the +inherent difficulty of enumerating every position that Schneider could take that would be +prohibited by, or consistent with, our Rule 102(e) order, but that does not, as Schneider argues, +render our order impermissibly vague.44 As courts have explained, it is often sufficient that a + +40 Id. at *52. +41 See id. at *49 (noting that, for purposes of defining what constitutes appearing or practicing before the +Commission, broadly interpreting Rule 102(e)'s remedial purpose "accords with the settled cases in which we have +denied the privilege of appearing or practicing before the Commission to accountants serving as officers of +privately-held subsidiaries of public companies"); cf., e.g., Pattison, 2012 SEC LEXIS 2973, at *51–52 +(permanently disqualifying former controller of a public company from appearing or practicing before the +Commission as an accountant); Steven A. Gould, CPA, Exchange Act Release No. 68500, 2012 SEC LEXIS 4013, at +*4 (Dec. 20, 2012) (settled order) (suspending former CFO from appearing or practicing before the Commission as +an accountant); James S. Quay, Exchange Act Release No. 68234, 2012 SEC LEXIS 3522, at *4 (Nov. 14, 2012) +(settled order) (suspending respondent, who was not licensed as a certified public accountant, from appearing or +practicing before the Commission as an accountant); H. Clayton Peterson, CPA , Exchange Act Release No. 67282, +2012 SEC LEXIS 1982, at *3 (June 27, 2012) (suspension order) (suspending former board member and audit +committee chairman, whose certified public accounting license had expired, from appearing or practicing before the +Commission because he had been convicted of a felony); Lynne Norman, Exchange Act Release No. 66352, 2012 +SEC LEXIS 437, at *5 (Feb. 7, 2012) (settled order) (suspending former controller, who held no accounting licenses +or certifications, from appearing or practicing before the Commission as an accountant). +42 Prince, 2013 U.S. Dist. LEXIS 62691, at *7–8, *110–11. +43 Id. +44 See DiCola v. FDA, 77 F.3d 504, 509 (D.C. Cir. 1996) ("The FDA chose . . . not to write the debarment order +in terms more specific than those in the statute because of the difficulty inherent in defining what constitut es a +sufficient nexus with the regulatory scheme under all circumstances." (internal quotation omitted)); cf. Perez v. +Hoblock, 368 F.3d 166, 175 (2d Cir. 2004) ("Limitations inherent in the English language often prevent the drafting +of statutes 'both general enough to take into account a variety of human conduct and sufficiently specific to provide +9 + +proscription "'mark out the rough area of prohibited conduct, allowing law-abiding individuals to +conform their conduct by steering clear of the prohibition.'"45 In implementing such a +proscription, "[n]o more than a reasonable degree of certainty can be demanded and it is not +unfair to require that one who deliberately goes perilously close to an area of proscribed conduct +shall take the risk that he may cross the line.''46 + Therefore, while our order in this case may not precisely enumerate the job titles that +Schneider could take and comply with our order, we find that our order nevertheless provides a +sufficient standard by which Schneider can judge his ability to accept a particular position.47 +There are nearly limitless positions that Schneider could safely take that have nothing to do with +preparing financial statements of public companies. Some positions, however, will involve duties +that increase the likelihood that Schneider could engage in prohibited conduct, including the two +that Schneider seeks to exempt from our order (audit committee member and CFO).48 +Determining whether Schneider could accept such positions will unavoidably involve a closer +call. Our order reasonably places Schneider on notice that, the more a prospective position is +associated with the preparation of a company's financial statements, the more Schneider's +acceptance of such a position without prior approval from the Commission would be done "at his +peril."49 For these reasons, we find no basis for modifying or clarifying our order.50 + +fair warning that certain kinds of conduct are prohibited.'" (quoting Arnett v. Kennedy, 416 U.S. 134, 159–60 +(1974))). +45 DiCola, 77 F.3d at 509 (quoting United States v. Thomas, 864 F.2d 188, 194 (D.C. Cir. 1988)). +46 Id. at 508 (quoting Throckmorton v. Nat'l Transp. Safety Bd., 963 F.2d 441, 445 (D.C. Cir. 1992)). +47 See id. at 509 (concluding that it was "fanciful for [debarred person] to say that he can only 'guess' at the +meaning of the debarment order; he will usually have a pretty good idea whether a position at a firm that is not itself +a drug manufacturer runs afoul of the remedial purpose for which he has been debarred from providing services to a +drug house"). +48 See, e.g., 15 U.S.C. §§ 7203(a)(3) (defining audit committee as a committee established "for the purpose of +overseeing the accounting and financial processes of the issuer and audits of the financial statements of the issuer"), +7241(a) (requiring chief financial officers, or the equivalent, to certify the issuer's periodic reports). +49 DiCola, 77 F.3d at 505, 509 (noting that an executive barred from "provid[ing] any type of service to a person +that has an approved or pending drug product application" was "on notice that, without prior approval from the +FDA, he gets close to the pharmaceutical industry at his peril"); see also Disclosure Required by §§ 404, 406 & 407 +of the Sarbanes-Oxley Act of 2002, Exchange Act Release No. 46701, 67 Fed. Reg. 66,208, 66,212 (Oct. 22, 2002) +(noting that, "[b]ecause of the significant role the audit committee plays in the filing of a public company's financial +statement, . . . any accountant, while suspended or barred from practice under Rule 102(e) of the Commission's +Rules of Practice, generally would not be eligible to serve as a financial expert [on an audit committee]"). Schneider +interprets our comments in the immediately preceding authority about financial experts as supporting his argument +that he may serve on an audit committee so long as he does not serve as a financial expert. If anything, however, +these comments simply emphasize that, the greater one's involvement with a public company's financial statements , +the greater the likelihood that one may violate a Rule 102(e) order. +50 The Division argues that we should also deny Schneider's motion using our more traditional analysis of bar and +suspension modifications. Although Schneider titles his motion as a "modification" of our order, he expressly +10 + + In denying Schneider's motion, we express no opinion on whether our Rule 102(e) order +prohibits Schneider from taking any of the hypothetical positions he posits.51 Nor do we express +any opinion on whether any of the positions Schneider held in the past, such as at CGI, violated +our order, as those questions are not before us. Nor can we can find any basis, given the record +before us, to conclude that Commission staff somehow misled Schneider about the scope or +applicability of our Rule 102(e) order when he consented to our order's prohibitions. Schneider +asserts, for example, that he lacked notice that he would be prohibited from serving on an audit +committee or as a CFO because he was serving on three audit committees at the time he +consented to our order. As described herein, however, we find that Rule 102 and case law +interpreting that rule gave Schneider sufficient notice of what conduct our order proscribed, and +nothing in the record before us provides a basis to conclude otherwise. Furthermore to the extent +Schneider is uncertain about an actual position he may seek to take sometime in the future, the +Division has represented its willingness to provide guidance to Schneider regarding such +potential positions. It is entirely possible, therefore, that Schneider "posits an injury that may +never materialize." +52 + Accordingly, IT IS ORDERED that James M. Schneider's motion and, in the alternative, +application for modification of the Commission's order imposing remedial sanctions are +DENIED. + By the Commission. + + + + + Elizabeth M. Murphy + Secretary + +represents in his reply brief that he is not seeking a modification to our order, only a clarification. See Respondent's +Reply at 18–19 (explaining that his motion "bears no resemblance to petitions for relief, which seek to absolve a +petitioner of an obligation by which he or she is admittedly bound"). +51 Cf. Hoblock, 368 F.3d at 175 (stating that the evaluation of whether a regulation is vague as applied to a +particular person "must be made with respect to [his] actual conduct and not with respect to hypothetical situations +at the periphery of the [regulation's] scope or with respect to the conduct of other parties who might not be +forewarned by the broad language"). +52 United States v. Colasuonno, 697 F.3d 164, 183 (2d Cir. 2012) (declining to amend a written judgment and +citing Simmonds v. INS, 326 F.3d 351, 357 (2d Cir. 2003) (stating that ripeness requirement allows courts "to avoid +becoming embroiled in adjudications that may later turn out to be unnecessary")). \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3471.txt b/raw/aaer/2013/AAER-3471.txt new file mode 100644 index 0000000000000000000000000000000000000000..b3be310ee9f9fd69713fd166b0c8be260d71b0b6 --- /dev/null +++ b/raw/aaer/2013/AAER-3471.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Subramanian Krishnan + + + + + + + + !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\/514246","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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Subramanian Krishnan , Civil Action No. 12-CV-2495 PAM-JJG + + Former CFO Agrees to Settle Charges of Evading Internal Controls to Pay for Unauthorized Travel and Entertainment Expenses + + + The Securities and Exchange Commission announced today that Subramanian Krishnan (Krishnan), the former Chief Financial Officer (CFO) of Digi International, Inc. (Digi), has agreed to settle the Commission's civil action against him. The Commission's complaint, filed September 28, 2012, in the U.S. District Court for the District of Minnesota, alleges that Krishnan engaged in conduct which resulted in the filing of inaccurate reports and accompanying certifications in Digi's annual quarterly reports from March 2005 through May 2010. The complaint alleges that Krishnan engaged in a course of conduct, that resulted in corporate funds being used to pay for unauthorized travel and entertainment expenses. Krishnan authorized such expenses for Digi employees, caused the Company to file inaccurate reports, failed to enforce Digi's internal controls, demonstrated a lack of management integrity, and wrongly certified that Digi's internal controls were effective. + + Simultaneously with the Commission's complaint, without admitting or denying the allegations in the Commission's complaint, Krishnan had previously consented to a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. Krishnan is also permanently restrained and enjoined from future violations of Sections 13(a) and 13(b)(5) and Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1 and 13b2-2 thereunder of the Exchange Act and from aiding and abetting violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + + Under today's announcement, Krishnan consented to the entry of a judgment prohibiting him from acting as an officer or director of a public company for a period of five years following the date of the filing of the Commission's complaint and imposing a $60,000 civil penalty. Krishnan also has consented to the issuance of a Commission order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending him from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after five years. + + Jennifer Moore, Justin J. Sutherland, and Karen I. Martinez conducted the Commission's investigation. Daniel J. Wadley and Thomas M. 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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/2013/AAER-3472.pdf b/raw/aaer/2013/AAER-3472.pdf new file mode 100644 index 0000000000000000000000000000000000000000..20ef65d842357c9e9c4de5edbc978e4e61e78632 Binary files /dev/null and b/raw/aaer/2013/AAER-3472.pdf differ diff --git a/raw/aaer/2013/AAER-3472.txt b/raw/aaer/2013/AAER-3472.txt new file mode 100644 index 0000000000000000000000000000000000000000..33e0a9c17de6b84f7310a24ae3f48956c216a3d8 --- /dev/null +++ b/raw/aaer/2013/AAER-3472.txt @@ -0,0 +1,164 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 69945 / July 8, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3472 / July 8, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15370 + + +____________________________________ + + +In the Matter of ORDER INSTITUTING ADMINISTRATIVE + PROCEEDINGS PURSUANT TO RULE + AICHUN LI, 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 +Aichun Li (“Respondent” or “Li”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice. +1 + +1 + Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over her and the subject matter of +these proceedings, and the findings contained in Section III.B.3 below, which are admitted, +Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant +to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Li, age 39, is and has been a certified public accountant licensed to practice in the +State of North Carolina. She served as Chief Financial Officer of Keyuan Petrochemicals, Inc. +(“Keyuan”) from May 2010 until her resignation in October 2011. + + 2. Keyuan was, at all relevant times, a Nevada corporation with its principal place of +business in Ningbo, China. Keyuan is a manufacturer and supplier of petrochemical products. At +all relevant times, Keyuan’ s common stock was registered with the Commission pursuant to +Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the +NASDAQ Stock Market LLC. + + 3. On February 28, 2013, the Commission filed a complaint against Li in +SEC v. +Keyuan Petrochemicals, Inc., Civil Action No. 13-cv-00263 (D.D.C.). On July 2, 2013, the court +entered an order permanently enjoining Li, by consent, from future violations of Section 13(b)(5) +of the Exchange Act and from aiding and abetting violations of Section 13(a) and 13(b)(2)(A) of +the Exchange Act and Exchange Act Rules 12b-20 and 13a-13 thereunder. Li was also ordered +to pay a $25,000 civil money penalty. + +4. The Commission’s complaint alleged, among other things, that between May +2010 and January 2011, Keyuan failed to disclose material related party transactions between +and among the company and its chief executive officer and controlling shareholders as well as +entities controlled by or affiliated with those persons. The related party transactions took the +form of loan guarantees, purchases of raw materials, sales of products, and short term cash +transfers for financing purposes. Li, who was hired to ensure the company’s compliance with +U.S. GAAP and oversee the SEC reporting process, received information indicating that the +company was engaged in certain related party transactions in the form of loan guarantees. Li +also encountered red flags that should have alerted her that the company was not properly +identifying or disclosing certain related party transactions. Despite such knowledge, Li signed +off on registration statements and periodic reports filed between May 2010 and January 2011 that + +3 + +failed to disclose material related party transactions, as required by U.S. GAAP and/or +Commission regulations. +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pursuant to Rule 102(e) of the Commission’s Rules of Practice, Li is suspended +from appearing or practicing before the Commission as an accountant. + + B. After two years from the date of this order, Respondent may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in her practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which she works or in some other acceptable manner, as long as she practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which she is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which +she is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges her responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + + +4 + +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that her state CPA license is current and she has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3473.pdf b/raw/aaer/2013/AAER-3473.pdf new file mode 100644 index 0000000000000000000000000000000000000000..91fd87201b247bb90903eaf62aaaff3eb66dd52e Binary files /dev/null and b/raw/aaer/2013/AAER-3473.pdf differ diff --git a/raw/aaer/2013/AAER-3473.txt b/raw/aaer/2013/AAER-3473.txt new file mode 100644 index 0000000000000000000000000000000000000000..baa6e0d3f2574e95eec48982ac67d0c8db0c07cc --- /dev/null +++ b/raw/aaer/2013/AAER-3473.txt @@ -0,0 +1,153 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70074 / July 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3473 / July 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15395 + + : + : + In the Matter of : CORRECTED ORDER INSTITUTING + : ADMINISTRATIVE PROCEEDINGS + Subramanian Krishnan (CPA), : PURSUANT TO RULE 102(e) OF THE + : COMMISSION’S RULES OF PRACTICE, + Respondent. : 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 +Subramanian Krishnan ("Krishnan" or “Respondent”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice. +1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings + +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 +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Krishnan, age 58, is and has been a certified public accountant licensed to +practice in the State of Minnesota since 1983. He served as Chief Financial Officer and Senior Vice +President of Digi International, Inc. (“Digi” or the “Company”), from February 1999 until his +resignation in May 2010. + + 2. Digi was, at all relevant times, a Delaware corporation headquartered in +Minnesota. At all relevant times, Digi manufactured device networking products for businesses. At +all relevant times, Digi’s common stock was registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the NASDAQ +Global Select Market. + + 3. On September 28, 2012, the Commission filed a complaint against Krishnan +in SEC v. Subramanian Krishnan + (Civil Action No. 0:12-cv-02495-PAM-JJG) in the United States +District Court for the District of Minnesota. On October 17, 2012, the court entered an order +permanently enjoining Krishnan, by consent, from future violations of Section 17(a) of the +Securities Act of 1933 (“Securities Act”); Sections 10(b) and 13(b)(5) of the Exchange Act and +Rules 10b-5, 13b2-1, 13b2-2, and 13a-14 thereunder, and aiding and abetting violations of Sections +13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 +thereunder; and from acting as an officer or director of a public company for a period of time to be +determined by stipulation or subsequent motion by the Commission. On July 15, 2013, Krishnan +was also ordered to pay a $60,000 civil money penalty and is prohibited from acting as an officer +or director of a public company for a period of five years from the date of the Commission’s +complaint. + + 4. The Commission’s complaint alleged that Krishnan engaged in a course of +conduct which resulted in Digi filing inaccurate reports and accompanying certifications in +Digi’s annual reports on Form 10-K and Digi’s quarterly reports on Form 10-Q for the period +from March 2005 through May 2010. The complaint also alleged that Krishnan engaged in +certain actions and inactions: a result of which corporate funds were used to pay for +unauthorized expenses. The complaint further alleged that Krishnan aided and abetted Digi’s +violations by making and keeping inaccurate books and records, failing to maintain a system of +adequate internal controls and making inaccurate representations to auditors. + +IV. + + 3 + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Krishnan’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Krishnan is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years (or 60 months) from the date of this order, Respondent may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the + 4 +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3474.txt b/raw/aaer/2013/AAER-3474.txt new file mode 100644 index 0000000000000000000000000000000000000000..5431cc33b6b256f7b012692a8390e35b5cac56b5 --- /dev/null +++ b/raw/aaer/2013/AAER-3474.txt @@ -0,0 +1,1386 @@ + + + + + + + + + + + + + + + + SEC.gov | Michael H. Taber, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/514406","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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Taber, CPA + + + + + + + + + + + + Michael H. Taber, CPA + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22773 / August 8, 2013 + Accounting and Auditing Enforcement Release No. 3474 / August 8, 2013 + Securities and Exchange Commission v. Michael H. Taber, CPA , Civil Action No. 13-mc-0282 (S.D.N.Y. filed Aug. 8, 2013) + + SEC Charges Certified Public Accountant with Violating Commission Suspension Order + + Seeks Disgorgement of Illicit Compensation Received During Suspended Period + + + The Securities and Exchange Commission today announced that it filed an application in U.S. District Court for the Southern District of New York against certified public accountant Michael H. Taber. Securities and Exchange Commission v. Michael H. Taber, CPA, 13-mc-0282 (S.D.N.Y.). Taber is a resident of Salisbury Mills, New York and Yulee, Florida, and has been licensed as a certified public accountant by the State of New York since 1974. + + The SEC alleged in its application that Taber violated a July 21, 2004 Commission Order issued under Rule 102(e)(3)(i) of the Commission's Rules of Practice (the "2004 Order") that permanently suspended Taber from appearing or practicing before the Commission as an accountant. According to the application, at the time of the 2004 Order, Taber was employed as the controller of Sono-Tek Corporation, an issuer that filed periodic reports with the Commission. Despite the 2004 Order, he continued to work in that capacity until 2005. Taber's responsibilities at Sono-Tek during that period included drafting quarterly and annual statements on Forms 10-Q and 10-K and preparing income statements, balance sheets, statements of cash flow, and footnotes to those financial statements. After Taber left Sono-Tek in 2005, he went to work for Jefferson Wells International, Inc., a professional services firm that outsourced specialists to perform accounting and other work. The application further alleged that while he was at Jefferson Wells, Taber provided a number of issuers with various accounting services, including: preparing income statements and statements of cash flow; drafting and editing footnotes to these and other financial statements; compiling and computing schedules of support for such footnotes; and creating, compiling, and editing this data and other information that was then incorporated into Forms 10-Q, 10-K, and 8-K that were filed with the Commission. Taber's relationship with Jefferson Wells ended in late 2010. + + The SEC's application seeks a district court order enforcing its 2004 Order suspending Taber from appearing or practicing before the Commission as an accountant, and asks that the court order him to pay $584,650.41 in disgorgement, representing illicit compensation gained as a result of his engaging in work that was proscribed by the 2004 Order, together with prejudgment interest in the amount of $146,849.02. + + + + + Application + +   + + + + + + + + + + + Resources + + + + + Application + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Anchor Bancorp Wisconsin, Inc., et al. + + + + + + + + + + + + Anchor Bancorp Wisconsin, Inc., et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22778 / August 14, 2013 + Accounting and Auditing Enforcement Release No. 3475 / August 14, 2013 + Securities and Exchange Commission v. Anchor Bancorp Wisconsin, Inc., et al. , Civil Action No. 1:13-cv-01241 (D.D.C.) + + Commission Charges Anchor Bancorp Wisconsin and Former CFO with Fraud + + + The Securities and Exchange Commission announced today that it filed a settled civil action in the United States District Court for the District of Columbia against Anchor Bancorp Wisconsin, Inc. (Anchor) and Dale C. Ringgenberg, Anchor's former Chief Financial Officer. The Commission's complaint alleged, among other things, that Anchor and Ringgenberg intentionally or recklessly made material misstatements in Anchor's quarterly Report on Form 10 Q for the period ended June 30, 2009. + + The Commission's complaint alleges that Ringgenberg took, or failed to take, actions to keep from having to correct earnings that Anchor had already released to its shareholders. Ringgenberg manipulated an estimate to offset an accounting adjustment required by Anchor's external auditors, and he refused or failed to properly account for real estate appraisals and related information that was available after the quarter closed but before Anchor filed its quarterly report. + + Without admitting or denying the allegations in the Commission's complaint, Anchor agreed to settle the action against it by consenting to the entry of a final judgment permanently enjoining it from violating Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13a-13 thereunder. Ringgenberg agreed to consent, without admitting or denying the allegations in the Commission's complaint, to the entry of a final judgment: (1) permanently enjoining him from violating Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5, 13a 14, 13b2 1, and 13b2-2(a) and from aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rule 13a-13 thereunder; (2) imposing a civil penalty of $75,000; and (3) barring him from serving as an officer or director of a public company for five years. The settlement is subject to the approval of the district court. + + The Commission acknowledges the assistance and cooperation of the Special Inspector General for the Troubled Asset Relief Program, the Office of the United States Attorney for the Western District of Wisconsin, and the Madison, Wisconsin Office of the Federal Bureau of Investigation. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Grout + + + + + + + + !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\/514436","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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Share sensitive information only on official, secure websites. + + + + + + + + + + + + + + + + + SEC homepage + + + + + + + Menu + + + + + + + + + + + + + + Close + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + Search Filings + + + + + + + + + Search Filings + + + + + + + + + Full Text Search + + + + + + Latest Filings + + + + + + Mutual Fund Search + + + + + + Variable Insurance Products Search + + + + + + SIC Codes + + + + + + CIK Lookup + + + + + + Public Dissemination Service (PDS) + + + + + + Search Assistance + + + + + + + + + + + + + Submit Filings + + + + + + + + + Submit Filings + + + + + + + + + EDGAR Filer Management Portal + + + + + + EDGAR Filing Portal + + + + + + Online Forms Management Portal + + + + + + EDGAR Next + + + + + + Forms Index + + + + + + Filer Support & Resources + + + + + + + + + + + + + Data & Research + + + + + + + + + Data & Research + + + + + + + + + Data Library + + + + + + Statistics & Data Visualizations + + + + + + Structured Data + + + + + + Investment Management Data + + + + + + Open Data at the SEC + + + + + + + + + + + + + Rules, Enforcement, & Compliance + + + + + + + + + + + + + + + + + + + + Rules & Regulations + + + + + + + + + Rulemaking Activity + + + + + + Submit Public Comments + + + + + + Staff Guidance + + + + + + No-Action, Interpretive, and Exemptive Letters + + + + + + Self-Regulatory Organization Rulemaking + + + + + + Public Petitions for Rulemaking + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + + + Litigation Releases + + + + + + Administrative Proceedings + + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + + Trading Suspensions + + + + + + Distributions to Harmed Investors + + + + + + Receiverships + + + + + + + + + + + + + + + + + Compliance + + + + + + + + + Examination Priorities + + + + + + Risk Alerts + + + + + + Compliance Outreach Program + + + + + + + + + + + + + + + + + + + + + + + Proposed Rules + + + + + + What's New + + + + + + Whistleblower Program + + + + + + + + + + + + + + + + + + + Featured Topics + + + + + + + + + Featured Topics + + + + + + + + + Crypto Task Force + + + + + + Cybersecurity + + + + + + Market Structure Analytics + + + + + + Saving and Investing for Military Personnel + + + + + + Saving and Investing for Teachers + + + + + + SEC-CFTC Harmonization Initiative + + + + + + Treasury Clearing Implementation + + + + + + + + + + + + + About + + + + + + + + + About + + + + + + + + + Mission + + + + + + Commissioners + + + + + + Divisions & Offices + + + + + + Division & Office Directors + + + + + + Advisory Committees + + + + + + Budget & Performance + + + + + + Reports & Publications + + + + + + Commission Votes + + + + + + Contact the SEC + + + + + + Careers + + + + + + + + + + + + + Submit a Tip or Complaint + + + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + Newsroom + + + | + + + Investors + + + Small Businesses + + + Whistleblowers + + + + + + + + + + + + + + + + + Search SEC.gov & EDGAR + + + + + + Search + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + More in this Section + + + + + + + + + + + + + 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 + + + + + + + + + + + + + + + + + + + + + + + + + + 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 + + + Javier Martin-Artajo and Julien G. Grout + + + + + + + + + + + + Javier Martin-Artajo and Julien G. Grout + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22779 / August 14, 2013 + Accounting and Auditing Enforcement Release No. 3476 / August 14, 2013 + Securities and Exchange Commission v. Javier Martin-Artajo and Julien G. Grout , Civil Action No. 13-CV-5677 (S.D.N.Y.) + + headline --> + + + The Securities and Exchange Commission announced today that it charged two former traders at JPMorgan Chase & Co. with fraudulently overvaluing investments in order to hide massive losses in a portfolio they managed. + The SEC alleges that Javier Martin-Artajo and Julien Grout were required to mark the portfolio's investments at fair value in accordance with U.S. generally accepted accounting principles and JPMorgan's internal accounting policy. But when the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses. Their mismarking scheme caused JPMorgan's reported first quarter income before income tax expense to be overstated by $660 million. + In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Martin-Artajo and Grout. + According to the SEC's complaint filed in the U.S. District Court for the Southern District of New York, Martin-Artajo and Grout worked in JPMorgan's chief investment office (CIO), which created the portfolio known as Synthetic Credit Portfolio (SCP) as a hedge against adverse credit events. The portfolio was primarily invested in credit derivative indices and tranches. The market value of SCP's positions began to steadily decline in early 2012 due to improving credit conditions and a recent change in investment strategy. Martin-Artajo and Grout began concealing the losses in March 2012 by providing management with fraudulent valuations of SCP's investments. + The SEC alleges that Martin-Artajo directed Grout to revise the manner in which he marked SCP's investments. Instead of continuing to price the portfolio's positions based on the mid-market prices contained in dealer quotes the CIO received, SCP's positions were instead marked at the most aggressive end of the dealers' bid-offer spread. On several occasions, Martin-Artajo provided a desired daily loss target that would enable the concealment of the extent of the losses. Grout entered the marks every day into JPMorgan's books and records, and sent daily profit and loss reports to CIO management in which he understated SCP's losses. For a period, Grout maintained a spreadsheet to track the difference between his marks and the mid-market prices previously used to value SCP's positions. By mid-March, this spreadsheet showed that the difference had grown to $432 million. + The SEC alleges that contrary to JPMorgan's accounting policy, Martin-Artajo instructed Grout on March 30 to wait for better prices after the close of trading in London in the hope that activity in the U.S. markets could support better marks for SCP's positions. The concealment of losses continued beyond the first quarter. By late April, trading counterparties raised collateral disputes over SCP positions totaling more than a half-billion dollars. Shortly thereafter, JPMorgan's management stripped the SCP traders of their marking authority and began valuing the book at the consensus mid-market prices. + The SEC's complaint alleges that Martin-Artajo and Grout violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-11 and 13a-13. + The SEC's investigation, which is continuing, has been conducted by Michael Osnato, Steven Rawlings, Peter Altenbach, Joshua Brodsky, Daniel Michael, Kapil Agrawal, Eli Bass, Daniel Nigro, Sharon Bryant, and Christopher Mele of the New York Regional Office. The litigation will be led by Joseph Boryshansky. + The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, Federal Bureau of Investigation, United Kingdom Financial Conduct Authority, Office of the Comptroller of the Currency, Federal Reserve Bank of New York, and Commodity Futures Trading Commission. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Yu + + + + + + + + !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\/514471","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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Wu, Ebrahim Shabudin, and Thomas T. Yu + + + + + + + + + + + + Thomas S. Wu, Ebrahim Shabudin, and Thomas T. Yu + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22786 / August 22, 2013 + Accounting and Auditing Enforcement Release No. 3477 / August 22, 2013 + Securities and Exchange Commission v. Thomas S. Wu, Ebrahim Shabudin, and Thomas T. Yu , Civil Action No. CV-11-4988 LB (N.D. Cal. Filed Oct. 11, 2011) + + SEC Settles Claims Against Ebrahim Shabudin Arising from Understated Bank Losses During Financial Crisis + + + On August 8, 2013, the United States District Court for the Northern District of California approved a settlement of the Securities and Exchange Commission's claims against Ebrahim Shabudin, the former Chief Operating Officer of UCBH Holdings, Inc.  The case against Mr. Shabudin and two other defendants involves fraudulent financial reporting for UCBH Holdings, Inc., the publicly-traded holding company for San Francisco-based United Commercial Bank.  The Commission alleges Mr. Shabudin and other defendants concealed losses on loans and other assets from the bank's auditors and delayed the proper reporting of those losses.  The Commission's complaint alleges Mr. Shabudin committed securities fraud by making false and misleading statements in connection with the 2008 annual report and misleading the bank's independent auditors, among other allegations.  + + Without admitting or denying the allegations, Mr. Shabudin agreed to pay a civil money penalty of $175,000, with the penalty partially reduced by the amount paid as a civil penalty in a related administrative action brought against him by the Federal Deposit Insurance Corporation.  + + Mr. Shabudin also consented to the entry of a final judgment that permanently enjoins him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, 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 thereunder.  The judgment also bars Mr. Shabudin from acting as an officer or director of a public company under the Exchange Act. + + For additional information, see Litigation Release No. 22121 and Accounting and Auditing Enforcement Release No. 3327 (October 11, 2011). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + True North Finance Corp., et al. + + + + + + + + + + + + True North Finance Corp., et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22796 / September 11, 2013 + Accounting and Auditing Enforcement Release No. 3478 / September 11, 2013 + Securities and Exchange Commission v. True North Finance Corp., et al. , Civil Action No. 10-cv-3995 (D. Minn., filed Sept. 21, 2010) + + Final Judgments Entered Against Cfo and Real Estate Finance Company + + + The Securities and Exchange Commission announced that on September 11, 2013, a Minnesota federal court entered final judgments by consent against Owen Mark Williams (Williams) and True North Finance Corporation, f/k/a CS Financing Corporation (True North), in a civil injunctive action filed by the Commission on September 21, 2010. Among other things, the judgment against Williams requires him to pay a $40,000 civil penalty. + + The Commission's complaint alleged that True North and its Chief Financial Officer, Williams, overstated revenue in True North's filings with the Commission in 2008 and 2009. Williams caused True North to improperly recognize revenue on interest from borrowers where the borrowers were not paying True North and where the borrowers' impaired financial condition meant that collectability was not reasonably assured. The Complaint alleged that this recognition of revenue departed from generally accepted accounting principles and also departed from True North's revenue recognition policy, which stated that the company would not recognize revenue when the payment of interest was 90 days past due. + + The final judgments against Williams and True North also imposed permanent injunctions prohibiting these Defendants from violating of Section 17(a)(2) of the Securities Act of 1933 (Securities Act), Sections 13(b)(2)(A), 13(b)(5), and 15(d) of the Securities Exchange Act of 1934 (Exchange Act), and Rules 13b2-1, 13b2-2, 13b-20, and 15d-14 thereunder. + + For further information, please see Litigation Release Number 21657 (Sept. 21, 2010). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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China MediaExpress Holdings, Inc. and Zheng Cheng , Civil Action No. Civil Action No. 1:13-cv-00927 (D.D.C.) + + SEC Charges China-Based Company and CEO in Latest Cross-Border Working Group Case + + + The Securities and Exchange Commission today charged a China-based company and the CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts.  The case is the latest from the SEC's Cross-Border Working Group that focuses on companies with substantial foreign operations that are publicly traded in the U.S.  The Working Group has enabled the SEC to file fraud cases against more than 65 foreign issuers or executives and deregister the securities of more than 50 companies. + + The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People's Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger.  In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not.  The company's chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy.  After suspicions of fraud were raised by the company's external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case. + + According to the SEC's complaint filed in Washington D.C., China MediaExpress became a publicly-traded company in October 2009 and began materially overstating its cash balances in press releases and SEC filings. For example, its 2009 annual report filed on March 31, 2010, reported $57 million in cash on hand when it actually had a cash balance of merely $141,000.  Later that year on November 9, 2010, China MediaExpress issued a press release boasting a cash balance of $170 million at the end of the third quarter of its fiscal year.  The actual cash balance was just $10 million. + + According to the SEC's complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.  At the same time, China Media received $53 million from a hedge fund pursuant to a sale of the company's preferred and common stock to that fund.  Zheng was financially incentivized to misrepresent China MediaExpress' financial condition, as he had agreements to receive stock if the company met certain net income targets.  For instance, when China Media met net income targets for fiscal year 2009, Zheng personally received 600,000 shares of China MediaExpress stock that were worth approximately $6 million at the time. + + According to the SEC's complaint, China MediaExpress' external auditor resigned in March 2011 due to suspicions about fraudulent bank confirmations and statements.  The company's audit committee then retained a law firm to conduct an internal investigation.  The law firm hired a Hong-Kong forensic accounting firm to assist in obtaining bank statements from China MediaExpress' banks to verify the publicly reported cash balances.  The evening before a planned visit to the banks by the accounting firm's team, Zheng called a senior accountant assigned to the team and told him that he had the authorization letters necessary to obtain China MediaExpress' bank statements.  He asked the accountant to meet him alone to obtain the authorization letters.  During the meeting, Zheng admitted that there would be discrepancies dating back one to two years between China MediaExpress' reported and actual cash balances. Zheng offered the accountant approximately $1.5 million to "assist with the investigation."  The accountant refused the offer.  Approximately one month later, the bank statements were obtained, and they showed substantial discrepancies between publicly reported and actual cash balances. + + The SEC's complaint charges Zheng and China MediaExpress with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Section 17(a) of the Securities Act of 1933.  The complaint also charges China MediaExpress with 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 charges Zheng with violating Exchange Act Rules 13b2-2 and 13a-14, and also with aiding and abetting China Media's violations of Exchange Act Section 13(a).  The complaint seeks financial penalties, permanent injunctions, disgorgement, and an officer and director bar against Zheng. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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RINO International Corporation, Dejun "David" Zou, and Jianping "Amy" Qiu , Civil Action No. 1:13-cv-00711 + + SEC Charges RINO, Its CEO, and Its Chairman of the Board with Scheme to Overstate Revenues and Divert Money for Personal Use + + The Securities and Exchange Commission today charged RINO International Corporation, its Chief Executive Officer, Dejun "David" Zou, and its Chairman of the Board, Jianping "Amy" Qiu with engaging in a scheme to overstate RINO's revenues and divert proceeds from a securities offering for their personal use in violation of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. RINO, Zou, and Qiu have agreed to settle the SEC's claims against them. + + RINO, a holding company for subsidiaries that manufacture, install, and service equipment for the Chinese steel industry, became a China-based U.S. issuer through a reverse merger in October 2007. According to the SEC's complaint, Zou, a Chinese national living in China, and Qiu, a Chinese national living in California, diverted some of the proceeds from an offering of securities by RINO in December 2009. Zou and Qiu are alleged to have used the proceeds to purchase a $3.5 million family home for personal use. RINO, Zou, and Qiu initially failed to disclose this diversion, and conflicting information was provided to RINO's outside auditor about the expenditure. Zou and Qiu also used offering proceeds to pay for automobiles as well as designer clothing and accessories without recording them as personal expenses or otherwise disclosing them in RINO's public filings. + + The Commission further alleges that RINO's SEC filings contained materially false and misleading statements and omissions concerning RINO's revenue and operations between 2008 and 2010. According to the complaint, RINO maintained two conflicting sets of financial records â€" one set of books for filings in China and another set of books for filings in the U.S. The Chinese books reflected sales of approximately $31 million from the first quarter of 2008 through the first three quarters of 2010. But the U.S. books that formed the basis for RINO's SEC filings contained false contracts and portrayed sales revenues of approximately $491 million during that same time period â€" more than 15 times greater than the revenues recorded in the Chinese books. The complaint alleges that Zou and Qiu knew or were reckless in not knowing that the U.S. books were supported by false contracts and, nonetheless, signed and certified RINO's public filings containing false and misleading statements and omissions about RINO's revenue and operations. + + The Commission's complaint, which was filed in federal court in Washington, D.C., charges RINO with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; Section 17(a) of the Securities Act of 1933 ("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. The SEC's complaint charges Zou and Qiu with violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; Section 17(a) of the Securities Act; Sections 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder; Exchange Act Rule 13a-14; and aiding and abetting RINO'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. + + Without admitting or denying the claims against them, RINO, Zou, and Qiu consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Zou and Qiu agreed to pay civil penalties of $150,000 and $100,000, respectively. Zou and Qiu also agreed to pay $3.5 million disgorgement into a related class action settlement. In addition, Zou and Qiu consented to entry of an order prohibiting them from serving as officers and directors of a public company for a period of ten years. The proposed settlement is subject to approval by the court. + + The SEC's investigation was primarily conducted by Tom Swiers, Sarah Nilson, Kam Lee, and Melissa Hodgman. + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + Fuqi International, Inc. + + + + + + + + + + + + Fuqi International, Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22739 / July 1, 2013 + Accounting and Auditing Enforcement Release No. 3483 / July 1, 2013 + + Securities and Exchange Commission v. Fuqi International, Inc. and Yu Kwai Chong , Civil Action No. 1:13-cv-995 (U.S. District Court for the District of Columbia) + + SEC Files Fraud Charges Against Fuqi International, Inc. and Its Chairman and Former Ceo and President Yu Kwai Chong + + + The Securities and Exchange Commission today announced the filing of fraud and related charges against Fuqi International, Inc. (Fuqi), a China-based jewelry company, and its Chairman of the Board of Directors and former CEO and President, Yu Kwai Chong (Chong). Fuqi and Chong have agreed to settle the SEC's claims against them. + The Commission alleges that Fuqi and Chong failed to disclose cash transfers of approximately $134 million to three purportedly unknown entities. Chong directed and authorized the transfers, which occurred between September 11, 2009 and November 24, 2010. Fuqi's full board of directors was not aware of and did not approve the cash transfers, and the transactions were made without any written agreement or repayment terms. Although Fuqi has been unable to obtain independent third-party verification of a majority of the underlying cash transfers to or from the company's bank accounts, internal company records indicate that the transferred funds were returned to Fuqi throughout the same period. The funds, however, were not returned to the same bank accounts or in the same amounts as the initial transfers of cash from Fuqi. Fuqi lacked adequate internal accounting controls and incorrectly recorded the cash transfers in its books and records as increases or decreases in "other payables" or "prepaids" accounts. In addition, Chong falsely certified that Fuqi's quarterly report on Form 10-Q, for the quarter ended September 30, 2009, contained no material misstatements or omissions even though Fuqi, at Chong's direction, had transferred $27.6 million to unknown third parties during that quarter. Fuqi also did not disclose the cash transfers in its November 10, 2009 current report on Form 8-K, which rendered Fuqi's statements relating to cash in the Form 8-K misleading. + In the settled complaint, the Commission alleges that Fuqi and Chong violated the antifraud provisions of the securities laws, Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges violations of reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1 and 13b2-2. Without admitting or denying the allegations, Fuqi and Chong have consented to the entry of a final judgment that: (i) permanently enjoins them from future violations of the federal securities laws; (ii) orders Fuqi and Chong to pay civil penalties of $1 million and $150,000, respectively; and (iii) bars Chong from serving as an officer and director for five years. The proposed settlement is subject to approval by the court. + The Commission also announced today the entry of an order revoking the registration of each class of registered securities of Fuqi for failure to make required periodic filings with the Commission. See Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Fuqi International, Inc., Administrative Proceeding File No. 3-15367, Exchange Act Release No. 69895 (July 1, 2013). + The SEC's investigation was conducted by Ansu N. Banerjee, L. Delane Olson, Stacy Fresch, and Melissa R. Hodgman. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + Enforcement & Litigation + + + + + + + Litigation Releases + + + + + Administrative Proceedings + + + + + Administrative Law Judge Orders and Initial Decisions + + + + + Trading Suspensions + + + + + Distributions to Harmed Investors + + + + + Receiverships + + + + + Electronic Filings in Administrative Proceedings (eFAP) + + + + + Rules of Practice + + + + + Applications for Reentry + + + + + Reports of Investigations + + + + + Whistleblower Program + + + + + Public Alert: Unregistered Soliciting Entities (PAUSE) + + + + + SEC Action Lookup - Individuals (SALI) + + + + + Enforcement Data Delivery Standards + + + + + Small Businesses + + + + + Appellate Briefs + + + + + Amicus / Friend of the Court Briefs + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + + Home + + + Enforcement and Litigation + + + Litigation Releases + + + China Intelligent Lighting and Electronics, Inc. and NIVS IntelliMedia Technology Group, Inc. + + + + + + + + + + + + China Intelligent Lighting and Electronics, Inc. and NIVS IntelliMedia Technology Group, Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22755 / July 22, 2013 + Accounting and Auditing Enforcement Release No. 3484 / July 22, 2013 + + Securities and Exchange Commission v. China Intelligent Lighting and Electronics, Inc. et al. , Civil Action No. 13 CIV 5079 + + SEC Files Fraud Charges Against China Intelligent Lighting and Electronics, Inc.; NIVS Intellimedia Technology Group, Inc.; and Their Sibling CEOs + + + The Securities and Exchange Commission today announced that the Commission filed fraud and other related charges against China Intelligent Lighting and Electronics, Inc. (CIL); NIVS IntelliMedia Technology Group, Inc. (NIV); and their respective CEOs, Xuemei Li and, her brother, Tianfu Li. CIL reports that it is a lighting company, and NIV reports that it is a consumer electronic company. Both are located in China. + + The Commission alleges that CIL, NIV, and their CEOs engaged in fraudulent schemes to raise and divert offering proceeds, and then attempted to hide the diversions by lying to auditors and making false and materially misleading filings with the Commission. CIL and NIV are U.S. issuers that raised approximately $7.7 million and $21.5 million, respectively, in public registered offerings in the U.S. capital markets in 2010. Thereafter, Xuemei Li, and Tianfu Li diverted those offering proceeds from CIL and NIV contrary to the stated uses of proceeds set forth in the offering documents. Specifically, on June 24, 2010, $7.7 million in offering proceeds was deposited into CIL's Hong Kong bank account. The next day, Xuemei Li transferred approximately $6.8 million, or almost 90%, to a company that has no disclosed relation to CIL, but continued to tell CIL's auditor that the funds remained in the account. Similarly, on April 26, 2010, $21.5 million in offering proceeds was deposited in NIV's Hong Kong bank account. Even though almost all of the money was transferred out of the Hong Kong bank account by May 5, 2010, NIV and Tianfu Li told the company's auditor that the funds continued to be held in the account. + + In addition to lying to auditors to mask the diversions, CIL, NIV, and their respective CEOs also falsified bank and accounting records to reflect inflated cash balances, and filed false and misleading quarterly reports on Forms 10-Q with the SEC that contained inflated cash balances. In addition, the defendants filed registration statements signed by the Lis that misled investors about how the offering proceeds would be used. + + In its complaint, the Commission alleges that the Defendants violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5. The Commission further alleges that Xuemei Li and Tianfu Li lied to the auditors and aided and abetted the companies' violations of the reporting, recordkeeping, and internal controls provisions of the securities laws, including Sections 13(a), 13(b)(2)(A), 13(b)(2) (B), and 13(b)(5) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, and 13b2-2. The Commission seeks permanent injunctive relief to prevent future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, civil penalties, officer and director bars, and any other appropriate relief. + + The Commission also announced today the entry of an order instituting administrative proceedings to determine whether the registration of each class of securities of CIL and NIV should be revoked for failure to make required periodic filings with the Commission. See Order Instituting Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of China Intelligent Lighting and Electronics, Inc. et al., Administrative Proceeding File No. 3-15383, Exchange Act Release No. 34-70017 (July 22, 2013). + + The SEC's investigation was conducted by Ansu N. Banerjee, L. Delane Olson, Kam Lee and Melissa R. 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Imperial Petroleum, Inc., et al. , Civil Action No. 13-cv-1489 (SD Indiana, filed September 18, 2013) + + SEC Charges Indiana-Based Company and Executives for Defrauding Investors in Renewable Fuel Production Scheme + + + On September 18, 2013, the Securities and Exchange Commission charged a company in Evansville, Ind., and several executives and suppliers for posing to investors as a legitimate biodiesel production business while concealing the extensive illegal activity that accounted for 99 percent of its revenues.  + + According to the Commission's complaint, when Imperial Petroleum purchased Middletown, Ind.-based E-Biofuels LLC as a subsidiary in 2010, E-Biofuels' owners falsely represented that they were producing renewable fuel from raw agricultural products such as soybean oil and chicken fat.  E-Biofuels received significant government incentives based on its biodiesel production representations.  But E-Biofuels actually used middlemen to buy finished biodiesel and portrayed those purchases in fake invoices as the raw "feedstock" needed to produce biodiesel.  E-Biofuels later sold the purchased biodiesel for as high as double the price it paid for it.  When Imperial's CEO Jeffrey Wilson learned that E-Biofuels was not producing biodiesel from raw materials, he allowed the scheme to continue instead of taking corrective action.  Imperial's annual revenue increased from $1 million to more than $100 million and its stock price soared as the company falsely told investors that E-Biofuels was in the business of environmentally friendly biodiesel production.  Imperial's stock price plummeted to less than 10 cents per share after the scheme fell apart, resulting in a market loss of approximately $60 million. + + The Commission's complaint filed in federal court in Indianapolis charges Imperial Petroleum and Wilson as well as three former owners of E-Biofuels â€" brothers Craig and Chad Ducey of Fisher, Ind. and Brian Carmichael, who now lives in Bend, Oregon.  The complaint also charges three New Jersey-based companies â€" Caravan Trading LLC, Cima Green LLC, and CIMA Energy Group â€" and their operators Joseph Furando and Evelyn Pattison (a/k/a Katirina Tracy) for acting as the middlemen in the scheme.  They allegedly provided false and misleading documents to deceive government regulators and attract investors to Imperial. + + In a separate action, the U.S. Attorney's Office for the Southern District of Indiana announced criminal charges.  + + According to the Commission's complaint, Imperial falsely stated in its annual reports for fiscal years 2010 and 2011 that E-Biofuels produced and sold more than 28 million gallons of biodiesel from May 24, 2010 (the closing date of Imperial's acquisition of E-Biofuels) to July 31, 2011 (end of the fiscal year).  More than 99 percent of Imperial's revenues came from E-Biofuels during this time period.  Wilson, the Duceys, Carmichael, and others under their direction misrepresented to customers that the product they were selling was valid renewable fuel produced by E-Biofuels.  In reality, the vast majority was biodiesel bought from the New Jersey companies and fraudulently recertified with new incentives and tax credits.  The biodiesel was purchased and then resold unchanged to customers for more than $100 million.  + The Commission complaint also alleges that the scheme generated gross illicit profits of more than $50 million by buying the biodiesel at or near market price, fabricating invoices describing the transactions as the purchase of soybean oil or some other legitimate type of feedstock, and falsely certifying to the Environmental Protection Agency that E-Biofuels had produced biodiesel.  On some occasions, E-Biofuels pretended to blend the biodiesel in order to receive improper tax credits, or sold the fuel with the tax credits to end users.  From November 2009 to January 2012, E-Biofuels created more than 52 million fraudulent renewable energy credits and $35 million in false tax credits.  This illegal business model was never disclosed to Imperial's investors or auditors. + + According to the complaint, Wilson knew by at least mid-June 2010 that E-Biofuels was not operating in the manner described in its annual report for 2010.  Nonetheless, he signed and certified the accuracy of the 10-K filing.  For the next three quarters and in the 10-K a year later, Imperial filed similar disclosures falsely describing the business as "biodiesel production" and misrepresenting that it used raw feedstock â€" primarily "premium white grease (chicken fat)" â€" to produce biodiesel.  Wilson signed and certified the accuracy of these reports.  Wilson also gave a false portrayal of the company when he had direct contact with prospective investors, including a power-point presentation with a video about E-Biofuels purportedly producing biodiesel from waste oils and greases.  In reality, E-Biofuels' business was almost entirely illegal and unsustainable.  + + The Commission complaint charges Imperial with violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 and various rules thereunder.  Wilson, the Duceys, and Carmichael are charged with violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b) of the Exchange Act, and various rules thereunder.  They also are charged with aiding and abetting violations of the Exchange Act.  The complaint charges Furando, Pattison, and the three New Jersey companies with aiding and abetting violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. + + The Commission seeks disgorgement of ill-gotten gains, financial penalties, and permanent injunctions against further violations of the securities laws.  The SEC seeks to bar Wilson, the Duceys, and Carmichael from acting as officers or directors of a public company. + + The Commission's investigation, which is continuing, has been conducted by Scott J. Hlavacek and James A. Davidson of the Chicago Regional Office.  The SEC's litigation will be led by John E. Birkenheier and Anne Graber Blazek.  The investigation of the criminal action was conducted by the U.S. Attorney's Office for the Southern District of Indiana, the Department of Justice's Environmental Crimes Division, the Federal Bureau of Investigation, the Environmental Protection Agency, the Internal Revenue Service, and the Department of Agriculture. + + + + + SEC Complaint + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Imaging Diagnostic Systems, Inc., Linda Grable, and Allan Schwartz , Civil Action No. 0:13-cv-62025 (S.D. FL.) (September 13, 2013) + + SEC Charges Imaging Diagnostic Systems, CEO, and CFO With Fraud + + + The Securities and Exchange Commission today charged Florida-based medical technology company Imaging Diagnostic Systems and two top executives for making material misstatements and omissions in public filings about the timing of its Food and Drug Administration (FDA) application and its failure to remit payroll taxes to the Internal Revenue Service (IRS). + + According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, Imaging Diagnostic Systems is engaged in the development and testing of a breast imaging system called CTLM® that purportedly uses a laser to detect breast cancer. The company has failed to obtain FDA approval to market and sell the CTLM® in the United States. From October 2008 to December 2009, Imaging Diagnostic Systems repeatedly disclosed in filings and letters to shareholders that it expected to file by specific deadlines a premarket approval application with the FDA to obtain permission to market and sell the CTLM®. The company failed to meet its projected deadlines. In fact, CEO Linda Grable and CFO Allan Schwartz knew there was no basis for the projections because Imaging Diagnostic Systems did not have enough cancer cases to finish its clinical trials and could not pay for the clinical sites. + + The SEC further alleges that beginning in early 2010, Imaging Diagnostic Systems stopped remitting payroll taxes to the IRS for its employees. The company's failure to pay payroll taxes constituted a known commitment, event, or uncertainty of the type that should have been disclosed in the Management's Discussion and Analysis sections of the company's periodic filings, which were signed by Grable and Schwartz. However, the company did not publicly disclose that it failed to remit payroll taxes until more than 16 months later, and even then still failed to disclose the risks associated with its failure to pay payroll taxes. + + The SEC's complaint also alleges that Grable and Schwartz failed to file beneficial ownership reports in 2009, 2010, and 2011 despite having received stock or options. + + The SEC's complaint charges Imaging Diagnostic Systems, Grable, and Schwartz with violating Section 17(a)(2) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(b). The complaint alleges that Imaging Diagnostic Systems violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The complaint alleges that Imaging Diagnostic Systems and Grable violated Section 14(a) of the Exchange Act and Rule 14a-9; Grable and Schwartz violated Section 16(a) of the Exchange Act and Rules 13a-14, 13b2-1, and 16a-3; and Grable and Schwartz aided and abetted the company's violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5(b), 12b-20, 13a-1 and 13a-13. The SEC seeks financial penalties and permanent injunctions. The SEC also seeks penny stock bars and officer-and-director bars against Grable and Schwartz. + + The SEC's investigation was conducted by Jenny A. Trotman and Kathleen Strandell and supervised by Thierry Olivier Desmet in the Miami Regional Office. The SEC's litigation will be led by Robert Levenson. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3487.txt b/raw/aaer/2013/AAER-3487.txt new file mode 100644 index 0000000000000000000000000000000000000000..7cc6d745ee7da48153ffb04cecb843237b394b9a --- /dev/null +++ b/raw/aaer/2013/AAER-3487.txt @@ -0,0 +1,367 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70448 / September 18, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3487 / September 18, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15502 + + + +In the Matter of + +MEDIFAST, 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 AND A CIVIL +PENALTY + +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 Medifast, Inc. (“Medifast,” “the Company,” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order and a Civil Penalty (“Order”), as set forth +below. + +2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. In March 2010, Medifast restated its financial statements for 2006, 2007, and 2008 +(“2010 Restatement”). The 2010 Restatement was required because Medifast had improperly +accounted for its income tax provision for the affected years, which resulted in material +understatements of its income tax expense and material overstatements of its net income after tax. +Medifast’s inaccurate financial statements resulted in part from improper accounting that did not +comply with generally accepted accounting principles (“GAAP”), and from a deficient system of +internal controls that failed to ensure the appropriate recording and reporting of its income tax +expense. + +2. Soon after its 2010 Restatement, Medifast engaged a new auditing firm. During +Medifast’s 2010 audit, this firm identified additional material errors related to Medifast’s revenue +recognition and expense recognition accounting. In April 2011, Medifast restated its financial +statements for 2008 and 2009 to correct material misstatements of its revenue and expenses for +those years (“2011 Restatement”). These material misstatements also resulted from improper +accounting that did not comply with GAAP, and from a deficient system of internal controls that +failed to ensure the appropriate recording and reporting of Medifast’s revenue and expenses. + +3. Medifast’s improper accounting practices and internal controls deficiencies resulted +in Medifast filing periodic reports with the Commission for the years 2006 through 2009 which +materially overstated its income and understated its expenses. As a result, Medifast violated +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 +thereunder. + +Respondent + +4. Medifast, Inc. is a Delaware corporation headquartered in Owings Mills, Maryland. +Through its operating subsidiaries, Medifast manufactures, distributes, and sells weight loss and +other health and diet products and supplements. Medifast’s common stock is registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange +Act”) and trades on the New York Stock Exchange. + + + + + +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 + + 5. As a public company, Medifast is required to fairly, accurately, and timely report its +financial results and condition. To ensure fair and accurate reports, the federal securities laws and +the Commission’s regulations require public companies such as Medifast to prepare and present +their reports and financial statements in conformity with GAAP. Financial statements filed with +the Commission that are not prepared in accordance with GAAP are presumed to be misleading or +inaccurate.2 Medifast represented in its Commission filings that its financial statements complied +with GAAP in all material respects. + +The 2010 Restatement + +6. On March 31, 2010, Medifast filed its Form 10-K for the year ended December +31, 2009 and restated its financial statements for the years ended December 31, 2006, 2007, and +2008. This restatement was required to correct material errors in the Company’s reported income +tax expense that were caused by the Company’s failure to account for its income tax provision in +conformity with Statement of Financial Accounting Standards 109, Accounting for Income Taxes +(FAS 109), and GAAP. + +The Accounting Standard + +7. FAS 109 establishes standards for companies to account for and report the effects +of income taxes.3 Due to differences between tax laws and accounting standards for financial +statements, some events are recognized for financial reporting purposes and for tax purposes in +different years. This can give rise to temporary differences between the tax bases of assets or +liabilities and their reported amounts in financial statements. The differences are temporary +because the event will become taxable or deductible when the related asset is recovered or the +related liability is settled. These temporary differences, or deferred taxes, are accounted for under +FAS 109 using an asset and liability approach. A deferred tax asset exists when temporary +differences will result in deductible amounts in future years. A deferred tax liability exists when +temporary differences will result in taxable amounts in future years. Under FAS 109, a company +must recognize both a current tax liability or asset for the amount of taxes payable or refundable +for the current year, and a deferred tax liability or asset for the estimated future tax effects +attributable to temporary differences. + + + + +2 Regulation S-X, 17 C.F.R. 210.4-01(a)(1). + +3 Upon the codification of GAAP, which became effective for periods ending after September 15, 2009, FAS 109 +became part of Accounting Standards Codification (ASC) 740, Income Taxes. + + +4 + +Medifast’s Improper Tax Accounting + +8. Medifast’s income tax accounting for the years 2006 through 2008 did not comply +with FAS 109 because, among other things, the Company did not calculate a deferred tax liability +to account for certain fixed assets that were being depreciated faster for tax purposes than for +financial statement purposes.4 This failure caused Medifast’s net income to be materially +overstated by an average of 12.4% over the three affected years: + + +Period Ending 12/31/2006 12/31/2007 12/31/2008 + +Net Income as +originally reported: +5,156,000 3,837,000 5,435,000 +Adjustment to Tax +Provision: +(583,000) (411,000) (601,000) +Net Income Restated: + +4,573,000 3,426,000 4,834,000 +Percentage Decrease +in Net Income due to +Restatement: + +12.7% + +12.0% + +12.4% + +9. Moreover, Medifast’s reported income tax provision in its Form 10-Ks for the +years 2007 and 2008 were not supported by Medifast’s internal income tax provision worksheets +for those years. These worksheets were used to calculate the Company’s current and deferred +taxes at year-end for financial statement and GAAP purposes. In 2008, the current income tax +provision on Medifast’s internal worksheet was calculated as $2,578,107 and a total deferred tax +asset was calculated as $1,321,072. In its 2008 Form 10-K, Medifast instead reported a current +income tax expense of $1,711,000 and a deferred tax expense of $704,000. + +10. In 2007, Medifast’s current tax provision was calculated on its internal worksheet +as $1,805,708 and a total deferred tax asset was calculated as $1,079,321. In its Form 10-K for +2007, Medifast instead reported a current income tax expense of $1,233,000 and a deferred tax +expense of $473,000. + + +4 Medifast gave the following explanation in its Form 10-K for 2010, note 17, for the 2010 Restatement: “Due to the +Company’s growth in past years, major infra structure investments were made…. For financial statement purposes, +these assets are depreciated over the assets [sic] useful life. However, for tax purposes, the depreciation can be +accelerated which results in lower taxable income and potential tax refunds which were realized for the years in +which accelerated tax depreciation was elected for the Company…. The resulting timing difference should have +resulted in a deferred tax liability and additional income tax provision expense in the year’s [sic] restated …. The +Company is restating for errors i dentified in its deferred tax accounts pertaining to… differences between the +income tax basis and the financial reporting basis of long -lived assets that were not reconciled to the deferred tax +balances….” + + +5 + +11. In its 2010 Restatement, Medifast acknowledged that it had a material weakness in +its internal controls over financial reporting because the preparation and review process for the +calculation of its tax provision was inadequate, which led to errors in the computation of deferred +tax assets, deferred tax liabilities, and the income tax provision. Medifast’s audit firm also +reported that the Company had not maintained effective internal control over financial reporting as +of December 31, 2009 because of the material weakness in its accounting for income taxes. + +The 2011 Restatement + +12. Soon after filing its 2010 Restatement, Medifast engaged a new audit firm.5 During +its audit of Medifast’s 2010 financial statements, the audit firm identified additional accounting +errors that required Medifast to again restate its financial statements, this time for the years 2008 +and 2009. These additional errors related to the Company’s use of improper accounting policies +with regard to expense accrual and revenue recognition that were not in compliance with GAAP.6 +These errors caused Medifast to materially overstate its income and understate expenses for the +affected years. + +Medifast’s Improper Expense Accrual and Revenue Recognition + + 13. In 2008 and 2009, Medifast consistently deferred recording certain expenses that +were charged to a credit card until the following month when the credit card payment was due, +rather than at the time the card purchase was made. This deferral of expense recording was not in +compliance with FAS Statement No. 5, Accounting for Contingencies, and resulted in certain +expenses being improperly recorded on a cash basis rather than an accrual basis. + +14. In 2008 and 2009, Medifast also failed to properly recognize revenue earned +through its brick-and-mortar weight loss clinics in accordance with GAAP. See ASC 605, Revenue +Recognition; AICPA Accounting Research Bulletin 43; FASB Statement of Concepts No. 5, +Recognition and Measurement in Financial Statements of Business Enterprises, Staff Accounting +Bulletin No. 104, Revenue Recognition. The Company’s clinics, called Medifast Weight Control +Centers (“MWCCs”), allow customers to pre-pay for weight loss programs that Medifast provides +over a period of time, depending on the amount of weight to be lost. Medifast prematurely +recognized the revenue associated with these weight loss programs at its MWCCs at the time its +clients paid the program fee, rather than over the period of time the revenue was earned by +Medifast, in contravention of GAAP. + +15. Taken together, Medifast’s accounting errors with regard to expense accrual and +revenue recognition caused Medifast’s 2008 and 2009 net income to be materially misstated. In +2009, Medifast improperly overstated its revenue by $169,000 and understated its expenses by + +5 Medifast Form 8-K, Item 4.01, filed with the Commission on April 16, 2010. + +6 The Company also took a $496,000 write-off in 2008 and 2009 related to an intangible asset for which it had no +supporting documentation. + +6 + +$539,000. These errors, in combination with other adjustments, resulted in an overstatement of the +Company’s net income by $606,000, or 5.1%. In 2008, the Company improperly overstated its +revenue by $143,000 and understated its expenses by $588,000. These errors, in combination with +other adjustments, resulted in an overstatement of the Company’s restated net income by $523,000, +or 10.8%. + +16. Medifast filed its Form 10-K for fiscal year 2010 in April 2011. The Form 10-K +included the Company’s 2011 Restatement as well as the report of Medifast’s audit firm on the +effectiveness of Medifast’s internal control over financial reporting as of December 31, 2010. In +its report, the audit firm identified material weaknesses in that Medifast did not maintain sufficient +in-house accounting personnel with the technical accounting knowledge, training, and expertise in +the selection, application and implementation of GAAP in the areas of revenue recognition and +expense accrual, among other things, and that the Company had continued ineffectiveness in its +internal controls over its accounting for income taxes. + +17. Medifast acknowledged in its 2011 Restatement that, among other things: i) it +failed to do a detailed review of ending liability balances for the costs and expenses affected by the +2011 Restatement, which resulted in certain expenses being recorded when they were paid rather +than incurred; and ii) it had been improperly recording program fees for its MWCCs on a cash +basis for customers who paid up-front. + +18. Medifast also acknowledged in its 2011 Restatement that it had a material +weakness in its internal control over financial reporting that resulted in incorrect accounting +policies with regard to its revenue recognition and expense accrual. In addition, Medifast stated +that a material weakness still existed in the preparation and review process for the calculation of its +tax provision, due to the lack of internal tax expertise at the Company and the fact that the controls +designed to remediate the weakness had not been in place for a sufficient period of time. + +Violations + + 19. 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. + + 20. Section 13(a) of the Exchange Act requires issuers that have securities registered +pursuant to Section 12 of the Exchange Act to file such periodic and other reports as the +Commission may prescribe and in conformity with such rules as the Commission may promulgate. +Exchange Act Rule 13a-1 requires issuers to file annual reports with the Commission. In addition +to the information expressly required to be included in such reports, Rule 12b-20 under the +Exchange Act requires issuers to add such further material information, if any, as may be necessary +to make the required statements, in light of the circumstances under which they are made, not +misleading. “The reporting provisions of the Exchange Act are clear and unequivocal, and they are +satisfied only by the filing of complete, accurate, and timely reports.” SEC v. Savoy Industries, + +7 + +587 F. 2d 1149, 1165 (D.C. Cir. 1978). A violation of the reporting provisions is established if a +report is shown to contain materially false or misleading information. SEC v. Kalvex, Inc., 425 F. +Supp. 310, 316 (S.D.N.Y. 1975). + +21. Section 13(b)(2)(A) of the Exchange Act requires public companies “to make and +keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(B) requires public +companies “to devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that, among other things, transactions are recorded to permit the preparation +of financial statements in conformity with generally accepted accounting principles. + +22. By engaging in the conduct above, Medifast violated Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. + +23. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Medifast, including its enhancement of internal controls and retention of additional +accounting personnel. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Medifast’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 of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) +of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. + +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $200,000 to 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; +(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: + + + +8 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Medifast, 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 Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3488.txt b/raw/aaer/2013/AAER-3488.txt new file mode 100644 index 0000000000000000000000000000000000000000..c0a5643879658daa100cad0d895f735226438881 --- /dev/null +++ b/raw/aaer/2013/AAER-3488.txt @@ -0,0 +1,360 @@ + +UNITED STATES OF AMERICA +BEFORE THE +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70449 / September 18, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3488 / September 18, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15503 + +________________________________ + : ORDER INSTITUTING PUBLIC + : ADMINISTRATIVE PROCEEDINGS +In the Matter of : PURSUANT TO SECTION 4C OF THE + : SECURITIES EXCHANGE ACT OF + Marc G. Nochimson, CPA : 1934 AND RULE 102(e) OF THE + : COMMISSION’S RULES OF +Respondent. : 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 Marc +G.Nochimson (“Respondent” or “Nochimson”) pursuant to Section 4C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.1 + + +1 Section 4C provides 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 have engaged in . . . improper +professional conduct. . . . + +Rule 102(e)(1)(ii) provides that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in . . . improper professional conduct. . . . + + + + 2 +II. +In anticipation of the institution of these proceedings, Respondent has submitted +an Offer of Settlement (the “Offer”), which the Commission has determined to accept. +Solely for the purpose of these proceedings and any other proceedings brought by or on +behalf of the Commission, or to which the Commission is a party, and without admitting +or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the +entry of this Order Instituting Public Administrative Proceedings Pursuant to Section 4C +of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of +Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth +below. + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds2 that: +A. SUMMARY + +1. This matter concerns Respondent Marc Nochimson’s improper +professional conduct in connection with annual audits of the financial statements of +Medifast, Inc. (“Medifast” or “the Company”) from 2006 to 2008. As engagement +partner with a now-defunct accounting firm, Nochimson supervised Medifast’s audits and +the firm issued unqualified opinions on the Company’s December 31, 2006, December +31, 2007, and December 31, 2008 financial statements. Each of these audit reports stated +that the underlying audit was conducted in accordance with the standards of the Public +Company Accounting Oversight Board (“PCAOB Standards”),3 and that the Company’s +financial statements were presented fairly in conformity with U.S. generally accepted +accounting principles (“GAAP”). In reality, Medifast’s financial statements were not +presented fairly in conformity with GAAP due to material errors resulting from +Medifast’s failure to properly account for its income tax provision and resulting income +tax expense during the affected years, and Nochimson did not conduct Medifast’s audits +in accordance with PCAOB Standards. + + 2. As the auditor with final responsibility for the Medifast audits, Nochimson +did not comply with PCAOB Standards when, in connection with deferred taxes and the +income tax provision, he failed to exercise due professional care and professional + +2 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other person or +entity in this or any other proceeding. + +3 References to the PCAOB Standards are cited as “AU [section]” and refer to the specific sections of the +codification of the American Institute of Certified Public Accountants (“AICPA”) professio nal standards, +known as the Statements on Auditing Standards, as issued by the Auditing Standards Board of the AICPA. +These standards were adopted by the PCAOB following passage of the Sarbanes -Oxley Act of 2002 (the +“SOX Act”) and include generally accepted auditing standards (“GAAS”) in place at the time of the SOX +Act’s passage. References in this order are to standards in effect at the time of the relevant conduct. + + + + 3 +skepticism, failed to obtain the necessary training and proficiency in the area of income +taxes, failed to adequately plan and supervise the audits, failed to obtain sufficient +competent evidential matter, and failed to prepare and retain adequate work paper +documentation. Nochimson thereby engaged in improper professional conduct in +connection with the audits of Medifast’s financial statements from 2006 through 2008 +within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +B. RESPONDENT +3. Nochimson, 55, resides in Marlton, New Jersey. Until late 2009, +Nochimson was an audit partner at a now-defunct accounting firm. Nochimson served as +the engagement partner for the audits of Medifast’s financial statements from fiscal years +2006 to 2009. He was the concurring partner on the 2005 Medifast audit and served as +audit manager on the 2003 and 2004 Medifast audits. In 2010, Nochimson became a +partner at another accounting firm. Nochimson is a certified public accountant licensed +to practice in the states of New Jersey, New York, Delaware, and Maryland. +C. RELEVANT ENTITY +4. Medifast is a Delaware corporation headquartered in Owings Mills, +Maryland. Medifast manufactures, distributes, and sells weight management and other +health and diet products. The Company’s common stock is registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 and trades +on the New York Stock Exchange. + +D. FACTS + + Medifast Improperly Accounted for its Income Tax Provision + +5. On March 31, 2010, Medifast filed its 10-K for the year ended December +31, 2009 and restated its financial statements for the years ended December 31, 2006, +2007, and 2008 (“2010 Restatement”). This restatement was required to correct +material errors in the Company’s reported income tax expense that were caused by the +Company’s failure to account for its income tax provision in conformity with FASB +Statement 109, Accounting for Income Taxes (“FAS 109”).4 Medifast’s income tax +accounting for the years 2006 through 2008 did not comply with FAS 109 because, + +4 FAS 109 establishes standards for companies to account for and report the effects of income taxes. Due to +differences between tax laws and accounting standards for financial statements, some events are recognized +for financial reporting purposes and for tax purposes in different years. This can give rise to temporary +differences between the tax bases of assets or liabilities and their reported amounts in financial statements. +These temporary differences, or deferred taxes, are accounted for under FAS 109 using an asset and liability +approach. Under FAS 109, a company must recognize both a current tax liability or asset for the amount of +taxes payable or refundable for the current year, and a deferred tax liability or asset for the estimated future +tax effects attributable to temporary differences. The current and deferred portions are then combined to +calculate the company’s total income tax provision (also referred to as its income tax expense) for the +reporting period. Upon the codification of GAAP, which became effective for periods ending after +September 15, 2009, FAS 109 is now part of Accounting Standards Codification (ASC) 740. + + + 4 +among other things, the Company did not calculate a deferred tax liability to account for +certain fixed assets that were being depreciated faster for tax purposes than for financial +statement purposes. This failure caused Medifast’s net income after tax to be materially +overstated over the three affected years by an average of 12.4% per year. + +6. Moreover, Medifast’s reported income tax provisions in its Form 10-Ks +were not properly supported by Medifast’s internal income tax provision worksheets, +nor by the audit work papers. The Company’s worksheets were used to calculate its +current and deferred taxes at year-end for financial statement purposes. In 2008, for +example, the “current income tax provision” on Medifast’s internal worksheet was +calculated as $2,578,107 and a “total deferred tax asset” was calculated as $1,321,072. +But Medifast reported in its Form 10-K a current income tax provision of $1,711,000 +and a deferred tax expense of $704,000. In 2007, Medifast’s “current income tax +provision” was calculated on its internal worksheet as $1,805,708 and a “total deferred +tax asset” was calculated as $1,079,321. But in its Form 10-K for 2007, Medifast +reported a current income tax provision of $1,233,000 and a deferred tax expense of +$473,000. + +7. In its 2010 Restatement, Medifast acknowledged that it had a material +weakness in its internal control over financial reporting because the preparation and +review process for the calculation of Medifast’s tax provision was inadequate, which +led to errors in the computation of deferred tax assets, deferred tax liabilities, and the +income tax provision. + +Nochimson Engaged in Improper Professional Conduct + +8. Nochimson was the engagement partner responsible for planning and +conducting the audits of Medifast’s financial statements for the years ended 2006 +through 2008. Medifast’s financial statements for th ose years, as filed with the +Commission, contained audit reports with unqualified opinions. Those audit reports +represented that Medifast’s audits had been conducted in accordance with the standards +of the PCAOB, and that Medifast’s financial statements were presented fairly in +conformity with GAAP. In fact, Nochimson did not conduct the audits of Medifast’s +financial statements in accordanc e with the Auditing Standards and Medifast’s financial +statements were not presented fairly in conformity with GAAP. + +9. Nochimson engaged in improper professional conduct pursuant to Rule +102(e)(1) by failing, in several instances, to comply with the PCAOB Standards in +conducting Medifast’s 2006, 2007 and 2008 financial statement audits , as discussed +below. + +Nochimson Failed to Exercise Due Professional Care and Skepticism +10. The PCAOB Standards require that "[d]ue professional care is to +be exercised in the planning and performance of the audit and the preparation of the +report." AU § 230.01. Among other things, due professional care requires that +“[a]uditors should be assigned to tasks and supervised commensurate with their level + + + 5 +of knowledge, skill and ability so that they can evaluate the audit evidence they are +examining. The auditor with final responsibility for the engagement should know, at a +minimum, the relevant professional accounting and auditing standards and should be +knowledgeable about the client. The auditor with final responsibility is responsible +for the assignment of tasks to, and supervision of, assistants.” AU § 230.06. In +addition, “[d]ue professional care requires the auditor to exercise professional +skepticism. Professional skepticism is an attitude that includes a questioning mind and a +critical assessment of audit evidence.” AU § 230.07. + +11. Nochimson had only a limited understanding of FAS 109, and did not +sufficiently understand Medifast’s tax provision. In addition, by the 2008 audit, +Nochimson knew that there was a problem with Medifast’s tax provision because he +could not reconcile the Company’s internal calculations with the tax provision +disclosures that the Company included in its Form 10-K for that year. Despite this +awareness, Nochimson did not reconcile the differences. Instead, he dismissed the +discrepancies as immaterial without conducting a proper materiality analysis. His firm +then issued an unqualified opinion on Medifast’s 2008 audited financial statements. +Based on the foregoing, Nochimson therefore failed to exercise the due care and +professional skepticism required of him under the PCAOB Standards. +Lack of Training and Proficiency +12. The PCAOB Standards require that the audit be performed by "a person +or persons having adequate technical training and proficiency as an auditor." AU +§ 210.01. Nochimson lacked the necessary training and proficiency as an auditor to +properly interpret the professional guidance under GAAP in FAS 109 related to deferred +taxes. In addition, the staff auditor responsible for performing the audit steps related to +Medifast’s 2007 income tax provision told Nochimson on several occasions that tax +accounting was his weakest area, and that he did not feel entirely comfortable auditing +the Company’s deferred taxes. Nevertheless, Nochimson allowed the staff auditor to +remain on the engagement. Instead of continuing with the audit of Medifast’s financial +statements, Nochimson had a professional obligation to acquire the necessary knowledge +and skills in this area, suggest someone else qualified to perform the work, or decline the +engagement. + + Nochimson Failed to Adequately Plan and Supervise the Audits +13. As the engagement partner, Nochimson was responsible for Medifast’s +audit planning and supervision. Proper audit planning and supervision under the PCAOB +Standards requires that “the work is to be adequately planned and assistants, if any, are to +be properly supervised.” AU § 311.01. The PCAOB Standards further state that “[t]he +extent of supervision appropriate in a given instance depends on many factors, including the +complexity of the subject matter and the qualifications of persons performing the work.” AU +§ 311.11. + +14. Nochimson’s supervision of Medifast’s audits did not comply with these + + + 6 +PCAOB Standards. For example, the staff auditor responsible for performing the audit +steps for Medifast related to its 2007 income tax provision told Nochimson that he did +not feel entirely comfortable auditing the Company’s deferred taxes. Instead of replacing +the staff auditor with another professional who understood FAS 109, Nochimson +proceeded with the audit and did not adjust his supervision of the audit accordingly. + +Nochimson Did Not Maintain Adequate Work Paper Documentation and Did Not +Obtain Sufficient Evidential Matter + +15. The PCAOB Standards establish general requirements for documentation +that an auditor should prepare and retain in connection with audits of financial +statements. PCAOB Auditing Standard No. 3.1. Because it is the written record +supporting the auditor’s representations, audit documentation should, among other +things, “[s]upport the basis for the auditor’s conclusions concerning every relevant +financial statement assertion, and … [d]emonstrate that the underlying accounting +records agreed or reconciled with the financial statements.” PCAOB Auditing Standard +No. 3.5. The PCAOB Standards also require an auditor to obtain sufficient competent +evidential matter concerning the assertions in an issuer’s financial statements, and state +that an auditor’s substantive procedures “must include reconciling the financial +statements to the [underlying] accounting records.” AU § 326.19. + +16. Nochimson did not maintain adequate documentation in connection with +the audits of Medifast’s income tax provision, and did not obtain sufficient evidential +matter concerning the assertions in Medifast’s financial statements with regard to its +income tax provision, in violation of the PCAOB Standards. For example, there was +inadequate documentation in the audit work papers to support Medifast’s deferred tax +expense amount, deferred tax asset amount, or tax basis depreciation for the years 2006 +through 2008. Nochimson also did not properly reconcile the tax provision work papers +with the amounts contained in the Company’s Form 10-K for the years 2007 and 2008, +and the tax provision amounts in Medifast’s work papers were materially different from +the tax provision amounts that were ultimately reported in Medifast’s Form 10-Ks. +E. VIOLATIONS + +17. Rule 102(e)(1)(ii) provides that the Commission may temporarily or +permanently deny an accountant the privilege of appearing or practicing before it if it +finds, after notice and opportunity for hearing, that the accountant engaged in “improper +professional conduct.” Such improper professional conduct includes, as applicable here, +“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). + + 18. As a result of his actions detailed above, Nochimson engaged in improper +professional conduct with respect to the audits of Medifast’s 2006, 2007 and 2008 +financial statements. + + + + 7 +F. FINDINGS + + 19. Based on the foregoing, the Commission finds that Respondent engaged in +improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent's Offer. + +Accordingly, it is hereby ORDERED that, effective immediately: + + A. Respondent Nochimson is denied the privilege of appearing or practicing +before the Commission as an accountant. + + B. After one year from the date of this order, Respondent may request that +the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + + 1. a preparer or reviewer, or a person responsible for the +preparation or review, of any public company’s financial statements that are filed with +the Commission. Such an application must satisfy the Commission that Respondent’s +work in his practice before the Commission will be reviewed either by the independent +audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this capacity; +and/or + + 2. an independent accountant. Such an application must satisfy +the Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) +in accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Respondent, or the registered public accounting firm with +which he is associated, has been inspected by the Board and that inspection did not +identify any criticisms of or potential defects in the Respondent’s or the firm’s quality +control system that would indicate that the Respondent will not receive appropriate +supervision; + (c) Respondent has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of any sanctions imposed by the +Board (other than reinstatement by the Commission); and + + + + 8 + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not +limited to, all requirements relating to registration, inspections, concurring partner +reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards +of accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. + +The Commission’s review may include consideration of, in addition to the matters +referenced above, any other matters relating to Respondent’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission. + + + +By the Commission. + + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3489.txt b/raw/aaer/2013/AAER-3489.txt new file mode 100644 index 0000000000000000000000000000000000000000..aa37256cb3fa703f3a5bc5cbb8d76d0d548a8aec --- /dev/null +++ b/raw/aaer/2013/AAER-3489.txt @@ -0,0 +1,369 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70450 / September 18, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3489 / September 18, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15504 + + + +In the Matter of + +BRENDAN N. CONNORS, 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, A CEASE-AND- +DESIST ORDER, AND A CIVIL PENALTY + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Brendan N. +Connors, CPA (“Respondent” or “Connors”) pursuant to Sections 4C and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.1 + + +1Section 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 have willfully violated, or willfully aided and +abetted the violation of, any provision of the securities laws or the rules and regulations thereunder. + +Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it . . . to +any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + + 2 +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, 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, a Cease-and-Desist Order, and a Civil Penalty (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds2 that: + +Summary + + 1. This matter involves improper tax accounting practices and material weaknesses in +internal control over financial reporting at Medifast, Inc. (“Medifast” or “the Company”) from +2006 through 2008. During that time, Respondent Brendan Connors was Medifast’s Vice +President of Finance and head of Medifast’s accounting department. He was one of the officials +responsible for ensuring that the Company’s financial statements were presented fairly in +conformity with generally accepted accounting principles (“GAAP”), and for devising and +maintaining a system of internal accounting controls. + +2. Connors calculated Medifast’s income tax expense during the years 2006 through +2008 in a manner that did not comply with GAAP. Connors’ improper conduct resulted in +Medifast filing periodic reports with the Commission for the years 2006 through 2008 that +materially understated its tax expense and overstated its net income after tax. Medifast thus +violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and +13a-1 thereunder, and Connors willfully3 aided and abetted and was a cause of those violations. + + Respondent + +3. Brendan Connors, age 35, joined Medifast in 2005 as its Vice-President of +Finance. He was promoted to Chief Financial Officer in May 2010, and resigned from Medifast in + +2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 A willful violation of the securities laws means “‘that the person charged with the duty knows what he is doing.’” +Wonsover v. SEC, 205 F. 3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F. 2d 969, 977 (D.C. Cir. +1949)). There is no requirement that the actor “‘also be aware that he is violating one of the Rules or Acts.’” Id. +(quoting Gearheart & Otis, Inc. v. SEC, 348 F. 2d 798, 803 (D.C. Cir. 1965)). + 3 +November 2012. He is a certified public accountant currently licensed to practice in +Massachusetts. He resides in Baltimore County, Maryland. + + Other Relevant Entity + +4. Medifast, Inc. is a Delaware corporation headquartered in Owings Mills, +Maryland. Through its operating subsidiaries, Medifast manufactures, distributes, and sells weight +loss and other health and diet products and supplements. From 2005 to 2010, Medifast’s revenues +grew from $40.1 million to $257.5 million. Medifast’s common stock is registered with the +Commission pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange +Act”) and trades on the New York Stock Exchange. + + Facts + +5. On March 31, 2010, Medifast filed its Form 10-K for the year ended December +31, 2009 and restated its financial statements for the years ended December 31, 2006, 2007, and +2008 (the “2010 Restatement”). The 2010 Restatement was required to correct material errors in +the Company’s reported income tax expense that were the result of Connors’ failure to account for +Medifast’s income tax provision in conformity with Statement of Financial Accounting Standards +109, Accounting for Income Taxes (“FAS 109”). + + The Accounting Standard + +6. FAS 109 establishes standards for companies to account for and report the effects +of income taxes.4 Due to differences between tax laws and accounting standards for financial +statements, some events are recognized for financial reporting purposes and for tax purposes in +different years. This can give rise to temporary differences between the tax bases of assets or +liabilities and their reported amounts in financial statements. The differences are temporary +because the event will become taxable or deductible when the related asset is recovered or the +related liability is settled. These temporary differences, or deferred taxes, are accounted for under +FAS 109 using an asset and liability approach. A deferred tax asset exists when temporary +differences will result in deductible amounts in future years. A deferred tax liability exists when +temporary differences will result in taxable amounts in future years. Under FAS 109, a company +must recognize both a current tax liability or asset for the amount of taxes payable or refundable +for the current year, and a deferred tax liability or asset for the estimated future tax effects +attributable to temporary differences. + +Connors’ Improper Accounting and Failure to Maintain Effective Internal Control + +7. As head of Medifast’s accounting department, Connors was responsible for +selecting, applying, and implementing appropriate accounting policies to ensure that the +Company’s reported financial statements were prepared in accordance with GAAP. He was also + +4 Upon the codification of GAAP, which became effective for periods ending after September 15, 2009, FAS 109 +became part of Accounting Standards Codification (ASC) 740, Income Taxes. + + 4 +one of the officials responsible for preparing the Company’s financial statements and for devising +and maintaining a system of internal accounting controls. + +8. For the years 2006 through 2008, Connors calculated the Company’s year-end +income tax provision using a pre-existing spreadsheet that included entries for the calculation of +deferred taxes and current taxes (“Tax Spreadsheet”). He used the Tax Spreadsheet to obtain the +Company’s income tax provision for reporting in the Company’s financial statements. Connors, +however, lacked the appropriate accounting expertise and knowledge to calculate the Company’s +tax provision in accordance with GAAP. He failed to properly account for the Company’s +deferred taxes, including failing to correctly record the deferred tax liability resulting from the +depreciation of certain fixed assets for tax purposes faster than for financial statement purposes. +He also failed to ensure that the Company had adequate in-house accounting personnel with the +knowledge to prepare the Company’s income tax provision in accordance with GAAP. + + 9. In addition, Connors’ tax calculations as entered on the Tax Spreadsheets differed +materially from the current and deferred income tax provisions that were reported in Medifast’s +Form 10-K filings. On the Tax Spreadsheet for 2007, for example, Connors calculated the +Company’s current tax provision as $1,805,708 and a total deferred tax asset of $1,079,321. In +contrast to those numbers, however, Medifast’s Form 10-K for 2007 reported the current income +tax provision as $1,233,000 and a deferred tax expense of $473,000. On Medifast’s Tax +Spreadsheet for 2008, Connors calculated a current income tax provision of $2,578,107 and a total +deferred tax asset of $1,321,072, but Medifast’s Form 10-K for 2008 reported the current income +tax provision as $1,711,000 and a deferred tax expense of $704,000. + +10. In fact, both the reported figures for Medifast’s income tax provision in its 2007 +and 2008 Forms 10-K and the tax provision calculations prepared by Connors on the Company’s +Tax Spreadsheets for those years were wrong, and Medifast’s income tax expense increased +significantly as reported in its 2010 Restatement. Connors, who was responsible for preparing the +tax disclosure in the Company’s reported financial statements, included materially different +numbers for the Company’s tax provision in its 2007 and 2008 Form 10-Ks than the numbers he +had calculated on the Tax Spreadsheets for those years. Connors also failed to ensure that the +Company’s prior-year income tax returns reconciled with its reported income tax provisions. + + +The 2010 Restatement + +11. Because of Connors’ improper tax accounting and failure to maintain adequate +internal accounting controls, Medifast materially overstated its net income after tax for 2006, 2007, +and 2008 by an average of 12.4% per year: + + + + + + + 5 +Period Ending 12/31/2006 12/31/2007 12/31/2008 + +Net Income as +originally reported: +5,156,000 3,837,000 5,435,000 +Adjustment to Tax +Provision: +(583,000) (411,000) (601,000) +Net Income Restated: + +4,573,000 3,426,000 4,834,000 +Percentage Decrease +in Net Income due to +Restatement: + +12.7% + +12.0% + +12.4% + + +12. In its 2010 Restatement, Medifast acknowledged that it had a material weakness in +its internal controls over financial reporting because the preparation and review process for the +calculation of its tax provision was inadequate, which led to errors in the computation of its +deferred tax assets, deferred tax liabilities, and the income tax provision. Medifast’s audit firm +also expressed an adverse opinion in its report on the Company’s internal control over financial +reporting as of December 31, 2009, due to the material weakness in Medifast’s accounting for +income taxes. + +13. Subsequently, in connection with the audit of Medifast’s 2010 internal control +over financial reporting, the Company’s auditor found that Medifast had a material weakness in its +internal control over income tax accounting, including a failure to reconcile its prior-year tax +returns with its reported prior-year tax provisions. + +Violations + +14. Section 13(a) of the Exchange Act requires issuers that have securities registered +pursuant to Section 12 of the Exchange Act to file such periodic and other reports as the +Commission may prescribe and in conformity with such rules as the Commission may +promulgate. Exchange Act Rule 13a-1 requires issuers to file annual reports with the +Commission. In addition to the information expressly required to be included in such reports, +Rule 12b-20 under the Exchange Act requires issuers to add such further material information, if +any, as may be necessary to make the required statements, in light of the circumstances under +which they are made, not misleading. “The reporting provisions of the Exchange Act are clear +and unequivocal, and they are satisfied only by the filing of complete, accurate, and timely +reports.” SEC v. Savoy Industries, 587 F. 2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. +913 (1979). A violation of the reporting provisions is established if a report is shown to contain +materially false or misleading information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 +(S.D.N.Y. 1975). As described above, Connors was responsible for preparing Medifast’s +financial statements for the years 2006 through 2008 and caused Medifast to issue annual reports +on Form 10-K for those years which materially misrepresented the Company’s financial results. +Accordingly, Connors aided and abetted and was a cause of Medifast’s violations of Section +13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. + 6 + +15. Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 require issuers to make +and keep books, records, and accounts that accurately and fairly reflect the transactions and +dispositions of their assets, and prohibit any person from directly or indirectly causing to be +falsified any book, record, or account subject to Section 13(b)(2)(A). Scienter is not required to +establish a violation of Rule 13b2-1. See, e.g., SEC v. Das, et al., No. 12-2780, slip op. at 17 (8th +Cir. July 29, 2013); SEC v. Softpoint, 958 F. Supp. 846, 865-66 (S.D.N.Y. 1997), aff’d, 159 F. 3d +1348 (2d Cir.1998). Instead, violations of this rule may be established by showing negligent +conduct. As described above, Connors was responsible for the Company’s improper accounting +regarding its tax provision from 2006 through 2008 and caused Medifast’s improper recording of +its tax provision in its books and records. Accordingly, Connors violated Rule 13b2-1 and aided +and abetted and was a cause of Medifast’s violations of Section 13(b)(2)(A) of the Exchange Act. + +16. Section 13(b)(2)(B) requires issuers to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit the preparation of financial statements in accordance with GAAP. As +discussed above, Connors failed to devise and maintain adequate internal accounting controls with +regard to the Company’s income tax accounting. As a result, Connors aided and abetted and was a +cause of Medifast’s violations of Section 13(b)(2)(B) of the Exchange Act. + + Findings + + + 17. Based on the foregoing, the Commission finds that Connors violated Rule 13b2-1 +of the Exchange Act and willfully aided and abetted and was a cause of Medifast’s violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 +thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Connors’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Connors 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, and 13b2-1 thereunder. + + B. Connors is denied the privilege of appearing or practicing before the Commission +as an accountant. + + C. After one year from the date of this order, Connors may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 7 + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Connors’ work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Connors, 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) Connors, or the registered public accounting firm with which +he/she is associated, has been inspected by the PCAOB and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + (c) Connors 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) Connors 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 Connors 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 Connors’ character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +E. Connors shall, within 180 days of the entry of this Order, pay a civil money penalty +in the amount of $40,000 to 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; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + 8 + +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Brendan N. +Connors as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3490.txt b/raw/aaer/2013/AAER-3490.txt new file mode 100644 index 0000000000000000000000000000000000000000..0debcafbc5617b4e41f7e0600fdc62d79933c2cb --- /dev/null +++ b/raw/aaer/2013/AAER-3490.txt @@ -0,0 +1,1455 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70458 / September 19, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3490 / September 19, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15507 + +In the Matter of +JPMorgan Chase & Co., +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against JPMorgan Chase & Co. +(“JPMorgan”). +II. +In anticipation of the institution of these proceedings, JPMorgan has submitted an +Offer of Settlement (“Offer”) that the Commission has determined to accept. JPMorgan admits +the facts contained in Annex A attached hereto, 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, the Offer, and the facts contained in Annex A attached hereto, +the Commission finds1 that: +1. Public companies are responsible for devising and maintaining a system of +internal accounting controls sufficient to, among other things, provide reasonable assurances that +transactions are recorded as necessary to permit preparation of reliable financial statements. In +addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established important +requirements for public companies and their management with respect to corporate governance +and disclosure. For example, public companies are obligated to maintain disclosure controls and +procedures that are designed to ensure that important information flows to the appropriate +persons so that timely decisions can be made regarding disclosure in public filings. Commission +regulations implementing Sarbanes-Oxley therefore require management to evaluate on a +quarterly basis the effectiveness of the company’s disclosure controls and procedures and the +company to disclose management’s conclusion regarding their effectiveness in its quarterly +filings. +2. On an investor call conducted in connection with the filing of its quarterly report +on May 10, 2012, JPMorgan publicly disclosed a trading loss of approximately $2 billion since +the start of the second quarter in a large portfolio of credit derivatives known as the Synthetic +Credit Portfolio (“SCP”) held by the firm’s Chief Investment Office (“CIO”). In the quarterly +report, JPMorgan stated that, based upon management’s evaluation at the time, its disclosure +controls and procedures were effective as of the end of the quarter. +3. Over the next few months, as JPMorgan sought to bring down risk in the SCP, the +losses in the SCP grew to nearly $6 billion. Nevertheless, the full extent of the trading losses +that had occurred during the first quarter was not detected and reported, in part, because of the +ineffectiveness of an internal control function within CIO, known as the Valuation Control +Group (“CIO-VCG”). Within JPMorgan and other financial institutions and investment firms, +valuation control units frequently serve as an essential internal control by helping to ensure that +traders and other market professionals record accurate valuations for trading positions. +Valuation control units must be sufficiently independent from the trading desks, and clear and +effective written policies are necessary in order to guard against the risk that a company’s +investment assets will be improperly valued—and its public filings misstated. +4. In the case of CIO, its VCG unit was unequipped to cope with the increase in the +size and complexity of the SCP in early 2012, and did not function as an effective internal +control in the first quarter of the year. The unit was understaffed, insufficiently supervised, and +did not adequately document its actual price-testing policies. Moreover, the actual price-testing +methodology employed by CIO-VCG in the first quarter of 2012 was subjective and +insufficiently independent from the SCP traders, which enabled the traders to improperly + +1 The findings herein are made pursuant to JPMorgan’s Offer and are not binding on any other +person or entity in this or any other proceeding. + +3 +influence the VCG process. In addition, during the first quarter of 2012, CIO-VCG failed to +escalate to CIO and JPMorgan management significant information that management required in +order to make informed decisions about disclosure of the firm’s financial results for the first +quarter of 2012. As a result, JPMorgan did not timely detect or effectively challenge +questionable valuations by the SCP traders as the portfolio’s losses accumulated in the first +quarter of 2012 and publicly misstated its financial results for that period. +5. JPMorgan’s response to the CIO trading losses also was affected by inadequate +communication between JPMorgan’s Senior Management and the Audit Committee of +JPMorgan’s Board of Directors (the “Audit Committee”). In April 2012, after learning of large +counterparty valuation disputes relating to SCP positions, JPMorgan Senior Management +initiated several reviews of the SCP marks and of CIO-VCG. By early May 2012, the various +reviews had alerted JPMorgan Senior Management to serious issues about CIO-VCG’s +effectiveness in price-testing the values SCP traders had assigned to positions in the SCP during +the first quarter of 2012. These issues, among others, prompted JPMorgan Senior Management +to take several actions, including recommending delaying the filing of the firm’s quarterly report +with the Commission, and substantially revising CIO-VCG policies in early May 2012 to +eliminate what Senior Management believed was an undue amount of subjectivity in a control +function. +6. Consistent with Sarbanes-Oxley’s emphasis on the role that the audit committee +of a public company’s board of directors should play in corporate governance, JPMorgan’s +internal controls include a requirement that its management keep the Audit Committee informed +of, among other things, the identification of any significant deficiencies or material weaknesses +in the firm’s internal control over financial reporting. Such updates are necessary for the Audit +Committee to fulfill its oversight role and help to assure the integrity and accuracy of +information JPMorgan discloses in its public filings. +7. Before JPMorgan filed its quarterly report on May 10, 2012, however, JPMorgan +Senior Management did not adequately update the Audit Committee concerning the facts learned +during the reviews of CIO-VCG. Nor did it adequately update the Audit Committee on +important observations made by the management-commissioned reviews of control breakdowns +at CIO-VCG that amounted to, at a minimum, a significant deficiency. Three primary issues +relating to the sharing and synthesis of relevant information contributed to the inadequate +communications with the Audit Committee. First, several employees involved in conducting the +reviews of CIO-VCG failed to timely escalate important facts regarding control deficiencies at +CIO-VCG. Second, JPMorgan Senior Management was concerned about the market sensitivity +of the SCP positions and the confidential nature of the review, and required that the review teams +keep their work strictly confidential, which had the effect of impeding the exchange of +information among the review teams and their ability to analyze collectively the information +generated by these reviews. Third, despite learning of important information concerning control +deficiencies at CIO-VCG, JPMorgan Senior Management did not make a considered assessment +of the significance of that information to determine if it revealed a significant deficiency or +material weakness at CIO-VCG that had to be disclosed to the Audit Committee. +8. On July 13, 2012, JPMorgan announced that it would restate its results for the +first quarter of 2012 because it was no longer confident that the SCP marks used to prepare the + +4 +first quarter results, which CIO-VCG was responsible for price testing, “reflect good faith +estimates of fair value at quarter end.” Also on this date, JPMorgan disclosed to investors that a +material weakness in internal control over financial reporting had existed at CIO as of March 31, +2012 based on deficiencies in the CIO-VCG process. +9. On August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results +for the first quarter of 2012. The restatement had the effect of moving certain SCP losses from +the second quarter to the first quarter. These misstated first quarter results were disclosed not +only in the quarterly report filed on Form 10-Q on May 10, 2012, but also in JPMorgan’s +earnings release for the first quarter, which was filed on Form 8-K with the Commission on April +13, 2012. Also on August 9, 2012, JPMorgan disclosed that its disclosure controls and +procedures as of March 31, 2012 were not effective and that management’s prior conclusion in +the firm’s May 10, 2012 quarterly report that they were effective was incorrect. +10. As a result of its failure to maintain effective internal control over financial +reporting as of March 31, 2012, and disclosure controls and procedures, and as a result of its +filing of inaccurate reports with the Commission (specifically, the Form 8-K filed on April 13, +2012, and the Form 10-Q filed on May 10, 2012), JPMorgan violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 +thereunder. +11. In response to the Commission’s investigation, JPMorgan provided substantial +cooperation to Commission staff. JPMorgan has also voluntarily undertaken a comprehensive +program of remediation to address, among other things, the internal control deficiencies that are +the subject of this proceeding. Most notably, JPMorgan has substantially strengthened the +valuation control function within CIO to ensure that price verification procedures are conducted +with the appropriate degree of independence and supervision. +IV. +RELEVANT ENTITIES AND PERSONS +12. JPMorgan, a Delaware corporation headquartered in New York, New York, +is a global banking and financial services firm whose common stock is registered with the +Commission under Section 12(b) of the Exchange Act and traded on The New York Stock +Exchange under the symbol “JPM.” +13. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity +reporting segment. Among other things, CIO is responsible for investing excess deposits from +JPMorgan’s banking arm. CIO maintains offices in New York, New York and London, United +Kingdom. +14. JPMorgan “Senior Management,” as that term is used herein, refers to one or +more of the following individuals who held the listed positions as of May 10, 2012: the +JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief +Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. + +5 +THE MISMARKING OF JPMORGAN’S +SYNTHETIC CREDIT PORTFOLIO +JPMorgan, CIO, and the Synthetic Credit Portfolio +15. In 2007, CIO created an investment portfolio, the SCP, which was designed to +provide a hedge against adverse credit events. It invested in derivatives that could be expected to +generate profit during adverse credit events, such as widespread corporate defaults. The +positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those +indices, both of which were constructed to track a collection of credit default swaps (“CDS”) +referencing the debt of corporate issuers. +16. The SCP was invested in two primary index groups: CDX, a group of North +American and Emerging Markets indices, and iTraxx, a group of European and Asian indices. +Some indices referenced companies considered to be investment grade and others referenced +companies considered to be high-yield (which generally means that their credit risk is viewed as +higher). Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is +equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a +buyer of CDS protection. +17. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a +net short risk position in high-yield indices and tranches, which meant that the SCP was +positioned to realize gains if high-yield companies were to default on their corporate debt. The +composition of the book changed from time to time in response to CIO’s assessment of market +conditions. +18. In December 2011, in preparation for complying with the capital adequacy +standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of +regulatory capital. To achieve this—and, in light of improving economic conditions, to reduce +the SCP’s credit protection profile—CIO management and the traders in charge of the SCP +considered reducing the size of the SCP’s short risk position in high-yield investments. There +were substantial costs associated with this strategy. To avoid these costs, CIO management and +traders therefore decided to add investments to the SCP’s existing long risk investment-grade +positions to offset the short risk high-yield position. However, as CIO built its long risk +investment-grade positions, which included a large investment in an index known as the CDX +North American Investment Grade Index Series 9 10-year, it also added substantially to its +existing high-yield short position. JPMorgan did not have risk limits restricting the notional size +of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP. +During the first quarter of 2012, CIO tripled the net notional amount of the SCP. As of March +31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately +$157 billion. +Traders Mismark the SCP as Losses Mount +19. Like many other public companies, JPMorgan reported its results, which +incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in +accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Under JPMorgan + +6 +policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the +SCP at fair value. Both GAAP and JPMorgan’s accounting policy required that the SCP traders +do so by making a good-faith estimate of the fair value of each SCP position based on +information available in the marketplace. Under GAAP, the positions in the SCP had to be +marked “within the bid-ask spread” at the point that is “most representative of fair value in the +circumstances,” with a particular emphasis on the price where the traders could reasonably +expect to transact. GAAP also allows for the use of mid-market pricing “as a practical expedient +for fair value measurements within a bid-ask spread.” +20. At the end of each business day, the SCP traders had to mark the positions in the +SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and +losses for the day. Additionally, the traders had to provide their valuations for the SCP to the +middle office at CIO so that the information could be incorporated into the books and records of +JPMorgan. +21. The SCP generated sizeable profits for JPMorgan over the period from 2007 to +2011. In the first quarter of 2012, however, it began experiencing substantial mark-to-market +losses. By early March 2012, the most senior SCP trader, who was a managing director within +CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there +was a market-moving event that could easily explain the losses. In response, a junior SCP trader +changed his daily marking methodology for the SCP. Previously, he had derived for each SCP +position a bid-offer spread from dealer quotes he had received and then assigned a mark that was +generally equivalent to the mid-point in that spread. In response to the most senior trader’s +instruction, the junior trader began to assign marks that often were at the most aggressive point +in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the +SCP positions). For some SCP positions, the junior trader assigned marks in March that were +altogether outside every dealer’s bid and offer received that day. As a result of these marking +practices, the SCP traders intentionally understated mark-to-market losses in the SCP. +22. In March 2012, the junior trader began to maintain a spreadsheet which showed +that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and +the average mid-market point between the best bids and offers he had received from dealers had +grown to $292 million. Within a few days, the difference had grown further to $432 million. +The traders, however, revealed significantly smaller losses in daily reports to CIO management +about the portfolio’s performance than were indicated by mid-market pricing. +23. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP +traders informed the most senior trader in the morning that losses for that day alone could reach +$250 million. In response, the most senior trader directed the junior trader not to mark the SCP +at the close of business in London, as JPMorgan policy required, but instead to wait for the +markets in New York to close because trading information from New York might support higher +valuations for the SCP positions. +24. The most senior trader also instructed the junior trader to use the “best” prices +(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP. On March +30, the junior trader marked the SCP positions in accordance with these instructions, and +reported to CIO management an estimated loss of $138 million. Over the next several weeks, the + +7 +traders continued to understate mark-to-market losses in the SCP until their authority over the +portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior +Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take +responsibility for the portfolio. +JPMorgan Issues Its First Quarter +Results and Subsequently Issues a Restatement +25. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending +March 31, 2012, which was filed on Form 8-K with the Commission. Also on April 13, +JPMorgan Senior Management conducted an earnings call with analysts and investors. The +earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax +expense was $7.641 billion. These results included the understated losses for the SCP, which +was based on the SCP traders’ marks as of March 30, 2012. +26. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for +the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced +significant mark-to-market losses in the SCP during the second quarter to date. Also on May 10, +2012, JPMorgan Senior Management conducted a call with analysts, during which the firm +disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to +date and that there could be additional losses, that the trading strategy that resulted in the losses +was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve +had teams from audit, legal, risk, and various control functions . . . involved in extensive review +of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there +are many errors, sloppiness, and bad judgment.” The $2 billion calculation was based on marks +for positions in the SCP that were derived from independent pricing sources and not from the +SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent +conclusions concerning the integrity of the SCP traders’ marks. +27. Two months later, on July 13, 2012, JPMorgan announced that it would restate its +results for the first quarter of 2012 because it had discovered “information that raises questions +about the integrity of the [SCP] marks” and was no longer confident that the marks used to +prepare the first quarter results “reflect good faith estimates of fair value at quarter end.” On +August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter. +The restatement had the effect of moving certain SCP losses from the second quarter to the first +quarter. Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private +Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 +billion, and the firm’s consolidated quarterly income before income tax expense from the +previously-reported $7.641 billion to $6.981 billion. +JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS +AND DISCLOSURE CONTROLS AND PROCEDURES +28. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial +statements for the first quarter of the year, management’s discussion of the firm’s various +businesses, and other information. In addition, the report stated that JPMorgan’s management + +8 +evaluated the effectiveness of its disclosure controls and procedures and concluded that they +were effective. +29. As discussed below, between late April and May 10, 2012, JPMorgan engaged in +an extensive process involving work performed by the Controller’s office, the Internal Audit +department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), +and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to +understand the CIO valuation control process and the differences between that process and the +valuation control process of the IB. As a result, by May 10, various executives and employees of +the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls. Due to +failures to timely escalate information and instructions that had the effect of hindering the +sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior +Management prior to May 10, 2012. And, as to the information that was escalated, JPMorgan +Senior Management did not make a considered assessment as to whether critical facts existed— +including any significant deficiency or material weakness in internal controls—that had to be +disclosed to the Audit Committee. Consequently, JPMorgan Senior Management did not +disclose the existence of any significant deficiencies or material weaknesses to the Audit +Committee before JPMorgan filed its quarterly report on May 10, 2012. +30. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would +restate its results for the first quarter of 2012, the firm announced that a material weakness in +internal control over financial reporting had existed at CIO as of March 31, 2012. As a result of +the material weakness, JPMorgan also announced that its management had concluded that +JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. +CIO Internal Controls in the First Quarter of 2012 +31. As part of fulfilling the requirements to devise and maintain systems of internal +accounting controls, financial institutions such as JPMorgan need to have internal controls that +adequately monitor and test the accuracy and integrity of, among other things, the valuations of +the firm’s trading portfolios such as the SCP. CIO-VCG served as a significant control for +ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were +measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the +quarterly and annual reports the firm filed with the Commission. +32. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks +that the SCP traders assigned to the portfolio’s positions on the last business day of every month. +Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price- +testing function by undertaking the following steps: +a. First, CIO-VCG had to calculate, as a benchmark, an independent price for +each of the SCP positions. A CIO-VCG policy and procedure document +indicates that, for index positions, these independent prices were to be +obtained from Markit Limited Group (“Markit”), a service that provides +consensus-based prices for indices. For tranches, CIO-VCG obtained +independent prices from dealer quotes, which it checked against Totem, + +9 +another consensus pricing service offered by Markit, for any significant +discrepancies. +b. After calculating an independent price for each SCP position, CIO-VCG +had to establish and apply a threshold (or tolerance) around each price that +represented the average bid-offer spread for the security based on quotes +received from dealers. While it had authority to make an adjustment to +trader marks that fell within these thresholds, CIO-VCG considered such +marks to be presumptively marked at fair value and would not make any +adjustment to those marks. +c. If the SCP traders’ mark for a given position fell outside of the threshold, +CIO-VCG would record the excess as a loss (or profit) and make a +corresponding adjustment to the mark-to-market profit and loss for the +SCP. +d. Finally, if CIO-VCG determined that the market for a particular position +had become illiquid, CIO-VCG applied a pre-established formula to +calculate and record a liquidity reserve to account for the risk that certain +SCP positions could not be sold at fair value due to reduced liquidity in +the marketplace. +33. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at +the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office. +That person was also responsible for price testing all of CIO’s other London-based portfolios. +34. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for +the end of March 2012. It applied the relevant thresholds to adjust downward the fair value of +the SCP by approximately $17 million compared to the traders’ marks and maintained the +previous month’s liquidity reserve of approximately $31 million. +35. During its price-testing process for quarter-end marks, CIO-VCG observed that +most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread. CIO- +VCG questioned one of the SCP traders about this shift. The trader did not explain the shift but +merely stated, “Talk to management.” CIO-VCG did not disclose to anyone its observations +concerning the shift in the SCP traders’ marking methodology until questions were being raised +about a collateral dispute, which is summarized below, on April 20, 2012. CIO-VCG also did +not share the details of its exchange with the SCP trader. +36. CIO-VCG calculated a significant difference between its independent prices and +the SCP traders’ marks. During its price-testing process, it calculated that the mid-market value +of the SCP based on its independent prices was approximately $192 million less than the value +based on the SCP traders’ marks. It subsequently identified an error in its calculations, which +increased the difference from $192 million to approximately $275 million. A March 30, 2012 +Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should +disclose this discrepancy to CIO management. However, that action plan was not required to be +fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value + +10 +adjustment based on marks that fell outside of its thresholds. Consequently, CIO management +was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG +calculated mid-market valuations, which warranted further analysis. +37. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management +and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 +million, based on a determination that certain tranches in the SCP portfolio had become illiquid +as of March 30. The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the +financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in +the firm’s May 10, 2012 report for the first quarter of 2012. +Large Collateral Calls and Increasing Losses Prompt +Multiple Reviews of CIO-VCG and the Traders’ Marks +38. On April 20, 2012, JPMorgan Senior Management was informed that the firm had +received several collateral calls—requests from trading counterparties for payment or the posting +of collateral based on their differing views of the fair value—concerning positions in the SCP. +The total amount in dispute was approximately $520 million. +39. A collateral dispute with a CDS counterparty can sometimes be an indication that +a firm’s internal price for an instrument does not accurately reflect its fair value. Accordingly, in +April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior +Management about the pricing of the SCP positions. In an April 20, 2012 email, a member of +JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our +valuation process” in the SCP. +40. At the same time that the collateral disputes were being escalated to JPMorgan +Senior Management, the SCP was also sustaining large daily losses. This development was +inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April +13 earnings release, and JPMorgan Senior Management was concerned about the losses and the +traders’ explanations of what was happening to the SCP positions and their strategy for dealing +with the risks to the SCP. On or about April 27, JPMorgan Senior Management asked a senior +trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis. Shortly +afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in +the SCP, and the SCP traders were relieved of all trading and pricing responsibilities. +Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus +mid-market prices published by Markit. +41. In late April and early May, JPMorgan Senior Management mobilized resources +from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior +experience with CIO-VCG’s price-testing process, and the Controller’s office, which included +JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law +firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process. At the +time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 +in early May 2012. In part due to the questions being raised about the valuation of the SCP, +JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the +filing to May 10. JPMorgan Senior Management delayed the filing so that it had additional time + +11 +to assess whether CIO’s first quarter results, which had been publicly released on April 13, were +in fact compliant with GAAP and should be disclosed again in the quarterly report. +The Investment Bank’s Review +42. On April 25, 2012, a member of JPMorgan Senior Management asked the +Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for +March 30, 2012 as if the positions had been held by the IB. IB-VCG also reviewed the price- +testing work that had been done by CIO-VCG at the end of March 2012. The IB-VCG review +was conducted under the supervision of the IB’s Chief Financial Officer. +IB-VCG Valuation “In Line with the Counterparties” +43. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ +marks. On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG +that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market +differences you see on the collateral calls. . . . In terms of dollar value, the number seems pretty +much in line . . . with the counterparties.” In other words, IB-VCG’s preliminary valuation of +the SCP positions was in line with those of CIO’s trading counterparties, who had valued the +SCP at several hundreds of millions of dollars less than the SCP traders did. +44. During the conference call, CIO-VCG explained to IB-VCG staff that in setting +thresholds around independent prices during its month-end price-testing process, it often +consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they +have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et +cetera.” CIO-VCG also informed IB-VCG that, when completing its price-testing process, it +used dealer quotes selected by SCP traders. IB-VCG staff believed that this process of +consulting the traders had the potential to significantly impair the independence and +effectiveness of the CIO-VCG process. +45. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior +Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP +traders’ marks. He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to +date (“IB-VCG Spreadsheet”). At that meeting, at least one of the positions in the IB-VCG +Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in +each individual column. +46. As of this time, JPMorgan Senior Management and CIO management knew that +the SCP traders’ marks were $275 million greater than independent mid-market prices computed +by CIO-VCG based on a combination of broker quotes and data from consensus pricing services. +IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet +calculated that the SCP traders’ marks were approximately $767 million greater than the values +placed on the SCP positions by consensus mid-market prices published by Markit and Totem. +47. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, +based on market information from March 30, 2012, for six SCP positions, including several of +the largest positions and some with the greatest total dollar value differences between trader +marks and IB-VCG’s consensus pricing. The IB-VCG Spreadsheet contained data regarding 133 + +12 +positions and reflected, among other things, that for the six positions for which it calculated an +approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads +that IB-VCG had approximated. +48. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit- +and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather +than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell +at prices that are inferior to the consensus, mid-market Markit or Totem prices). This analysis +showed that adjusting marks to the conservative end of the bid-offer spread would have further +reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion +difference between the traders’ marks and a price-taker’s marks at the conservative end of the +bid-offer spread. JPMorgan Senior Management elected not to pursue this marking methodology +with respect to the March 2012 quarter-end marks because, among other reasons, it understood +that using mid-market prices was acceptable under GAAP. +Spreadsheet Errors +49. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ +quarter-end marks. During this review, IB-VCG learned that in March 2012 CIO-VCG used a +spreadsheet in its price-testing process into which data had been manually entered, and that this +spreadsheet contained certain errors and reflected differences from the IB-VCG methodology +that may have had the effect of understating the difference between the traders’ marks and the +independent mid-market prices derived by CIO-VCG. On May 8, 2012, IB-VCG forwarded an +email to one member of JPMorgan Senior Management explaining these issues. IB-VCG and +CIO-VCG were instructed to work together to address the errors and other issues. +50. The next day, IB-VCG corrected one such error, which involved the calculation of +the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s +independent prices. Before the correction, the difference was believed to be approximately $275 +million. After the correction, the difference increased to $512 million. IB-VCG informed +JPMorgan Senior Management of the correction and the quantitative impact it had. +51. Based on the price-testing work of IB-VCG and other information, the +management of the IB expressed concerns to JPMorgan Senior Management about the potential +for mismarking of the SCP and whether CIO VCG was an effective control over the SCP. On +May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior +Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., +could effectively be priced in the marketplace) and that he could not recall a variance between +trader marks and independent prices in the IB “greater than $50mm that remained at any month +end across the ENTIRE IB’s positions.” +52. In light of their concerns relating to CIO, two senior IB executives initially +expressed some reservations regarding the scope of their sub-certifications that JPMorgan +required officers in the various business lines to provide in connection with its quarterly and +annual filings. One of the executives apprised JPMorgan Senior Management that in light of the +CIO related information to which he was privy, he had a conversation with an outside lawyer +concerning the scope of his certification obligations. After relaying that conversation to the + +13 +other Investment Bank executive with certification obligations, both executives signed their sub- +certifications. +The Internal Audit Review +53. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior +Management instructed Internal Audit to review the CIO-VCG process, including whether it had +been applied consistently over past quarters. Also on May 2, at the end of a meeting of the Audit +Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed +of the losses recently suffered, separately requested that Internal Audit review CIO. +54. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG +had applied at March 30. As noted above, JPMorgan policy required that CIO-VCG set a +threshold around its independent price for each SCP position that was representative of the +average spread between the bids and the offers received from dealers for the position. Because +the threshold was applied on each side of the independent price, in order to reflect the bid-offer +spread the threshold on each side would be one-half of the entire spread. +55. By May 9, 2012, the Internal Audit team learned that in validating the SCP +traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid- +offer spread (rather than one half of the spread) on each side of its independent prices. The result +was a threshold that was twice the size of the bid-offer spread and beyond the range of +reasonable fair value estimates. The Internal Audit team calculated that, had CIO-VCG applied +the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by +$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made +at month end. +56. On May 10, the Internal Audit team collected its work in a draft memo (“Internal +Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the +application of [its] own thresholds.” +57. Although Internal Audit completed this work in the days prior to May 10, it did +not fully share this information with JPMorgan Senior Management and did not circulate the +Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. +The Controller’s Review +58. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to +assess whether the traders’ quarter-end marks complied with GAAP and to review the +effectiveness of CIO-VCG’s quarter-end internal control process. +59. The Controller’s staff made several significant observations. One was that, as +losses in the SCP increased in March 2012, the traders departed from their historical practice of +marking the positions close to the mid-point between the bids and offers received from dealers. +Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they +marked the positions in a manner that resulted in smaller mark-to-market losses. JPMorgan +Senior Management was informed of this fact in late April 2012. The traders justified their +marks to the Controller’s staff by explaining that the market had become volatile and dislocated. + +14 +This volatility, the SCP traders claimed, caused significant intraday price movements that may +help explain the difference between the SCP traders’ marks and consensus pricing services. To +test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and +determined that the difference between the SCP traders’ marks and the mid-market prices was +less than the average daily price movement. While accepting the SCP traders’ justification, +however, the Controller’s staff failed to adequately assess whether CIO could transact at the +price where the SCP was marked. +60. For two quarter end marks assigned by the SCP traders, the Controller’s staff also +detected significant differences from mid-market consensus pricing that were not supported by +pricing data received by the SCP traders on the date that the mark was assigned. When the +Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide +as compared to the mid-market price. This fact had not been adequately considered by CIO- +VCG during its actual price testing process in connection with the first quarter of 2012, nor was +this fact given appropriate scrutiny by the Controller’s staff. Consequently, the Controller’s staff +did not escalate this information to JPMorgan Senior Management. +The Special Review by Outside Counsel +61. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan +retained an outside law firm to provide advice regarding disclosure and to review, among other +things, whether the independence of the CIO-VCG process had been improperly compromised +by the involvement of the SCP traders. By May 10, 2012, when JPMorgan filed its first quarter +report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP +marks, the executive to whom he reported, and other members of CIO management. The law +firm also had collected and reviewed a limited number of the relevant emails and Bloomberg +chats from the first quarter of 2012. +The Process for Synthesizing and +Escalating Information from the Various Reviews +62. JPMorgan Senior Management led a process that involved daily—sometimes +twice daily—meetings and calls in which participants involved in the different reviews discussed +what they and their teams were doing and learning. Despite that process, a number of significant +facts learned in the course of the various reviews were not shared in these group meetings and +calls and were not otherwise escalated to JPMorgan Senior Management. This in turn led to +JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March +2012. +63. JPMorgan Senior Management’s emphasis on confidentiality and sharing +information on a need-to-know basis contributed to this incomplete understanding. JPMorgan +Senior Management was concerned about sensitive information relating to CIO’s positions being +widely distributed and imposed restrictions on the creation and sharing of work product relating +to those positions. These instructions affected the ability of those conducting the reviews to +share, learn from, and build upon each other’s work. + +15 +64. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] +with people outside the immediate group” and to exercise caution in committing its findings to +writing. +65. A member of JPMorgan Senior Management also instructed IB-VCG to “keep +[its] analysis in a relatively tight group.” On April 29, 2012, an IB executive confirmed to the +member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the +Controller’s staff, “without getting my express approval first.” +66. Finally, the Internal Audit team was instructed to maintain strict confidentiality in +connection with its review. +67. JPMorgan Senior Management did not receive all relevant information for another +reason: some employees conducting the reviews failed to appreciate the significance of certain of +the facts they had learned and their relevance to the quarterly report that was about to be filed. +For example, in looking back on his work after learning in late June that the integrity of the +traders’ marks was in question, a London-based employee primarily responsible for the +Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better +understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP +traders’ quarter-end marks and Markit and Totem consensus, mid-market prices. The employee +further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) +were determined” and “should have picked up that the tolerances determined by adding whole +bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012. +Although executives were in contact with those responsible for the various reviews, some of +those employees failed to timely analyze and escalate to JPMorgan Senior Management +important facts that they had discovered. +JPMorgan Senior Management’s +Response to the Information It Received +68. Despite the inadequate information sharing and escalation described above, +significant information learned in the management-commissioned reviews was escalated to +JPMorgan Senior Management. This information, which related to the adequacy of the CIO- +VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end +marks, included the following: +a. As losses began to mount, SCP traders began consistently marking at or +near the very edge of the advantageous side of the bid-offer spread. +b. There was a collateral dispute of over $500 million. +c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks +was “in line with . . . the counterparties.” Specifically, the value of the +SCP based on trader marks was approximately $767 million more than the +value based on mid-point consensus pricing. +69. Management also learned of the following facts that directly related to CIO-VCG +and the processes it was using in March 2012: + +16 +a. The CIO-VCG process relied on manual spreadsheets that contained +errors, one of which caused CIO-VCG to understate the disparity between +its independent prices and the traders’ marks by $237 million. +b. The SCP traders provided some of the quotes that were used in CIO- +VCG’s price-testing process and this process “need[ed] to be enhanced to +ensure independence.” +70. In response to what it was learning prior to May 10, JPMorgan Senior +Management decided to enhance CIO-VCG’s valuation policies. To assist with this task, the +persons conducting the reviews recommended certain changes, and a member of JPMorgan +Senior Management drafted revisions to CIO-VCG procedures, which were shared with +JPMorgan Senior Management and CIO management on May 5, 2012. On May 7, 2012, a senior +CIO executive circulated a “proposed operational approach to VCG price testing” that contained +additional policy revisions. Both sets of changes were implemented before May 10, 2012. +71. Collectively, the new policies were intended to remediate several of the issues +discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: +a. Disparity between CIO-VCG independent prices and traders’ marks. The +revised policies significantly curtailed the size of thresholds that CIO-VCG +could apply, directing that the difference between a trader’s mark and CIO- +VCG’s independent price could not exceed $500,000 for an index position +and $2,000,000 for a tranche position. +b. Trader involvement in the VCG process. The revised policies required CIO- +VCG to “source broker quotes independently from the market,” rather than +through the traders, thereby “eliminating any reliance on [the traders] for +sourcing of market data.” +c. Variance between Markit and CIO-VCG’s independent prices. The revised +policies stated that, for positions where CIO-VCG could rely on dealer +quotes in calculating independent prices, CIO-VCG must obtain at least two +quotes and, if two are not available, it must use Markit or Totem as an input. +The revised policies also provided that, even when dealer quotes are +obtained, “mid prices derived from selected dealer quotes should be +compared . . . to Markit/Totem sourced data and any material differences . . . +must be reported to the CFO of CIO and must be reconciled.” +d. Inadequate oversight over sole CIO-VCG price-tester. The revised policies +introduced a new protocol for escalating to management valuation disputes +between CIO-VCG and the traders, requiring the involvement of JPMorgan +risk personnel and the Chief Financial Officer of CIO. +72. In addition to these policy changes, in early May the staff of IB-VCG prepared a +remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing +process, and to ensure proper review of the spreadsheets. On May 8, 2012, after CIO finance + +17 +management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan +Senior Management. +The Reviews of CIO-VCG Are Not +Addressed with the Audit Committee +73. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s +stockholders—including oversight of management’s responsibilities for internal controls— +ultimately rests with JPMorgan’s Board of Directors. The Board, in turn, discharges its oversight +function through several Board committees. One of the principal committees is the Audit +Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective +internal controls, which are critical to the integrity of the firm’s financial reports and compliance +with applicable policies and laws. +74. To assist the Audit Committee in carrying out its responsibility, the Audit +Committee’s Charter requires JPMorgan management to provide updates to the Committee on all +“significant operating and control issues in internal audit reports,” the “initiation and status of +significant special investigations,” the “identification and resolution status of material +weaknesses” in controls, and any “reportable conditions in the internal control environment, +including any significant deficiencies.” These updates serve an important internal control +function, allowing the Audit Committee to fulfill its oversight role by, among other things, +keeping the Board up-to-date on significant matters, assessing whether to approve the filing of +quarterly and annual reports, and evaluating whether the Committee should conduct its own +independent investigation of any issues raised with it. +75. In late April and early May 2012, while JPMorgan’s Senior Management was +devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure +to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also +was in contact with members of the Audit Committee. +76. However, while JPMorgan Senior Management was informed of, and was +addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management +did not engage in a considered assessment, before the firm filed its first quarter report on May +10, 2012, to determine if these matters constituted a significant deficiency or material weakness +in the firm’s internal control over financial reporting and therefore had to be disclosed to the +firm’s Audit Committee. Nor, more broadly, did JPMorgan Senior Management disclose to the +Audit Committee its concerns regarding the operation of CIO-VCG. +77. On May 2, 2012, the Audit Committee met with some members of JPMorgan +Senior Management. The focus of the meeting was on the mounting losses in the SCP portfolio. +Despite the requirement to keep the Audit Committee apprised of the significant control issues +that were under review, there was no discussion of the IB-VCG or Controller reviews related to +CIO-VCG and the traders’ marks, although that work was underway. There was also no +discussion of the fact that an outside law firm had been retained to advise on disclosures to be +made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO- +VCG process, including whether the SCP traders exercised undue influence on the process. + +18 +78. During a full meeting of the Board of Directors hours before the filing of +JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that +reviews of what occurred in CIO were underway, including by Internal Audit, legal, the +Controller’s staff, and risk management. But, JPMorgan Senior Management did not discuss the +details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. +79. Because the Audit Committee was not apprised of the initiation of the reviews or +facts learned as a result of those reviews, it was unable to provide input on the issues before the +filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to +ensure that it was sufficient from the perspective of the Audit Committee. +80. As noted above, the Audit Committee was not made aware before JPMorgan filed +its first quarter report of the facts learned by various members of the review teams, including that +CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors, that SCP +traders may have exerted influence over that process, or that CIO-VCG applied valuation +thresholds that were in some instances twice the applicable spread. +81. Other information learned by various members of the review teams that further +called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with +the Audit Committee. At the end of the first quarter, CIO-VCG made a fair value adjustment of +$17 million to the traders’ marks. However, certain facts raised issues as to the adequacy of this +adjustment and the process through which it was made, including the $520 million in collateral +disputes over SCP positions, the $767 million disparity between the SCP traders’ marks and +consensus, mid-market prices, the fact that the traders marked some of the largest notional SCP +positions outside the bid-offer spread approximated by IB-VCG, and the fact that the traders +began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. +82. Finally, the Audit Committee was not apprised of, or included in, JPMorgan +Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation +policies to ensure proper oversight by CIO management. As a result, the Audit Committee did +not have any input into the proposed changes or an understanding of the reasons that motivated +them. +Subsequent Disclosures by JPMorgan +83. Based on the information available to it, the Audit Committee approved of the +content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012. On July +13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over +financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of +the synthetic credit portfolio.” In its amended Form 10-Q for the first quarter of 2012 filed on +August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues +in certain interrelated and interdependent control elements comprising that process, including +insufficient engagement of CIO senior finance management in the valuation control process in +light of the increased size and heightened risk profile of the synthetic credit portfolio during the +first quarter of 2012, and in the effectiveness of certain procedures employed during the first +quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” + +19 +84. JPMorgan also corrected prior statements concerning its disclosure controls and +procedures. In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by +this report, an evaluation was carried out under the supervision and with the participation of the +Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial +Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a- +15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and +Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls +and procedures were effective.” On August 9, 2012, when JPMorgan disclosed that it had +determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, +“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief +Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined +in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, +2012.” +V. +As a result of the conduct described above, JPMorgan violated Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-11, 13a-13, and 13a-15 +thereunder. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in JPMorgan’s Offer. +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: +A. JPMorgan 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-11, 13a-13, and 13a-15 thereunder. + +B. JPMorgan shall, within ten (10) business days of the entry of this Order, pay a +civil money penalty in the amount of $200,000,000 to the Securities and Exchange Commission. +If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: + +(1) JPMorgan may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/ +Fedwire instructions upon request; +(2) JPMorgan 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) JPMorgan may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities +and Exchange Commission and hand- delivered or mailed to: + + + +20 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +JPMorgan Chase & Co. 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 Andrew M. +Calamari, Regional Director – New York Regional Office, Division of Enforcement, Securities +and Exchange Commission, 3 World Financial Center, Suite 400, New York, NY 10281. +C. Such civil money penalty may be distributed pursuant to Section 308(a) of the +Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”). Regardless of whether any +Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to +this Order shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, JPMorgan 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 JPMorgan’s +payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related Investor +Action grants such a Penalty Offset, JPMorgan 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 United States Treasury or to a Fair Fund, as the +Commission directs. 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. JPMorgan shall pay all reasonable administrative costs and expenses of any +distribution, including the fees and expenses of a tax administrator, within thirty (30) days after +receipt of an invoice for such services. + +By the Commission. + + + + Elizabeth M. Murphy + Secretary + + +ANNEX A + + JPMorgan Chase & Co. (“JPMorgan”) admits to the facts set forth below and +acknowledges that its conduct violated the federal securities laws: + +RELEVANT ENTITIES AND PERSONS +1. JPMorgan, a Delaware corporation headquartered in New York, New York, +is a global banking and financial services firm whose common stock is registered with the +Commission under Section 12(b) of the Exchange Act and traded on The New York Stock +Exchange under the symbol “JPM.” +2. CIO is a unit of JPMorgan and part of the firm’s Corporate/Private Equity +reporting segment. Among other things, CIO is responsible for investing excess deposits from +JPMorgan’s banking arm. CIO maintains offices in New York, New York and London, United +Kingdom. +3. JPMorgan “Senior Management,” as that term is used herein, refers to one or +more of the following individuals who held the listed positions as of May 10, 2012: the +JPMorgan Chief Executive Officer, the JPMorgan Chief Financial Officer, the JPMorgan Chief +Risk Officer, the JPMorgan Controller, and the JPMorgan General Auditor. +THE MISMARKING OF JPMORGAN’S +SYNTHETIC CREDIT PORTFOLIO +JPMorgan, CIO, and the Synthetic Credit Portfolio +4. In 2007, CIO created an investment portfolio, the SCP, which was designed to +provide a hedge against adverse credit events. It invested in derivatives that could be expected to +generate profit during adverse credit events, such as widespread corporate defaults. The +positions in the SCP consisted of credit derivative indices and portions (or “tranches”) of those +indices, both of which were constructed to track a collection of credit default swaps (“CDS”) +referencing the debt of corporate issuers. +5. The SCP was invested in two primary index groups: CDX, a group of North +American and Emerging Markets indices, and iTraxx, a group of European and Asian indices. +Some indices referenced companies considered to be investment grade and others referenced +companies considered to be high-yield (which generally means that their credit risk is viewed as +higher). Investors in CDX and iTraxx indices, including CIO, can be “long” risk, which is +equivalent to being a seller of CDS protection, or “short” risk, which is equivalent to being a +buyer of CDS protection. +6. Beginning in 2008, the SCP’s investment strategy generally consisted of holding a +net short risk position in high-yield indices and tranches, which meant that the SCP was +positioned to realize gains if high-yield companies were to default on their corporate debt. The +composition of the book changed from time to time in response to CIO’s assessment of market +conditions. + +2 +7. In December 2011, in preparation for complying with the capital adequacy +standards of the Third Basel Accord, the SCP traders were instructed to reduce the SCP’s use of +regulatory capital. To achieve this—and, in light of improving economic conditions, to reduce +the SCP’s credit protection profile—CIO management and the traders in charge of the SCP +considered reducing the size of the SCP’s short risk position in high-yield investments. There +were substantial costs associated with this strategy. To avoid these costs, CIO management and +traders therefore decided to add investments to the SCP’s existing long risk investment-grade +positions to offset the short risk high-yield position. However, as CIO built its long risk +investment-grade positions, which included a large investment in an index known as the CDX +North American Investment Grade Index Series 9 10-year, it also added substantially to its +existing high-yield short position. JPMorgan did not have risk limits restricting the notional size +of the SCP, and CIO’s trading strategy led to a large increase in the notional size of the SCP. +During the first quarter of 2012, CIO tripled the net notional amount of the SCP. As of March +31, 2012, the SCP contained 132 trading positions with a net notional amount of approximately +$157 billion. +Traders Mismark the SCP as Losses Mount +8. Like many other public companies, JPMorgan reported its results, which +incorporated the mark-to-market profit and loss of the SCP, at the end of each quarter in +accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). Under JPMorgan +policy, the SCP traders were required to assign valuations (or “marks”) to the positions in the +SCP at fair value. Both GAAP and JPMorgan’s accounting policy required that the SCP traders +do so by making a good-faith estimate of the fair value of each SCP position based on +information available in the marketplace. Under GAAP, the positions in the SCP had to be +marked “within the bid-ask spread” at the point that is “most representative of fair value in the +circumstances,” with a particular emphasis on the price where the traders could reasonably +expect to transact. GAAP also allows for the use of mid-market pricing “as a practical expedient +for fair value measurements within a bid-ask spread.” +9. At the end of each business day, the SCP traders had to mark the positions in the +SCP and report to CIO management a summary of the portfolio’s mark-to-market profits and +losses for the day. Additionally, the traders had to provide their valuations for the SCP to the +middle office at CIO so that the information could be incorporated into the books and records of +JPMorgan. +10. The SCP generated sizeable profits for JPMorgan over the period from 2007 to +2011. In the first quarter of 2012, however, it began experiencing substantial mark-to-market +losses. By early March 2012, the most senior SCP trader, who was a managing director within +CIO, instructed the other SCP traders to stop reporting losses to CIO management unless there +was a market-moving event that could easily explain the losses. In response, a junior SCP trader +changed his daily marking methodology for the SCP. Previously, he had derived for each SCP +position a bid-offer spread from dealer quotes he had received and then assigned a mark that was +generally equivalent to the mid-point in that spread. In response to the most senior trader’s +instruction, the junior trader began to assign marks that often were at the most aggressive point +in the bid-offer spread received that day (i.e., the point that resulted in higher valuations of the +SCP positions). For some SCP positions, the junior trader assigned marks in March that were + +3 +altogether outside every dealer’s bid and offer received that day. As a result of these marking +practices, the SCP traders intentionally understated mark-to-market losses in the SCP. +11. In March 2012, the junior trader began to maintain a spreadsheet which showed +that, by March 15, 2012, the difference between the daily prices he had assigned to the SCP and +the average mid-market point between the best bids and offers he had received from dealers had +grown to $292 million. Within a few days, the difference had grown further to $432 million. +The traders, however, revealed significantly smaller losses in daily reports to CIO management +about the portfolio’s performance than were indicated by mid-market pricing. +12. On March 30, 2012, the last trading day in the first quarter of 2012, the SCP +traders informed the most senior trader in the morning that losses for that day alone could reach +$250 million. In response, the most senior trader directed the junior trader not to mark the SCP +at the close of business in London, as JPMorgan policy required, but instead to wait for the +markets in New York to close because trading information from New York might support higher +valuations for the SCP positions. +13. The most senior trader also instructed the junior trader to use the “best” prices +(i.e., the most advantageous prices within the bid-offer spread) in marking the SCP. On March +30, the junior trader marked the SCP positions in accordance with these instructions, and +reported to CIO management an estimated loss of $138 million. Over the next several weeks, the +traders continued to understate mark-to-market losses in the SCP until their authority over the +portfolio was taken away from them on or around April 29, 2012, when JPMorgan Senior +Management asked a senior Investment Bank (“IB”) trader and senior risk officer to take +responsibility for the portfolio. +JPMorgan Issues Its First Quarter +Results and Subsequently Issues a Restatement +14. On April 13, 2012, JPMorgan issued its earnings release for the quarter ending +March 31, 2012, which was filed on Form 8-K with the Commission. Also on April 13, +JPMorgan Senior Management conducted an earnings call with analysts and investors. The +earnings release disclosed that JPMorgan’s consolidated quarterly income before income tax +expense was $7.641 billion. These results included the understated losses for the SCP, which +was based on the SCP traders’ marks as of March 30, 2012. +15. One month later, on May 10, 2012, JPMorgan filed on Form 10-Q its report for +the first quarter, which ended on March 31, 2012, disclosing that CIO had experienced +significant mark-to-market losses in the SCP during the second quarter to date. Also on May 10, +2012, JPMorgan Senior Management conducted a call with analysts, during which the firm +disclosed that CIO had suffered losses of approximately $2 billion during the second quarter to +date and that there could be additional losses, that the trading strategy that resulted in the losses +was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored,” that “we’ve +had teams from audit, legal, risk, and various control functions . . . involved in extensive review +of what happened,” and that “[w]e have more work to do but it’s obvious at this point that there +are many errors, sloppiness, and bad judgment.” The $2 billion calculation was based on marks +for positions in the SCP that were derived from independent pricing sources and not from the + +4 +SCP traders; therefore, the full year-to-date loss figure was not affected by its subsequent +conclusions concerning the integrity of the SCP traders’ marks. +16. Two months later, on July 13, 2012, JPMorgan announced that it would restate its +results for the first quarter of 2012 because it had discovered “information that raises questions +about the integrity of the [SCP] marks” and was no longer confident that the marks used to +prepare the first quarter results “reflect good faith estimates of fair value at quarter end.” On +August 9, 2012, JPMorgan filed an amended Form 10-Q with restated results for the first quarter. +The restatement had the effect of moving certain SCP losses from the second quarter to the first +quarter. Specifically, the restatement reduced the revenues of JPMorgan’s Corporate/Private +Equity reporting segment in the first quarter by $660 million, from $1.689 billion to $1.029 +billion, and the firm’s consolidated quarterly income before income tax expense from the +previously-reported $7.641 billion to $6.981 billion. +JPMORGAN’S INEFFECTIVE INTERNAL ACCOUNTING CONTROLS +AND DISCLOSURE CONTROLS AND PROCEDURES +17. JPMorgan’s May 10, 2012 quarterly report on Form 10-Q contained its financial +statements for the first quarter of the year, management’s discussion of the firm’s various +businesses, and other information. In addition, the report stated that JPMorgan’s management +evaluated the effectiveness of its disclosure controls and procedures and concluded that they +were effective. +18. As discussed below, between late April and May 10, 2012, JPMorgan engaged in +an extensive process involving work performed by the Controller’s office, the Internal Audit +department (“Internal Audit”), valuation experts from the Investment Banking Division (“IB”), +and in-house and outside counsel in an effort to evaluate the SCP’s quarter-end marks and to +understand the CIO valuation control process and the differences between that process and the +valuation control process of the IB. As a result, by May 10, various executives and employees of +the firm had learned of deficiencies as of March 31, 2012 in CIO’s internal controls. Due to +failures to timely escalate information and instructions that had the effect of hindering the +sharing of information, not all of these deficiencies had been escalated to JPMorgan Senior +Management prior to May 10, 2012. And, as to the information that was escalated, JPMorgan +Senior Management did not make a considered assessment as to whether critical facts existed— +including any significant deficiency or material weakness in internal controls—that had to be +disclosed to the Audit Committee. Consequently, JPMorgan Senior Management did not +disclose the existence of any significant deficiencies or material weaknesses to the Audit +Committee before JPMorgan filed its quarterly report on May 10, 2012. +19. On July 13, 2012, at the same time JPMorgan disclosed to investors that it would +restate its results for the first quarter of 2012, the firm announced that a material weakness in +internal control over financial reporting had existed at CIO as of March 31, 2012. As a result of +the material weakness, JPMorgan also announced that its management had concluded that +JPMorgan’s disclosure controls and procedures were not effective as of March 31, 2012. + +5 +CIO Internal Controls in the First Quarter of 2012 +20. As part of fulfilling the requirements to devise and maintain systems of internal +accounting controls, financial institutions such as JPMorgan need to have internal controls that +adequately monitor and test the accuracy and integrity of, among other things, the valuations of +the firm’s trading portfolios such as the SCP. CIO-VCG served as a significant control for +ensuring that certain assets and liabilities of CIO, including the positions in the SCP, were +measured at fair value in accordance with GAAP in JPMorgan’s books and records and in the +quarterly and annual reports the firm filed with the Commission. +21. For the SCP, CIO-VCG carried out its responsibility by price-testing the marks +that the SCP traders assigned to the portfolio’s positions on the last business day of every month. +Under firm policy applicable during the first quarter of 2012, CIO-VCG performed this price- +testing function by undertaking the following steps: +a. First, CIO-VCG had to calculate, as a benchmark, an independent price for +each of the SCP positions. A CIO-VCG policy and procedure document +indicates that, for index positions, these independent prices were to be +obtained from Markit Limited Group (“Markit”), a service that provides +consensus-based prices for indices. For tranches, CIO-VCG obtained +independent prices from dealer quotes, which it checked against Totem, +another consensus pricing service offered by Markit, for any significant +discrepancies. +b. After calculating an independent price for each SCP position, CIO-VCG +had to establish and apply a threshold (or tolerance) around each price that +represented the average bid-offer spread for the security based on quotes +received from dealers. While it had authority to make an adjustment to +trader marks that fell within these thresholds, CIO-VCG considered such +marks to be presumptively marked at fair value and would not make any +adjustment to those marks. +c. If the SCP traders’ mark for a given position fell outside of the threshold, +CIO-VCG would record the excess as a loss (or profit) and make a +corresponding adjustment to the mark-to-market profit and loss for the +SCP. +d. Finally, if CIO-VCG determined that the market for a particular position +had become illiquid, CIO-VCG applied a pre-established formula to +calculate and record a liquidity reserve to account for the risk that certain +SCP positions could not be sold at fair value due to reduced liquidity in +the marketplace. +22. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at +the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office. +That person was also responsible for price testing all of CIO’s other London-based portfolios. + +6 +23. On April 4, 2012, CIO-VCG completed its price-testing process for the SCP for +the end of March 2012. It applied the relevant thresholds to adjust downward the fair value of +the SCP by approximately $17 million compared to the traders’ marks and maintained the +previous month’s liquidity reserve of approximately $31 million. +24. During its price-testing process for quarter-end marks, CIO-VCG observed that +most of the SCP traders’ marks migrated to the aggressive end of the bid/offer spread. CIO- +VCG questioned one of the SCP traders about this shift. The trader did not explain the shift but +merely stated, “Talk to management.” CIO-VCG did not disclose to anyone its observations +concerning the shift in the SCP traders’ marking methodology until questions were being raised +about a collateral dispute, which is summarized below, on April 20, 2012. CIO-VCG also did +not share the details of its exchange with the SCP trader. +25. CIO-VCG calculated a significant difference between its independent prices and +the SCP traders’ marks. During its price-testing process, it calculated that the mid-market value +of the SCP based on its independent prices was approximately $192 million less than the value +based on the SCP traders’ marks. It subsequently identified an error in its calculations, which +increased the difference from $192 million to approximately $275 million. A March 30, 2012 +Internal Audit report on CIO-VCG contained an Action Plan under which CIO-VCG should +disclose this discrepancy to CIO management. However, that action plan was not required to be +fully implemented until June 30, 2012, and CIO-VCG only disclosed the $17 million fair value +adjustment based on marks that fell outside of its thresholds. Consequently, CIO management +was not alerted to the significant difference between the SCP traders’ marks and the CIO-VCG +calculated mid-market valuations, which warranted further analysis. +26. Shortly after April 4, 2012, CIO Finance, with the approval of CIO management +and JPMorgan Senior Management, increased the existing $31 million liquidity reserve by $155 +million, based on a determination that certain tranches in the SCP portfolio had become illiquid +as of March 30. The traders’ marks, as adjusted by CIO-VCG, were then incorporated in the +financial information provided for CIO in JPMorgan’s earnings release on April 13, 2012 and in +the firm’s May 10, 2012 report for the first quarter of 2012. +Large Collateral Calls and Increasing Losses Prompt +Multiple Reviews of CIO-VCG and the Traders’ Marks +27. On April 20, 2012, JPMorgan Senior Management was informed that the firm had +received several collateral calls—requests from trading counterparties for payment or the posting +of collateral based on their differing views of the fair value—concerning positions in the SCP. +The total amount in dispute was approximately $520 million. +28. A collateral dispute with a CDS counterparty can sometimes be an indication that +a firm’s internal price for an instrument does not accurately reflect its fair value. Accordingly, in +April 2012, the size of the collateral disputes over the SCP raised concerns by JPMorgan Senior +Management about the pricing of the SCP positions. In an April 20, 2012 email, a member of +JPMorgan Senior Management observed that the collateral disputes were not “a good sign on our +valuation process” in the SCP. + +7 +29. At the same time that the collateral disputes were being escalated to JPMorgan +Senior Management, the SCP was also sustaining large daily losses. This development was +inconsistent with what CIO had told JPMorgan Senior Management to expect prior to the April +13 earnings release, and JPMorgan Senior Management was concerned about the losses and the +traders’ explanations of what was happening to the SCP positions and their strategy for dealing +with the risks to the SCP. On or about April 27, JPMorgan Senior Management asked a senior +trader from the IB and a senior risk officer to evaluate the portfolio on an urgent basis. Shortly +afterwards, the IB trader and risk officer were put in charge of managing and reducing the risk in +the SCP, and the SCP traders were relieved of all trading and pricing responsibilities. +Additionally, on a going-forward basis, positions in the SCP were to be marked to consensus +mid-market prices published by Markit. +30. In late April and early May, JPMorgan Senior Management mobilized resources +from various parts of the firm—the IB’s valuation experts, Internal Audit, which had prior +experience with CIO-VCG’s price-testing process, and the Controller’s office, which included +JPMorgan’s fair value accounting experts—as well as the Legal Department and an outside law +firm to conduct reviews of the SCP traders’ marks and CIO-VCG’s price-testing process. At the +time, JPMorgan was planning to file with the Commission its report for the first quarter of 2012 +in early May 2012. In part due to the questions being raised about the valuation of the SCP, +JPMorgan Senior Management, with approval of the Audit Committee, decided to postpone the +filing to May 10. JPMorgan Senior Management delayed the filing so that it had additional time +to assess whether CIO’s first quarter results, which had been publicly released on April 13, were +in fact compliant with GAAP and should be disclosed again in the quarterly report. +The Investment Bank’s Review +31. On April 25, 2012, a member of JPMorgan Senior Management asked the +Valuation Control Group in the firm’s IB (“IB-VCG”) to price-test the SCP traders’ marks for +March 30, 2012 as if the positions had been held by the IB. IB-VCG also reviewed the price- +testing work that had been done by CIO-VCG at the end of March 2012. The IB-VCG review +was conducted under the supervision of the IB’s Chief Financial Officer. +IB-VCG Valuation “In Line with the Counterparties” +32. The next day, IB-VCG performed a preliminary analysis of the SCP traders’ +marks. On a conference call that day, IB-VCG staff informed CIO management and CIO-VCG +that “[t]he rough initial result [of its analysis] . . . seems to, to be in line with the mark-to-market +differences you see on the collateral calls. . . . In terms of dollar value, the number seems pretty +much in line . . . with the counterparties.” In other words, IB-VCG’s preliminary valuation of +the SCP positions was in line with those of CIO’s trading counterparties, who had valued the +SCP at several hundreds of millions of dollars less than the SCP traders did. +33. During the conference call, CIO-VCG explained to IB-VCG staff that in setting +thresholds around independent prices during its month-end price-testing process, it often +consulted with the SCP traders—whose valuations it was supposed to validate—“to see if they +have any market input to decide whether, you know, if it’s, that’s wrong, that’s correct, et +cetera.” CIO-VCG also informed IB-VCG that, when completing its price-testing process, it + +8 +used dealer quotes selected by SCP traders. IB-VCG staff believed that this process of +consulting the traders had the potential to significantly impair the independence and +effectiveness of the CIO-VCG process. +34. On Saturday, April 28, 2012, at a meeting with members of JPMorgan Senior +Management and CIO management, the IB’s CFO presented IB-VCG’s analysis of the SCP +traders’ marks. He reviewed with the attendees a spreadsheet that detailed IB-VCG’s work to +date (“IB-VCG Spreadsheet”). At that meeting, at least one of the positions in the IB-VCG +Spreadsheet was reviewed on a column-by-column basis in order to describe the data included in +each individual column. +35. As of this time, JPMorgan Senior Management and CIO management knew that +the SCP traders’ marks were $275 million greater than independent mid-market prices computed +by CIO-VCG based on a combination of broker quotes and data from consensus pricing services. +IB-VCG relied exclusively upon consensus pricing services, and the IB-VCG Spreadsheet +calculated that the SCP traders’ marks were approximately $767 million greater than the values +placed on the SCP positions by consensus mid-market prices published by Markit and Totem. +36. As part of its analysis, IB-VCG staff calculated an approximate bid-offer spread, +based on market information from March 30, 2012, for six SCP positions, including several of +the largest positions and some with the greatest total dollar value differences between trader +marks and IB-VCG’s consensus pricing. The IB-VCG Spreadsheet contained data regarding 133 +positions and reflected, among other things, that for the six positions for which it calculated an +approximate bid-offer spread, the traders’ quarter-end marks were outside the bid-offer spreads +that IB-VCG had approximated. +37. After presenting IB-VCG’s analysis, the IB’s CFO began to calculate the profit- +and-loss impact if CIO marked the SCP to the conservative end of the bid-offer spread, rather +than to mid-market prices, as a price-taker would have done (since price-takers often buy and sell +at prices that are inferior to the consensus, mid-market Markit or Totem prices). This analysis +showed that adjusting marks to the conservative end of the bid-offer spread would have further +reduced the value of the SCP by approximately $250 million, resulting in an over $1 billion +difference between the traders’ marks and a price-taker’s marks at the conservative end of the +bid-offer spread. JPMorgan Senior Management elected not to pursue this marking methodology +with respect to the March 2012 quarter-end marks because, among other reasons, it understood +that using mid-market prices was acceptable under GAAP. +Spreadsheet Errors +38. IB-VCG also reviewed the process that CIO-VCG had applied to the traders’ +quarter-end marks. During this review, IB-VCG learned that in March 2012 CIO-VCG used a +spreadsheet in its price-testing process into which data had been manually entered, and that this +spreadsheet contained certain errors and reflected differences from the IB-VCG methodology +that may have had the effect of understating the difference between the traders’ marks and the +independent mid-market prices derived by CIO-VCG. On May 8, 2012, IB-VCG forwarded an +email to one member of JPMorgan Senior Management explaining these issues. IB-VCG and +CIO-VCG were instructed to work together to address the errors and other issues. + +9 +39. The next day, IB-VCG corrected one such error, which involved the calculation of +the difference between the value of the SCP based on the traders’ marks and CIO-VCG’s +independent prices. Before the correction, the difference was believed to be approximately $275 +million. After the correction, the difference increased to $512 million. IB-VCG informed +JPMorgan Senior Management of the correction and the quantitative impact it had. +40. Based on the price-testing work of IB-VCG and other information, the +management of the IB expressed concerns to JPMorgan Senior Management about the potential +for mismarking of the SCP and whether CIO VCG was an effective control over the SCP. On +May 6, 2012, for example, a senior IB executive explained to a member of JPMorgan Senior +Management that the securities in the SCP had “very good price discovery mechanisms” (i.e., +could effectively be priced in the marketplace) and that he could not recall a variance between +trader marks and independent prices in the IB “greater than $50mm that remained at any month +end across the ENTIRE IB’s positions.” +41. In light of their concerns relating to CIO, two senior IB executives initially +expressed some reservations regarding the scope of their sub-certifications that JPMorgan +required officers in the various business lines to provide in connection with its quarterly and +annual filings. One of the executives apprised JPMorgan Senior Management that in light of the +CIO related information to which he was privy, he had a conversation with an outside lawyer +concerning the scope of his certification obligations. After relaying that conversation to the +other Investment Bank executive with certification obligations, both executives signed their sub- +certifications. +The Internal Audit Review +42. In addition to the IB-VCG review, on or around May 2, 2012, JPMorgan Senior +Management instructed Internal Audit to review the CIO-VCG process, including whether it had +been applied consistently over past quarters. Also on May 2, at the end of a meeting of the Audit +Committee of JPMorgan’s Board of Directors, the Audit Committee, having just been informed +of the losses recently suffered, separately requested that Internal Audit review CIO. +43. The Internal Audit team discovered deficiencies with the thresholds CIO-VCG +had applied at March 30. As noted above, JPMorgan policy required that CIO-VCG set a +threshold around its independent price for each SCP position that was representative of the +average spread between the bids and the offers received from dealers for the position. Because +the threshold was applied on each side of the independent price, in order to reflect the bid-offer +spread the threshold on each side would be one-half of the entire spread. +44. By May 9, 2012, the Internal Audit team learned that in validating the SCP +traders’ quarter-end marks in March 2012, CIO-VCG had in some cases applied the entire bid- +offer spread (rather than one half of the spread) on each side of its independent prices. The result +was a threshold that was twice the size of the bid-offer spread and beyond the range of +reasonable fair value estimates. The Internal Audit team calculated that, had CIO-VCG applied +the thresholds appropriately, it would have adjusted the traders’ quarter-end marks downward by +$307 million—$290 million more than the $17 million adjustment CIO-VCG had actually made +at month end. + +10 +45. On May 10, the Internal Audit team collected its work in a draft memo (“Internal +Audit Draft Memo”), which stated, among other things, that CIO-VCG was “inconsistent in the +application of [its] own thresholds.” +46. Although Internal Audit completed this work in the days prior to May 10, it did +not fully share this information with JPMorgan Senior Management and did not circulate the +Internal Audit Draft Memo to JPMorgan Senior Management or the Audit Committee. +The Controller’s Review +47. On April 28, 2012, JPMorgan Senior Management asked the Controller’s staff to +assess whether the traders’ quarter-end marks complied with GAAP and to review the +effectiveness of CIO-VCG’s quarter-end internal control process. +48. The Controller’s staff made several significant observations. One was that, as +losses in the SCP increased in March 2012, the traders departed from their historical practice of +marking the positions close to the mid-point between the bids and offers received from dealers. +Instead, they marked many positions at the aggressive end of the bid-offer spreads, i.e., they +marked the positions in a manner that resulted in smaller mark-to-market losses. JPMorgan +Senior Management was informed of this fact in late April 2012. The traders justified their +marks to the Controller’s staff by explaining that the market had become volatile and dislocated. +This volatility, the SCP traders claimed, caused significant intraday price movements that may +help explain the difference between the SCP traders’ marks and consensus pricing services. To +test the volatility explanation, the Controller’s staff analyzed intraday pricing information, and +determined that the difference between the SCP traders’ marks and the mid-market prices was +less than the average daily price movement. While accepting the SCP traders’ justification, +however, the Controller’s staff failed to adequately assess whether CIO could transact at the +price where the SCP was marked. +49. For two quarter end marks assigned by the SCP traders, the Controller’s staff also +detected significant differences from mid-market consensus pricing that were not supported by +pricing data received by the SCP traders on the date that the mark was assigned. When the +Controller’s staff questioned these marks, one of the SCP traders agreed that they were too wide +as compared to the mid-market price. This fact had not been adequately considered by CIO- +VCG during its actual price testing process in connection with the first quarter of 2012, nor was +this fact given appropriate scrutiny by the Controller’s staff. Consequently, the Controller’s staff +did not escalate this information to JPMorgan Senior Management. +The Special Review by Outside Counsel +50. In addition to the foregoing reviews, on or around May 1, 2012, JPMorgan +retained an outside law firm to provide advice regarding disclosure and to review, among other +things, whether the independence of the CIO-VCG process had been improperly compromised +by the involvement of the SCP traders. By May 10, 2012, when JPMorgan filed its first quarter +report, the law firm had interviewed the employee of CIO-VCG who had price-tested the SCP +marks, the executive to whom he reported, and other members of CIO management. The law + +11 +firm also had collected and reviewed a limited number of the relevant emails and Bloomberg +chats from the first quarter of 2012. +The Process for Synthesizing and +Escalating Information from the Various Reviews +51. JPMorgan Senior Management led a process that involved daily—sometimes +twice daily—meetings and calls in which participants involved in the different reviews discussed +what they and their teams were doing and learning. Despite that process, a number of significant +facts learned in the course of the various reviews were not shared in these group meetings and +calls and were not otherwise escalated to JPMorgan Senior Management. This in turn led to +JPMorgan’s incomplete understanding of deficiencies relating to the CIO-VCG process in March +2012. +52. JPMorgan Senior Management’s emphasis on confidentiality and sharing +information on a need-to-know basis contributed to this incomplete understanding. JPMorgan +Senior Management was concerned about sensitive information relating to CIO’s positions being +widely distributed and imposed restrictions on the creation and sharing of work product relating +to those positions. These instructions affected the ability of those conducting the reviews to +share, learn from, and build upon each other’s work. +53. On April 29, 2012, the Controller’s staff was instructed not to “discuss [its work] +with people outside the immediate group” and to exercise caution in committing its findings to +writing. +54. A member of JPMorgan Senior Management also instructed IB-VCG to “keep +[its] analysis in a relatively tight group.” On April 29, 2012, an IB executive confirmed to the +member of JPMorgan Senior Management that IB-VCG “speaks to no one,” including the +Controller’s staff, “without getting my express approval first.” +55. Finally, the Internal Audit team was instructed to maintain strict confidentiality in +connection with its review. +56. JPMorgan Senior Management did not receive all relevant information for another +reason: some employees conducting the reviews failed to appreciate the significance of certain of +the facts they had learned and their relevance to the quarterly report that was about to be filed. +For example, in looking back on his work after learning in late June that the integrity of the +traders’ marks was in question, a London-based employee primarily responsible for the +Controller’s review conducted an after-the-fact assessment, noting that he “[s]hould have better +understood the $767 [million] diff.,” i.e., IB-VCG’s calculation of the disparity between the SCP +traders’ quarter-end marks and Markit and Totem consensus, mid-market prices. The employee +further noted that he “[s]hould have pressed [CIO-VCG] more on how the tolerances (thresholds) +were determined” and “should have picked up that the tolerances determined by adding whole +bid-offer,” a fact already known to members of the Internal Audit team prior to May 10, 2012. +Although executives were in contact with those responsible for the various reviews, some of +those employees failed to timely analyze and escalate to JPMorgan Senior Management +important facts that they had discovered. + +12 +JPMorgan Senior Management’s +Response to the Information It Received +57. Despite the inadequate information sharing and escalation described above, +significant information learned in the management-commissioned reviews was escalated to +JPMorgan Senior Management. This information, which related to the adequacy of the CIO- +VCG process that produced the $17 million fair value adjustment to the traders’ quarter-end +marks, included the following: +a. As losses began to mount, SCP traders began consistently marking at or +near the very edge of the advantageous side of the bid-offer spread. +b. There was a collateral dispute of over $500 million. +c. Independent analysis by IB-VCG of the SCP traders’ quarter-end marks +was “in line with . . . the counterparties.” Specifically, the value of the +SCP based on trader marks was approximately $767 million more than the +value based on mid-point consensus pricing. +58. Management also learned of the following facts that directly related to CIO-VCG +and the processes it was using in March 2012: +a. The CIO-VCG process relied on manual spreadsheets that contained +errors, one of which caused CIO-VCG to understate the disparity between +its independent prices and the traders’ marks by $237 million. +b. The SCP traders provided some of the quotes that were used in CIO- +VCG’s price-testing process and this process “need[ed] to be enhanced to +ensure independence.” +59. In response to what it was learning prior to May 10, JPMorgan Senior +Management decided to enhance CIO-VCG’s valuation policies. To assist with this task, the +persons conducting the reviews recommended certain changes, and a member of JPMorgan +Senior Management drafted revisions to CIO-VCG procedures, which were shared with +JPMorgan Senior Management and CIO management on May 5, 2012. On May 7, 2012, a senior +CIO executive circulated a “proposed operational approach to VCG price testing” that contained +additional policy revisions. Both sets of changes were implemented before May 10, 2012. +60. Collectively, the new policies were intended to remediate several of the issues +discovered by the management-commissioned reviews of CIO-VCG and the traders’ marks: +a. Disparity between CIO-VCG independent prices and traders’ marks. The +revised policies significantly curtailed the size of thresholds that CIO-VCG +could apply, directing that the difference between a trader’s mark and CIO- +VCG’s independent price could not exceed $500,000 for an index position +and $2,000,000 for a tranche position. + +13 +b. Trader involvement in the VCG process. The revised policies required CIO- +VCG to “source broker quotes independently from the market,” rather than +through the traders, thereby “eliminating any reliance on [the traders] for +sourcing of market data.” +c. Variance between Markit and CIO-VCG’s independent prices. The revised +policies stated that, for positions where CIO-VCG could rely on dealer +quotes in calculating independent prices, CIO-VCG must obtain at least two +quotes and, if two are not available, it must use Markit or Totem as an input. +The revised policies also provided that, even when dealer quotes are +obtained, “mid prices derived from selected dealer quotes should be +compared . . . to Markit/Totem sourced data and any material differences . . . +must be reported to the CFO of CIO and must be reconciled.” +d. Inadequate oversight over sole CIO-VCG price-tester. The revised policies +introduced a new protocol for escalating to management valuation disputes +between CIO-VCG and the traders, requiring the involvement of JPMorgan +risk personnel and the Chief Financial Officer of CIO. +61. In addition to these policy changes, in early May the staff of IB-VCG prepared a +remedial plan to address the spreadsheet errors it had identified in CIO-VCG’s price-testing +process, and to ensure proper review of the spreadsheets. On May 8, 2012, after CIO finance +management and CIO-VCG concurred in the remedial plan, IB-VCG described it to JPMorgan +Senior Management. +The Reviews of CIO-VCG Are Not +Addressed with the Audit Committee +62. The responsibility for overseeing JPMorgan’s management on behalf of the firm’s +stockholders—including oversight of management’s responsibilities for internal controls— +ultimately rests with JPMorgan’s Board of Directors. The Board, in turn, discharges its oversight +function through several Board committees. One of the principal committees is the Audit +Committee, which is charged with overseeing JPMorgan’s efforts to assure that it has effective +internal controls, which are critical to the integrity of the firm’s financial reports and compliance +with applicable policies and laws. +63. To assist the Audit Committee in carrying out its responsibility, the Audit +Committee’s Charter requires JPMorgan management to provide updates to the Committee on all +“significant operating and control issues in internal audit reports,” the “initiation and status of +significant special investigations,” the “identification and resolution status of material +weaknesses” in controls, and any “reportable conditions in the internal control environment, +including any significant deficiencies.” These updates serve an important internal control +function, allowing the Audit Committee to fulfill its oversight role by, among other things, +keeping the Board up-to-date on significant matters, assessing whether to approve the filing of +quarterly and annual reports, and evaluating whether the Committee should conduct its own +independent investigation of any issues raised with it. + +14 +64. In late April and early May 2012, while JPMorgan’s Senior Management was +devoting daily attention to CIO-VCG and the SCP traders’ quarter-end marks—in large measure +to ensure that CIO results reported in its upcoming quarterly report would be accurate—it also +was in contact with members of the Audit Committee. +65. However, while JPMorgan Senior Management was informed of, and was +addressing, various issues with internal controls at CIO-VCG, JPMorgan Senior Management +did not engage in a considered assessment, before the firm filed its first quarter report on May +10, 2012, to determine if these matters constituted a significant deficiency or material weakness +in the firm’s internal control over financial reporting and therefore had to be disclosed to the +firm’s Audit Committee. Nor, more broadly, did JPMorgan Senior Management disclose to the +Audit Committee its concerns regarding the operation of CIO-VCG. +66. On May 2, 2012, the Audit Committee met with some members of JPMorgan +Senior Management. The focus of the meeting was on the mounting losses in the SCP portfolio. +Despite the requirement to keep the Audit Committee apprised of the significant control issues +that were under review, there was no discussion of the IB-VCG or Controller reviews related to +CIO-VCG and the traders’ marks, although that work was underway. There was also no +discussion of the fact that an outside law firm had been retained to advise on disclosures to be +made in the first quarter Form 10-Q that related to CIO and to assess certain aspects of the CIO- +VCG process, including whether the SCP traders exercised undue influence on the process. +67. During a full meeting of the Board of Directors hours before the filing of +JPMorgan’s first quarter report on May 10, 2012, JPMorgan Senior Management mentioned that +reviews of what occurred in CIO were underway, including by Internal Audit, legal, the +Controller’s staff, and risk management. But, JPMorgan Senior Management did not discuss the +details of or facts learned in the IB-VCG, Controller, or Internal Audit reviews. +68. Because the Audit Committee was not apprised of the initiation of the reviews or +facts learned as a result of those reviews, it was unable to provide input on the issues before the +filing of JPMorgan’s first quarter report, and was unable to engage with those doing the work to +ensure that it was sufficient from the perspective of the Audit Committee. +69. As noted above, the Audit Committee was not made aware before JPMorgan filed +its first quarter report of the facts learned by various members of the review teams, including that +CIO-VCG’s March 2012 price-testing process was compromised by spreadsheet errors, that SCP +traders may have exerted influence over that process, or that CIO-VCG applied valuation +thresholds that were in some instances twice the applicable spread. +70. Other information learned by various members of the review teams that further +called into question CIO-VCG’s March 2012 quarter-end valuation process was not shared with +the Audit Committee. At the end of the first quarter, CIO-VCG made a fair value adjustment of +$17 million to the traders’ marks. However, certain facts raised issues as to the adequacy of this +adjustment and the process through which it was made, including the $520 million in collateral +disputes over SCP positions, the $767 million disparity between the SCP traders’ marks and +consensus, mid-market prices, the fact that the traders marked some of the largest notional SCP + +15 +positions outside the bid-offer spread approximated by IB-VCG, and the fact that the traders +began to mark the SCP at the aggressive end of the bid-offer spread when losses began to mount. +71. Finally, the Audit Committee was not apprised of, or included in, JPMorgan +Senior Management’s efforts to remedy the control issues at CIO-VCG by revising valuation +policies to ensure proper oversight by CIO management. As a result, the Audit Committee did +not have any input into the proposed changes or an understanding of the reasons that motivated +them. +Subsequent Disclosures by JPMorgan +72. Based on the information available to it, the Audit Committee approved of the +content of JPMorgan’s quarterly report on Form 10-Q that was filed on May 10, 2012. On July +13, 2012, JPMorgan disclosed that a material weakness existed in its internal control over +financial reporting stemming from the “effectiveness of CIO’s internal controls over valuation of +the synthetic credit portfolio.” In its amended Form 10-Q for the first quarter of 2012 filed on +August 9, 2012, JPMorgan disclosed that this material weakness finding “was the result of issues +in certain interrelated and interdependent control elements comprising that process, including +insufficient engagement of CIO senior finance management in the valuation control process in +light of the increased size and heightened risk profile of the synthetic credit portfolio during the +first quarter of 2012, and in the effectiveness of certain procedures employed during the first +quarter of 2012 by the CIO Valuation Control Group in performing the price verifications.” +73. JPMorgan also corrected prior statements concerning its disclosure controls and +procedures. In its May 10 Form 10-Q, JPMorgan stated, “As of the end of the period covered by +this report, an evaluation was carried out under the supervision and with the participation of the +Firm’s management, including its Chairman and Chief Executive Officer and its Chief Financial +Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rule 13a- +15(e) under the Securities Exchange Act of 1934). Based on that evaluation, the Chairman and +Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls +and procedures were effective.” On August 9, 2012, when JPMorgan disclosed that it had +determined that a material weakness existed at CIO as of March 31, 2012, it also disclosed that, +“[a]s a result of that determination, the Firm’s Chairman and Chief Executive Officer and Chief +Financial Officer also concluded that the Firm’s disclosure controls and procedures (as defined +in Rule 13a-15(e) under the Securities Exchange Act of 1934) were not effective at March 31, +2012.” \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3491.pdf b/raw/aaer/2013/AAER-3491.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0559f8f363934e6b0398461d52f5d0cf6fe2100c Binary files /dev/null and b/raw/aaer/2013/AAER-3491.pdf differ diff --git a/raw/aaer/2013/AAER-3491.txt b/raw/aaer/2013/AAER-3491.txt new file mode 100644 index 0000000000000000000000000000000000000000..bd5b4d629f5ac685ab9f5e99b6c4a9dc4c51db10 --- /dev/null +++ b/raw/aaer/2013/AAER-3491.txt @@ -0,0 +1,153 @@ + + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70492 / September 24, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3491 / September 24, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15521 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + OWEN MARK : 102(e) OF THE COMMISSION’S RULES OF + WILLIAMS, CPA : 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 Owen +Mark Williams (“Respondent” or “Williams”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice. +1 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Williams, age 55, is and has been a certified public accountant licensed to +practice in the State of California. He served as Chief Financial Officer of True North Finance +Corporation (“True North”), f/k/a CS Financing Corporation, from 2007 until 2010. + + 2. True North was, at all relevant times, a Delaware corporation with its +principal place of business in Corte Madera, California. True North was engaged in the business of +real estate finance. At all relevant times, True North issued notes registered with the Commission +pursuant to Section 6 of the Securities Act of 1933 (“Securities Act”). + + 3. On September 21, 2010, the Commission filed a complaint against +Williams in SEC v. True North Finance Corp., et al., Civil Action Number 10-cv-3995, in the +United States District Court for the District of Minnesota. On September 11, 2013, the court +entered an order permanently enjoining Williams, by consent, from future violations of Section +17(a)(2) of the Securities Act, Section 13(b)(5) of the Securities Exchange Act of 1934 and Rules +13b2-1, 13b2-2, and 15d-14 thereunder. Williams was also ordered to pay a $40,000 civil +money penalty. + + 4. The Commission’s complaint alleged, among other things, that Williams caused +True North to improperly recognize revenue on interest from borrowers where the borrowers +were not paying True North and where the borrowers’ impaired financial condition meant that +collectability was not reasonably assured. The complaint alleged that this recognition of +revenue departed from generally accepted accounting principles and also departed from True +North’s revenue recognition policy, which stated that the company would not recognize revenue +when the payment of interest was 90 days past due. + + + + 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 Williams’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Williams is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the Respondent’s or the firm’s quality control system that would +indicate that the Respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of + 4 +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3492.txt b/raw/aaer/2013/AAER-3492.txt new file mode 100644 index 0000000000000000000000000000000000000000..1409eba489f8944329405e7f07468517484f0bde --- /dev/null +++ b/raw/aaer/2013/AAER-3492.txt @@ -0,0 +1,1396 @@ + + + + + + + + + + + + + + + + SEC.gov | Troy Lyndon and Ronald Zaucha + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/514606","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Troy Lyndon and Ronald Zaucha , Civil Action No. CV13 00486 SOM KSC (D. Haw. September 24, 2013) + + SEC Charges CEO of Video Game Company and Purported Consultant in Revenue Inflation Scheme + + + On September 24, 2013, the Securities and Exchange Commission charged the founder of a religious-themed video game manufacturer and his friend with scheming to falsely inflate the company's revenue by nearly 1,300 percent in a one-year period through sham circular transactions. + + The SEC alleges that Troy Lyndon, who serves as the company's CEO and CFO, caused Left Behind Games Inc. to issue almost two billion shares of stock to Ronald Zaucha as purported compensation for consulting services to the California-based company. The true purpose of the arrangement was to enable Zaucha to sell millions of unregistered shares of Left Behind Games stock into the market and then kick back a portion of his stock proceeds to the company in order to prop up its revenue at a time when it was in dire need of additional funds. + + The SEC's complaint was filed September 24, 2013. Lyndon lives in Honolulu and Zaucha lives in Maui. The company's stock was suspended by the SEC today. + + According to the SEC's complaint, Left Behind Games was founded in 2001 and touted itself as "the only publicly-traded exclusive publisher of Christian modern media" and "the world leader in the publication of Christian video games and a Christian social network provider." However, financial troubles caused the company to terminate all of its employees and close its office at the end of 2011. + + The SEC alleges that Lyndon and Zaucha concocted their scheme beginning in 2009 in an apparent last-ditch fraudulent effort to save the company, which was unprofitable and severely undercapitalized at the time. Left Behind Games issued stock to Zaucha for his so-called consulting services, and at Lyndon's direction he promptly sold virtually all of his stock for approximately $4.6 million in proceeds. Zaucha then kicked back approximately $3.3 million of these proceeds to the company in three deceiving ways. + + The SEC alleges that Zaucha first paid the company $871,000 between September 2009 and June 2010 for what his consulting agreement termed as "early-sell fees" for his excessive sale of stock. Secondly, in December 2010, Zaucha formed a company called Lighthouse Distributors and used the proceeds of his stock sales to finance the purchase of approximately $1.38 million in old and obsolete inventory from Left Behind Games. Lighthouse simply gave most of these products away to churches and religious organizations, yet Left Behind Games improperly recognized the revenue from these sham transactions and falsely claimed that its revenue had increased nearly 1,300 percent from the prior fiscal year. Zaucha later kicked back another $1 million to Left Behind Games as instructed by Lyndon. Meanwhile, Lyndon allowed Zaucha to retain $1.28 million of his stock sale proceeds for personal uses, which included the purchase of condominiums in Maui and Orange County, Calif. + + Zaucha performed few, if any, consulting services, according to the SEC's complaint. Each of the consulting agreements was vague about the services that Zaucha would provide. One agreement noted that Zaucha had experience in marketing related to non-profit corporations when, in fact, Lyndon understood Zaucha's experience to be as a pastor running prison ministries rather than in marketing. Two agreements also vaguely stated that Zaucha would perform services to build an "independent rep network" to contact church pastors in an effort to offer Left Behind Games products. In reality, Left Behind Games had no "network" of independent representatives calling potential purchasers of its products. + + The SEC's complaint alleges that Lyndon and Zaucha violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint also alleges that Lyndon violated Section 13(b)(5) of the Exchange Act, and Rules 13a-14, 13b2-1, and 13b2-2, and that he aided and abetted Left Behind Games' violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The complaint seeks permanent injunctions, financial penalties, and penny stock bars against Lyndon and Zaucha, and an officer-and-director bar against Lyndon. + + The SEC's investigation, which is continuing, has been conducted by Lucee Kirka, Carol Shau, and Marc Blau of the Los Angeles office. 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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 + + + Mercantile Bancorp, Inc. + + + + + + + + + + + + Mercantile Bancorp, Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22817 / September 26, 2013 + Accounting and Auditing Enforcement Release No. 3493 / September 26, 2013 + Securities and Exchange Commission v. Mercantile Bancorp, Inc. , Civil Action No. 3:13-cv-3341 (CD Illinois) + + SEC Charges Two Bank Executives for Financial Misstatements and Failure to Disclose Probable Loss on Troubled Loan + + On September 24, 2013, the Securities and Exchange Commission charged two former bank executives at Illinois-based Mercantile Bancorp with failing to recognize in financial statements a probable loss on one of the bank's largest troubled loans. Former CEO Ted Awerkamp of Amarillo, Texas, and former CFO Michael McGrath of Quincy, Ill., agreed to settle the SEC's charges by paying penalties of $100,000 each and being barred from acting as an officer or director of a publicly traded company. + + The SEC alleges that prior to the end of the third quarter in 2010, Awerkamp knew that the borrower in a shared national credit loan for a large residential real estate development to be built in Colorado Springs was unwilling or unable to contribute the necessary funds to complete the project, which served as collateral for the loan. He also knew that the collateral had declined significantly in value. After the third quarter but still weeks before the bank's quarterly report was filed, Awerkamp and McGrath also learned that the borrower missed a loan payment and declared bankruptcy. Based on these and other events, U.S. accounting rules required Mercantile to recognize a $5.28 million loan loss in its third quarter financial statements, yet the bank failed to do so. + + According to the SEC's complaint, the failure to report the loan loss caused Mercantile to falsely state that its main subsidiary bank had met certain capital ratio thresholds required by the Federal Deposit Insurance Corporation (FDIC). Mercantile also understated its net loss for the quarter and the nine months ending September 30. The bank reported those figures as $7.5 million and $11 million when they were actually at least $12.78 million and $16.28 million. Mercantile also falsely stated that its main subsidiary bank had a net income of $1.8 million for first nine months of 2010 when it actually had a net loss of at least $3.48 million during that period. + + The SEC's complaint charges Mercantile with violations of Section 17(a)(3) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-11 and 13a-13. Awerkamp is charged with violations of Section 17(a)(3) of 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. He also is charged with aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13. McGrath is charged with violations of Section 17(a)(3) of 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. He also is charged with aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13. + + Mercantile, Awerkamp, and McGrath consented to the entry of final judgments without admitting or denying the SEC's allegations. In addition to the monetary sanctions and officer-and-director bars against Awerkamp and McGrath, they agreed to be permanently enjoined from future violations of these provisions of the securities laws. + + The SEC's investigation was conducted by Jake Schmidt, Timothy T. Tatman, and James A. 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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 + + + Universal Travel Group + + + + + + + + + + + + Universal Travel Group + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22823 / September 27, 2013 + Accounting and Auditing Enforcement Release No. 3494 / September 27, 2013 + Securities and Exchange Commission v. Universal Travel Group, Jiangping Jiang and Jing Xie , Civil Action No. 1:13-cv-01492 (U.S. District Court for the District of Columbia) + + SEC Files Fraud Charges Against Universal Travel Group, Its Former CEO and Chair, Jiangping Jiang, and Its Former Director, Secretary and Interim CFO, Jing Xie + + + The Securities and Exchange Commission today announced the filing of fraud and related charges against Universal Travel Group (UTG), a China-based travel services company, its former CEO and Chair, Jiangping Jiang (Jiang), and its former Director, Secretary and Interim CFO, Jing Xie (Xie). UTG, Jiang and Xie have agreed to settle the SEC's claims against them. + The Commission alleges that UTG, Jiang and Xie failed to disclose cash transfers of approximately $41 million to thirty-four unknown entities in Hong Kong and China between September 2008 and March 2011. The transferred cash derived from private and public stock offerings in the U.S., and UTG claims it was returned to Chinese accounts of its subsidiaries as part of a currency exchange. The complaint alleges that the undisclosed transfers rendered false and misleading the risk factor and liquidity discussions in UTG's public disclosure. The Commission alleges further that the defendants failed to disclose further risks arising from UTG's receipt and usages of cash revenues, and from its inadequate controls over cash and its failure properly to document cash transactions. Further, prior to June 2011 the Commission alleges that the defendants falsely described UTG's business organization, failing to disclose that UTG had transferred certain subsidiaries to third parties pursuant to agreements designed to give UTG the economic benefits of ownership, and UTG materially overstated its revenues and profits in its quarterly reports in 2010. In 2010, UTG is also alleged to have failed to obtain an auditor's attestation to its assessment of internal controls. Jiang and Xie are alleged to have knowingly failed to establish proper internal controls at UTG, caused documents to be falsified, and falsely certified to UTG's internal controls for 2010. + In the settled complaint, the Commission alleges that UTG, Jiang and Xie violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The Commission further alleges violations of, or aiding and abetting violations of, the reporting, recordkeeping and internal controls provisions of the federal securities laws, Sections 13(a), 13(b)(2)(A) & (B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13a-14 and 13b2-1 thereunder. Without admitting or denying the allegations, UTG, Jiang and Xie have consented to the entry of final judgments that: (i) permanently enjoins them from future violations of the federal securities laws; (ii) orders UTG, Jiang and Xie to pay civil penalties of $750,000, $125,000 and $60,000, respectively; and (iii) bars Jiang and Xie from serving as an officer or director of a public company for five years. The proposed settlement is subject to approval by the court. + The Commission also announced today the entry of an order revoking the registration of each class of registered securities of UTG for failure to make required periodic filings with the Commission. See Order Instituting Proceedings, Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Universal Travel Group, Administrative Proceeding File No. 3-15528, Exchange Act Release No. 34-70536 (September 27, 2013). + The SEC's investigation was conducted by Robert Wilson, Brad Mroski and Melissa Robertson. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Kaplan + + + + + + + + !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\/514666","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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Tomasetta, Eugene F. Hovanec, Yatin D. Mody, and Nicole R. Kaplan + + + + + + + + + + + + Vitesse Semiconductor Corporation, Louis R. Tomasetta, Eugene F. Hovanec, Yatin D. Mody, and Nicole R. Kaplan + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22825 / September 27, 2013 + Accounting and Auditing Enforcement Release No. 3495 / September 27, 2013 + Securities and Exchange Commission v. Vitesse Semiconductor Corporation, Louis R. Tomasetta, Eugene F. Hovanec, Yatin D. Mody, and Nicole R. Kaplan , Civil Action No. 10 Civ. 9239 (JSR) (S.D.N.Y., filed December 10, 2010) + + Executives to be Permanently Enjoined, to Pay Civil Penalties and Disgorgement, and to be Barred for Ten Years from Serving as an Officer and Director of any Public Company + The Commission also Determines Not to Seek Civil Penalties Against Two Other Former Senior Vitesse Employees Based on Their Cooperation + + + The Securities and Exchange Commission today settled civil fraud charges against Louis R. Tomasetta, the former Chief Executive Officer and a former Director of Vitesse Semiconductor Corporation (Vitesse), and Eugene F. Hovanec, a former Vice President of Finance, Chief Financial Officer, and Executive Vice President of Vitesse, arising from alleged schemes to improperly recognize revenue and backdate stop option grants. + On December 10, 2010, the Commission charged Tomasetta and Hovanec, and two other former senior Vitesse employees, with perpetrating a scheme from September 2001 to April 2006 to improperly inflate Vitesse's revenues through channel stuffing and the failure to timely record credits. The Commission also charged Tomasetta and Hovanec with perpetrating a scheme from 1995 to 2006 to backdate stock option grants and to fail to record millions of dollars in compensation expenses associated with the backdated grants. Finally, the Commission alleged that Tomasetta and Hovanec attempted to cover-up their options backdating scheme by fabricating fraudulent meeting minutes of the Compensation Committee of Vitesse's Board. + Without admitting or denying the allegations in the Commission's complaint, Tomasetta consented to the entry of a final judgment permanently enjoining him from violating and/or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, as well as the financial reporting, record-keeping, internal controls, false statements to auditors, proxy, and securities reporting provisions of the federal securities laws. Tomasetta also agreed to be barred from serving as an officer or director of any public company for ten years. Tomasetta will pay $2,126,450 in disgorgement, in satisfaction of the Commission's claim to recover the "in-the-money benefit" from his exercise of backdated stock option grants, and a $100,000 civil penalty. Under the terms of the settlement, Tomasetta's disgorgement shall be deemed satisfied by his prior payment of $1,200,000 and his transfer of 814,655 shares of Vitesse stock to the class action Settlement Fund in Louis Grasso v. Vitesse Semiconductor et.al., No CV 06-02639 R (CTx) (C.D. Cal.). + Without admitting or denying the allegations in the Commission's complaint, Hovanec consented to the entry of a final judgment permanently enjoining him from violating and/or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, as well as the financial reporting, record-keeping, internal controls, false statements to auditors, and securities reporting provisions of the federal securities laws. Hovanec also agreed to be barred from serving as an officer or director of any public company for ten years. Hovanec will pay $781,280 in disgorgement, in satisfaction of the Commission's claim to recover the "in-the-money" benefit from his exercise of backdated stock option grants, and a $50,000 civil penalty. Under the terms of the settlement, Hovanec's disgorgement shall be deemed satisfied by his prior payment of $250,000 and his transfer of 458,014 shares of Vitesse stock to the class action Settlement Fund in Louis Grasso v. Vitesse Semiconductor et.al. , No CV 06-02639 R (CTx) (C.D. Cal.). + The settlements are subject to the approval of the United States District Court for the Southern District of New York. + The Commission also determined that it would not seek to impose civil monetary penalties against two other defendants-former Vitesse Controller and Chief Financial Officer Yatin D. Mody and former Vitesse Director of Finance Nicole R. Kaplan-due to their timely and substantial cooperation in the Commission's investigation and litigation. + On December 10, 2010, the Commission filed civil fraud charges against Mody and Kaplan for their participation in the revenue recognition scheme, and entered into bifurcated settlements with each of them, on a neither admit nor deny basis. Mody agreed to entry of a judgment permanently enjoining him from violating and/or aiding and abetting the antifraud, reporting and record-keeping provisions of the federal securities laws; permanently barring him from serving as an officer or director of any public company; ordering him to pay $162,320 in disgorgement and prejudgment interest; and providing that, upon motion of the Commission, the court would determine the appropriateness and amount of any civil penalty. Kaplan agreed to entry of a judgment permanently enjoining her from violating and/or aiding and abetting the antifraud, reporting and record-keeping provisions of the federal securities laws; ordering her to pay $47,495 in disgorgement and prejudgment interest; and providing that, upon motion of the Commission, the court would determine the appropriateness and amount of any civil penalty. Both Mody and Kaplan also agreed to permanent suspensions from appearing or practicing before the Commission as accountants. See Litigation Release No. 21769 (December 10, 2010). + The Commission previously filed settled charges in this matter against Vitesse. On December 10, 2010, the Commission charged Vitesse with fraud and other securities violations based on the revenue recognition and stock option backdating schemes noted above. Vitesse settled the matter, on a neither admit nor deny basis, by agreeing to pay a $3 million dollar penalty and to be permanently enjoined from violating the antifraud, reporting, record keeping and proxy statement provisions of the federal securities laws. 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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/2013/AAER-3496.pdf b/raw/aaer/2013/AAER-3496.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c04efbfb33bb531107a635ab6570237a4a002581 Binary files /dev/null and b/raw/aaer/2013/AAER-3496.pdf differ diff --git a/raw/aaer/2013/AAER-3496.txt b/raw/aaer/2013/AAER-3496.txt new file mode 100644 index 0000000000000000000000000000000000000000..1379f52ec57097e1aa378e2f017a52485c3519e5 --- /dev/null +++ b/raw/aaer/2013/AAER-3496.txt @@ -0,0 +1,362 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70549 / September 27, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3496 / September 27, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15530 + + + + +In the Matter of + +SCOTT LONDON, 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 Scott London, +CPA (“Respondent” or “London”) pursuant to Sections 4C +1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”), Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess the +requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . 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. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent consents to the Commission’s +jurisdiction over him and the subject matter of these proceedings and 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 multiple auditor independence rule violations by an accountant, +London, who accepted cash and other things of value as compensation for tips he provided to a +friend concerning five audit clients. On at least 18 occasions between October 2010 and February +2013, Respondent, a partner at KPMG LLP (“KPMG”) disclosed material non-public information +concerning five of KPMG’s corporate clients to Bryan Shaw (“Shaw”), who traded in the +companies’ securities prior to several corporate announcements. KPMG issued audit reports to and +reviewed quarterly financial statements for the five corporate clients in connection with and +following these announcements. The clients filed with the Commission annual reports, quarterly +reports, as well as proxy or information statements which incorporated financial statements. +Respondent’s conduct caused KPMG to violate the independence rules with respect to the five +clients. These violations in turn caused the five clients to make filings with the Commission that did +not comply with the issuers’ reporting requirements. After KPMG learned of Respondent’s +conduct, it resigned from two audit engagements, withdrew previously issued audit reports for these +clients, and withdrew reports on the effectiveness of their internal control over financial reporting. +B. RESPONDENT + + Scott London, age 50, of Agoura Hills, California, is a certified public accountant licensed +to practice in the states of California and Nevada. London was employed at KPMG LLP and its +predecessor, KPMG Peat Marwick LLP (“KPMG”) from 1984 until his termination on April 5, +2013. During the time period relevant to this proceeding, London was the Partner-in-Charge of +KPMG’s Pacific Southwest business unit audit practice that served clients in California, Arizona +and Nevada, and was the Lead Audit Engagement Partner on the Herbalife, Ltd. (“Herbalife”) and +Skechers USA, Inc. (“Skechers”) engagements. London also served as the Account Executive for +Deckers Outdoor Corp. (“Deckers”) from 2009 through the 2011 audit engagement period. Due to +his position at the firm, London routinely had access to material non-public information regarding +many of KPMG’s audit clients. + 3 + +C. FACTS + + 1. Affected Issuers + +a) Herbalife, Ltd. (“Herbalife”) is a Cayman Islands corporation headquartered +in the Cayman Islands, with corporate offices in Los Angeles, California. During the time period +relevant to this proceeding, Herbalife’s stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act, and traded on the New York Stock Exchange. KPMG was +Herbalife’s auditor during the time period relevant to this proceeding. On April 9, 2013, Herbalife +filed a Form 8-K announcing that KPMG resigned as its auditor on April 8, 2013. The Form 8-K +stated that KPMG “concluded it was not independent because of alleged insider trading in +[Herbalife’s] securities by one of KPMG’s former partners, who until April 5, 2013, was the KPMG +engagement partner on [Herbalife’s] audit.” As a result, the Form 8-K disclosed, “KPMG notified +[Herbalife] its independence has been impaired and [it] had no option but to withdraw its audit +report on [Herbalife’s] financial statements for the fiscal years ended December 31, 2010, 2011 and +2012 and the effectiveness of internal control over financial reporting as of December 31, 2010, +2011 and 2012. . . .” +b) Skechers USA, Inc. (“Skechers”) is a Delaware corporation headquartered in +Manhattan Beach, California. During the time period relevant to this proceeding, Skechers’ stock +was registered with the Commission pursuant to Section 12(b) of the Exchange Act, and traded on +the New York Stock Exchange. KPMG was Skechers’ auditor during the time period relevant to +this proceeding. On April 10, 2013, Skechers filed a Form 8-K announcing that KPMG resigned as +its auditor on April 8, 2013. The Form 8-K stated that KPMG “concluded it was not independent +because of alleged insider trading in [Skechers’] securities by one of KPMG’s former partners who +was the KPMG engagement partner on [Skechers’] audit for the 2011 and 2012 fiscal years.” As a +result, the Form 8-K disclosed, “KPMG notified [Skechers] its independence has been impaired and +it had no option but to withdraw its audit report on [Skechers’] financial statements for the fiscal +years ended December 31, 2011 and 2012 and the effectiveness of internal control over financial +reporting as of December 31, 2011 and 2012. . . .” +c) Deckers Outdoor Corp. (“Deckers”) is a Delaware corporation headquartered +in Goleta, California. During the time period relevant to this proceeding, Deckers’ stock was +registered with the Commission pursuant to Section 12(b) of the Exchange Act, and traded on the +Nasdaq Global Select Market. KPMG was Deckers’ auditor during the relevant time period. +d) RSC Holdings, Inc. (“RSC Holdings”) was a Delaware corporation +headquartered in Scottsdale, Arizona. During the time period relevant to this proceeding, RSC +Holdings’ stock was registered with the Commission pursuant to Section 12(b) of the Exchange +Act, and its shares were traded on the New York Stock Exchange. On May 15, 2012, RSC +Holdings filed a Form 15 terminating its securities registration with the Commission pursuant to +Rules 12g-4(a)(1) and 12h-3(b)(1)(i) of the Exchange Act. KPMG was RSC Holdings’ auditor +during the relevant time period. + 4 +e) Pacific Capital Bancorp. (“Pacific Capital”) was a Delaware corporation and +a bank holding company headquartered in Santa Barbara, California. During the time period +relevant to this proceeding, Pacific Capital’s stock was registered with the Commission pursuant to +Section 12(b) of the Exchange Act, and its shares were traded on The Nasdaq Stock Market. On +December 19, 2012, Pacific Capital filed a Form 15 terminating its securities registration with the +Commission pursuant to Rules 12g-4(a)(1) and 12h-3(b)(1)(i) of the Exchange Act. KPMG was +Pacific Capital’s auditor during the relevant time period. + 2. Lack of Independence + + a) KPMG is a Delaware limited liability partnership and the U.S. member firm +of the KPMG network of independent member firms affiliated with KPMG International +Cooperative, a Swiss entity. KPMG is registered with the Public Company Accounting Oversight +Board (“PCAOB”). At all relevant times and continuing to the present, KPMG has provided +auditing services to a variety of companies, including companies whose securities are registered +with the Commission and traded in the U.S. markets. + + b) During the time period relevant to this proceeding, KPMG performed annual +audits and quarterly reviews of financial statements for Herbalife, Skechers, Deckers, RSC +Holdings, and Pacific Capital (collectively, the “Audit Clients”). + + c) During the time period relevant to this proceeding, London was KPMG’s +Lead Audit Engagement Partner on the Herbalife and Skechers engagements. London was also +KPMG’s Partner-in-Charge of the firm’s Pacific Southwest business unit audit practice that served +each of the above-referenced Audit Clients. As the Partner-in-Charge, London was responsible for +the financial performance of the audit practice, and involved in the annual client continuance +process with respect to all audit clients of the Pacific Southwest business unit. London was also +responsible for assigning the Lead Audit Engagement Partners in the Pacific Southwest business +unit (including the Lead Audit Engagement Partners for Deckers and RSC Holdings during the +relevant period). London evaluated the performance of, and provided input into, the compensation +decisions for most of the audit partners in the business unit. Specifically, he evaluated the Lead +Audit Engagement Partners for audits and interim reviews of Deckers’ and RSC Holdings’ annual +and quarterly financial statements during the relevant period. London further served as the Account +Executive for Deckers from 2009 through the 2011 audit engagement period. + d) London provided Shaw with material non-public information that London +received in the course of his employment with KPMG, concerning financial results, earnings, +guidance and/or merger announcements by the Audit Clients, with the knowledge or belief that +Shaw intended to use the information to trade in the companies’ securities in advance of the +following public announcements: + + 5 +Issuer Date Event +Deckers 10/28/10 Financial results for fiscal third quarter +Herbalife 11/1/10 Financial results for fiscal third quarter +Skechers 2/16/11 Financial results for fiscal fourth quarter and year end +Herbalife 2/22/11 Financial results for fiscal fourth quarter and year end +Skechers 4/27/11 Financial results for fiscal first quarter +Herbalife 5/2/11 Financial results for fiscal first quarter +Skechers 7/27/11 Financial results for fiscal second quarter +Herbalife 8/1/11 Financial results for fiscal second quarter +Skechers 10/26/11 Financial results for fiscal third quarter +Deckers 10/27/11 Financial results for fiscal third quarter +RSC Holdings 12/15/11 Agreement to be acquired by United Rentals, Inc. +Skechers 2/15/12 Financial results for fiscal fourth quarter and year end +Herbalife 2/21/12 Financial results for fiscal fourth quarter and year end +Deckers 2/23/12 Financial results for fiscal fourth quarter and year end +Pacific Capital 3/9/12 Agreement to be acquired by UnionBanCal Corporation +Deckers 4/26/12 Financial results for fiscal first quarter +Herbalife 2/19/13 Financial results for fiscal fourth quarter and year end +Deckers 2/28/13 Financial results for fiscal fourth quarter and year end + e) London accepted cash and other valuable items, including jewelry, concert +tickets and a Rolex Daytona Cosmograph, as compensation for the inside information he provided +to Shaw. + f) London knew that passing material non-public information to Shaw was +wrong and understood that KPMG explicitly prohibited employees from disclosing inside +information regarding clients. + g) KPMG represented that it was independent and had conducted audits “in +accordance with the standards of the Public Company Accounting Oversight Board (United States)” +in each Report of Independent Registered Public Accounting Firm (“audit reports”) it provided to +the Audit Clients, for the years listed below: + (1) Herbalife for its fiscal years ended December 31, 2010, 2011 and 2012. + (2) Deckers for its fiscal years ended December 31, 2010, 2011 and 2012. + (3) Skechers for its fiscal years ended December 31, 2010, 2011 and 2012. + (4) RSC Holdings for its fiscal year ended December 31, 2011. + (5) Pacific Capital for its fiscal year ended December 31, 2011. + h) KPMG conducted interim reviews of financial statements for Herbalife and +Deckers for the quarter ended September 30, 2010. KPMG also conducted interim reviews of +financial statements for Herbalife, Deckers and Skechers for the quarters ended March 31, June 30, +and September 30, in the fiscal years ended December 31, 2011 and 2012. Additionally, KPMG + 6 +conducted interim reviews of financial statements for Pacific Capital for the quarters ended March +31, June 30, and September 30, 2012. + i) KPMG represented to each of the Audit Clients during the affected periods +that it was “independent” within the meaning of the federal securities laws and therefore able to +serve as each client’s external auditor. These written confirmations did not disclose London’s +receipt of compensation in exchange for providing inside information to Shaw concerning the Audit +Clients as detailed above. + j) The Audit Clients filed with the Commission annual financial statements that +included KPMG’s audit reports on Forms 10-K. The Audit Clients, additionally, filed with the +Commission quarterly financial statements that had been reviewed by KPMG on Forms 10-Q. + k) RSC Holdings also filed a proxy statement which incorporated by reference +a Form 10-K filed for the fiscal year ended December 31, 2011, that contained KPMG’s audit +report. Pacific Capital, similarly, filed a Schedule 14C information statement with the Commission +that incorporated by reference a Form 10-K filed for the fiscal year ended December 31, 2011, that +contained KPMG’s audit report. + 3. Violations + + a) Rule 2-01 of Regulation S-X codifies accountant qualification requirements, +and Rule 2-01(b) articulates the general standard of auditor independence. Preliminary Note 3 to +Rule 2-01 states that the Commission will consider all relevant facts and circumstances in +determining whether an accountant is independent. Rule 2-01(b) provides that “[t]he Commission +will not recognize an accountant as independent, with respect to an audit client, if the accountant is +not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude +that the accountant is not, capable of exercising objective and impartial judgment on all issues +encompassed within the accountant’s engagement.” + b) Rule 2-01(c)(1) of Regulation S-X provides in pertinent part that “[a]n +accountant is not independent if, at any point during the audit and professional engagement period, +the accountant has a direct financial interest or a material indirect financial interest in the +accountant's audit client. . .” Similarly, the professional independence standards for accountants +and auditors, as set forth in AICPA ET Rule 101.02, and adopted by the PCAOB as its interim +ethical standards under Rule 3600T, state, in part, that “[i]ndependence shall be considered to be +impaired if during the period of the professional engagement a covered member had . . . any direct +or material indirect financial interest in the client. . . .” + c) Rule 2-01(f)(11) of Regulation S-X defines covered persons to include +partners, principals, shareholders, and employees of an accounting firm who are on the “audit +engagement team” or in the “chain of command,” as well as any other partner, principal, or +shareholder from an “office” of the accounting firm in which the lead audit engagement partner +primarily practices in connection with the audit. Rule 2-01(f)(7)(i), in turn, defines the “audit +engagement team” as including “all partners . . . participating in an audit, review, or attestation +engagement of an audit client, including audit partners. . . .”; Rule 2-01(f)(7)(ii) defines the “audit + 7 +partner” as including the “lead or coordinating audit partner having primary responsibility for the +audit or review”; and Rule 2-01(f)(8) provides that persons in the “chain of command” include +individuals who “(i) [s]upervise or have direct management responsibility for the audit, including +at all successive senior levels through the accounting firm’s chief executive; (ii) [e]valuate the +performance or recommend the compensation of the audit engagement partner; or (iii) [p]rovide +quality control or other oversight of the audit.” + d) London was a covered person as to all of the Audit Clients during the +relevant period. London was the Lead Audit Engagement Partner on the Herbalife and Skechers +engagements, and in the chain of command with respect to each of the Audit Clients as a result of +his role as the partner in charge of KPMG’s Pacific Southwest business unit audit practice. + e) London had prohibited financial interests in the Audit Clients, as a result of +his receipt of cash and other valuable consideration in exchange for the material non-public +information he provided Shaw concerning financial results, earnings, guidance and/or merger +announcements that London either knew or believed Shaw intended to use to trade in the +companies’ securities prior to public announcements. London therefore lacked independence with +respect to the Audit Clients under Rules 2-01(b) and (c)(1) of Regulation S-X, PCAOB Rule 3600T, +and AICPA ET Rule 101.02. +f) Rule 2-02(b)(1) of Regulation S-X requires accountants’ reports to state +“whether the audit was made in accordance with generally accepted auditing standards.” +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” SEC Release No. 34- +49708. Thus, an auditor violates Rule 2-02(b)(1) of Regulation S-X if it issues a report stating that +it had conducted its audit in accordance with PCAOB standards when it had not. + g) As a result of London’s conduct described above, KPMG violated Rule 2- +02(b)(1) of Regulation S-X. KPMG’s audits and interim reviews of the Audit Clients’ financial +statements were not conducted in accordance with PCAOB standards because London, a covered +person in KPMG, lacked independence as to the Audit Clients. As a result of his conduct, London +willfully aided and abetted and caused KPMG’s violation of Rule 2-02(b)(1) of Regulation S-X. + h) KPMG’s failure to comply with Rule 2-02(b)(1) of Regulation S-X in turn +caused the Audit Clients to file annual reports with the Commission on Forms 10-K that failed to +include independently audited financial statements as required by Exchange Act Section 13(a) and +Rule 13a-1 thereunder. KPMG’s lack of independence, additionally, caused the Audit Clients to +file interim financial statements on Forms 10-Q, pursuant to Rule 13a-13 under the Exchange Act, +that had not been reviewed by an independent public accountant prior to filing, as required under +Rule 10-01(d) of Regulation S-X. As a result of his conduct, London willfully aided and abetted +and caused the Audit Clients' violations of Section 13(a) of the Exchange Act, and Rules 13a-1 and +13a-13 thereunder during the aforementioned fiscal years. + +i) KPMG’s failure to comply with Rule 2-02(b)(1) of Regulation S-X also +caused the Audit Clients to file proxy or information statements on Schedules 14A and 14C that + 8 +failed to comply with the requirements of Sections 14(a) and 14(c) of the Exchange Act and Rules +14a-3 and 14c-2 thereunder. Specifically, the proxy statements filed by the Audit Clients in +connection with annual meetings of shareholders were neither accompanied nor preceded by +audited financial statements prepared in accordance with Regulation S-X, as required pursuant to +Rules 14a-3 and 14c-2. Furthermore, the proxy statement filed by RSC Holdings and the +information statement filed by Pacific Capital in connection with the announced acquisitions +incorporated each company’s Form 10-K containing KPMG’s improperly issued audit report. As a +result of his conduct, London willfully aided and abetted and caused the Audit Clients’ violations +of Section 14(a) and 14(c) of the Exchange Act and Rules 14a-3 and 14c-2 thereunder. + + j) As a result of the conduct described above, London engaged in improper +professional conduct. For accountants, improper professional conduct includes “intentional or +knowing conduct, including reckless conduct that results in a violation of applicable professional +standards.” Rule 102(e)(1)(iv)(A). London intentionally and knowingly violated a duty of trust +and confidence owed to KPMG and the Audit Clients when he tipped Shaw while a covered +person and thus failed to comply with Rules 2-01(b) and (c)(1) of Regulation S-X, and violated +PCAOB Rule 3600T and AICPA ET Rule 101.02. + +4. Findings + + a) Based on the foregoing, the Commission finds that London (a) willfully +aided and abetted and caused KPMG’s violations of Rule 2-02(b)(1) of Regulation S-X; and (b) +willfully aided and abetted and caused the Audit Clients’ violations of Sections 13(a), 14(a) and +14(c) of the Exchange Act, and Rules 13a-1, 13a-13, 14a-3 and 14c-2 promulgated thereunder. + + b) Based on the foregoing, the Commission finds that London engaged in +improper professional conduct pursuant to Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent London’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + + + 9 +A. London shall cease and desist from committing or causing any violations and any +future violations of Sections 13(a), 14(a) and 14(c) of the Exchange Act and Rules 13a-1, 13a-13, +14a-3 and 14c-2 promulgated thereunder, and of Rule 2-02(b)(1) of Regulation S-X. + + B. London is denied the privilege of appearing or practicing before the Commission as +an accountant. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3497.pdf b/raw/aaer/2013/AAER-3497.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3edb1116d6e2e9d2a5e77b429963c0d38d90216c Binary files /dev/null and b/raw/aaer/2013/AAER-3497.pdf differ diff --git a/raw/aaer/2013/AAER-3497.txt b/raw/aaer/2013/AAER-3497.txt new file mode 100644 index 0000000000000000000000000000000000000000..05791f865d25e7ce0e7f2e3f301b8760aa4de1f6 --- /dev/null +++ b/raw/aaer/2013/AAER-3497.txt @@ -0,0 +1,77 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70553 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3497 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15531 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +RICK D. SNOW, 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 Rick D. Snow (“Snow”) 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. Snow, age 49, was a certified public accountant licensed to practice in the State of +Ohio (currently inactive). From 2002 until November 2009, Snow was the Chief Financial +Officer of Fair Finance Company, an Ohio-based consumer finance company. Prior to joining +Fair Finance Company, Snow was a senior manager for a regional accounting firm, as well as an +accountant for Grant Thornton LLP. + + +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 December 12, 2012, a judgment of conviction was entered against Snow in +United States v. Snow, Case No. 1:11-Cr-00042-003, in the United States District Court for the +Southern District of Indiana, finding him guilty of one count of conspiracy to commit wire fraud +and securities fraud, three counts of wire fraud, and one count of securities fraud. + +3. As a result of this conviction, Snow was sentenced to 120 months imprisonment +in a federal penitentiary and ordered to pay restitution in the amount of $208,830,082.27. + +III. + +In view of the foregoing, the Commission finds that Snow 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 Rick D. Snow 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. + + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3498.pdf b/raw/aaer/2013/AAER-3498.pdf new file mode 100644 index 0000000000000000000000000000000000000000..7466ca8b7a023394372695841a79cfa1e0efc93f Binary files /dev/null and b/raw/aaer/2013/AAER-3498.pdf differ diff --git a/raw/aaer/2013/AAER-3498.txt b/raw/aaer/2013/AAER-3498.txt new file mode 100644 index 0000000000000000000000000000000000000000..9b41fb3ae738ff7cb269c11055fac0ffd5536cbf --- /dev/null +++ b/raw/aaer/2013/AAER-3498.txt @@ -0,0 +1,109 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70557 / September 30, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3498 / September 30, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-13739 + +In the Matter of +John W. Jacobsen, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On January 7, 2010, John W. Jacobsen, CPA (“Jacobsen”) was denied the privilege of +appearing or practicing as an accountant before the Commission as a result of settled public +administrative proceedings instituted by the Commission against Jacobsen pursuant to Section +4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission's Rules of Practice. +1 This order is issued in response to Jacobsen’s application for +reinstatement to practice before the Commission as an accountant. + +Jacobsen served as the engagement partner for Eide Bailly LLP’s (“Eide”) review of +Quest Resource Corporation (“Quest Resource”) and Quest Energy Partners, L.P.’s (“Quest +Energy” and, together with Quest Resource”, “Quest”) financial statements for the quarter ended +June 30, 2008. The Commission alleged that while performing these professional services, +Jacobsen learned that Quest had engaged in a circular series of funds transfers to and from a +company controlled by the CEO of Quest Resource and general partner of Quest Energy. As a +result of these transfers, $10 million was outstanding at the time of Eide’s review of Quest’s +second quarter financial statements. Jacobsen failed to undertake adequate procedures to +determine whether the transfers were properly recorded in Quest’s financial statements and +properly disclosed in its Forms 10-Q for the second quarter of 2008. Specifically, Jacobsen +failed to undertake adequate procedures to ascertain the terms and other details of the +transactions; to determine whether the transactions were authorized by Quest’s board of +directors; or whether Quest had properly accounted for the transactions, including whether it had + +1 See Accounting and Auditing Enforcement Release No. 3098 dated January 7, 2010. Jacobsen was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. +established appropriate reserves. Moreover, Jacobsen failed to adequately consider whether the +transfers might constitute fraud or an illegal act and whether the transfers violated Section 13(k) +of the Exchange Act which prohibits any issuer to make “personal loans” to any executive +officer. + +Jacobsen has met all of the conditions set forth in the original order and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Jacobsen attests that he will undertake to have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission, while practicing before the Commission in this capacity. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.” +2 This “good cause” determination is +necessarily highly fact specific. + + On the basis of the information supplied, representations made, and undertakings agreed +to by Jacobsen, it appears that he has complied with the terms of the January 7, 2010 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of +Practice, and that Jacobsen, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Jacobsen, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that John +W. Jacobsen, CPA is hereby reinstated to appear and practice before the Commission as an +accountant. + +By the Commission. + + + +Elizabeth M. Murphy +Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3499.pdf b/raw/aaer/2013/AAER-3499.pdf new file mode 100644 index 0000000000000000000000000000000000000000..076242faf504af3c0800803978f10b63a0945245 Binary files /dev/null and b/raw/aaer/2013/AAER-3499.pdf differ diff --git a/raw/aaer/2013/AAER-3499.txt b/raw/aaer/2013/AAER-3499.txt new file mode 100644 index 0000000000000000000000000000000000000000..634434bf3d42a91610696afd0f03f501607f3c59 --- /dev/null +++ b/raw/aaer/2013/AAER-3499.txt @@ -0,0 +1,121 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70561 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3499 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15532 + +In the Matter of + +MICHAEL McGRATH, 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 Michael +McGrath (“McGrath” or “Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice. +1 + + + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. McGrath, age 59, was a certified public accountant licensed to practice in the +State of Illinois, but that license became inactive in 1986. He served as Chief Financial Officer of +Mercantile Bancorp (“Mercantile”) from 1986 until his termination in 2012. + + 2. Mercantile was, at all relevant times, a Delaware corporation and bank +holding company with its principal place of business in Quincy, Illinois. Through its subsidiary +banks, Mercantile conducted a consumer and commercial banking business and its securities were +registered with the Commission pursuant to Section 12(b) of the Exchange Act and traded on the +NYSE Amex under the symbol MBR. In December 2011, Mercantile filed a Form 15 Certification +and Notice of Termination of Registration. After the relevant time period, the FDIC closed two of +Mercantile’s three subsidiary banks. On June 27, 2013, Mercantile filed a bankruptcy petition. + + 3. On September 24, 2013, the Commission filed a complaint against McGrath +in SEC v. Mercantile Bancorp, et al. (Civil Action No. 3:13-cv-3341). On September 26, 2013, the +court entered an order permanently enjoining McGrath, by consent, from future violations of +Section 17(a)(3) of 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, and aiding and abetting future violations of +Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 +thereunder. McGrath was also ordered to pay a $100,000 civil penalty and barred from serving as +an officer or director of a public company. + + 4. The Commission’s complaint alleged, among other things, that generally +accepted accounting principles (“GAAP”) required Mercantile to disclose a probable, material loss +in an amended S-1 filing and to recognize that loss in Mercantile’s Form 10-Q for the third quarter +of 2010. Mercantile—through former CEO Ted Awerkamp and former CFO McGrath—did +neither. Because it did not recognize that loss in its third quarter financial statements, Mercantile +was able to (i) falsely state that its main subsidiary bank had met certain capital ratio thresholds +required by the FDIC; (ii) understate its net loss for the quarter and the nine months ending +September 30 +th as $7.5 million and $11 million (instead of at least $12.78 million and at least +$16.28 million); and (iii) falsely state that its main subsidiary bank had net income of $1.8 million +for first nine months of 2010 when it actually had a net loss of at least $3.48 million during that + 3 +period. The complaint also alleges that McGrath and Awerkamp misled Mercantile’s outside +auditor and circumvented the company’s internal accounting controls. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent McGrath’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. McGrath is suspended from appearing or practicing before the Commission as an +accountant. + + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3500.pdf b/raw/aaer/2013/AAER-3500.pdf new file mode 100644 index 0000000000000000000000000000000000000000..22965405504122e82fb38dfaf2007f01073b4a43 Binary files /dev/null and b/raw/aaer/2013/AAER-3500.pdf differ diff --git a/raw/aaer/2013/AAER-3500.txt b/raw/aaer/2013/AAER-3500.txt new file mode 100644 index 0000000000000000000000000000000000000000..4ea24d5506aa4deb8a22db847924ef4d15452868 --- /dev/null +++ b/raw/aaer/2013/AAER-3500.txt @@ -0,0 +1,720 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70562 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3500 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15534 + + + + +In the Matter of + +PATRIZIO & ZHAO LLC and +XINGGENG (JOHN) ZHAO, +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 Patrizio & +Zhao LLC (“P&Z”) and Xinggeng (John) Zhao, CPA (“Respondents”) pursuant to Sections 4C1 +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess the +requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + 2 + +II. + + In anticipation of the institution of these proceedings, Respondents have each submitted an +Offer of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds +3 that: + +A. SUMMARY + +1. This matter involves improper professional conduct under Rule 102(e) of the +Commission’s Rules of Practice and related violations by Patrizio & Zhao LLC (“P&Z”) partner +Xinggeng (John) Zhao. P&Z served as auditor to Keyuan Petrochemicals, Inc. (“Keyuan”), a +China-based issuer, and Zhao was the engagement partner. + +2. On February 28, 2013, the Commission filed a complaint against Keyuan alleging +that between May 2010 and January 2011, in what was its first year as a U.S. public company, +Keyuan systematically failed to disclose in its SEC filings numerous material related party +transactions, including transactions between Keyuan and its CEO and controlling shareholders as +well as entities controlled by or affiliated with those persons. +4 The Commission further alleged +that the related party transactions took the form of loan guarantees, purchases of raw materials, +sales of products, and short term cash transfers for financing purposes. + +3. P&Z conducted audits and interim reviews of the periods in which Keyuan failed +to disclose the material related party transactions. P&Z audited Keyuan’s December 31, 2008 +(“2008”) and December 31, 2009 (“2009”) financial statements (the “Keyuan Audits”). P&Z +also conducted interim reviews of Keyuan’s financial statements for the first, second, and third +quarters of 2010 (the “Keyuan Interim Reviews”). + + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 See SEC v. Keyuan Petrochemicals, Inc., Civil Action No. 13-cv-00263 (D.D.C.). + 3 + +4. In conducting the Keyuan Audits and Keyuan Interim Reviews, Zhao failed to +comply with Public Company Accounting Oversight Board (“PCAOB”) standards.5 P&Z +workpapers and other documents reflect many of the same types of related party transactions that +Keyuan failed to disclose. Zhao, who determined that related party transactions were an audit +risk area, reviewed documentation reflecting that Keyuan was engaged in such transactions. +Nonetheless, he approved the issuance of unqualified audit opinions as well as interim review +reports on Keyuan’s financial statements that failed to disclose the material related party +transactions, in violation of U.S. generally accepted accounting principles (“GAAP”). +6 + +5. By failing to conduct the Keyuan Audits and Keyuan Interim Reviews in +accordance with PCAOB standards, P&Z and Zhao engaged in improper professional conduct. +P&Z and Zhao also caused the primary disclosure and reporting violations that were the subject +of the Commission’s civil action against Keyuan. + +B. RESPONDENTS + +6. Xinggeng (John) Zhao, age 48, is a Chinese citizen and resident of Montville, +New Jersey. Zhao is a founding partner of P&Z and head of the firm’s China practice. Zhao is a +Certified Public Accountant (“CPA”) licensed in New Jersey. Zhao served as the engagement +partner on the Keyuan Audits and Keyuan Interim Reviews. + +7. Patrizio & Zhao LLC is an accounting and auditing firm registered with the +PCAOB and based in Parsippany, New Jersey. The firm audits public companies, provides tax +preparation services and performs a limited number of non-public company audits. + +C. OTHER RELEVANT PARTY + +8. Keyuan Petrochemicals, Inc., is a Nevada corporation whose common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act. It is +headquartered in Ningbo, Zhejiang Province, China. NASDAQ suspended trading in Keyuan’s +shares on October 7, 2011 and delisted the shares on April 23, 2012. Currently, its shares are +quoted on OTC Link (formerly “Pink Sheets”) operated by OTC Markets Group Inc. under the +symbol “KEYP.” + +D. FACTS + + +5 Citations to PCAOB standards refer to standards in effect at the time of the conduct discussed herein. + +6 GAAP provides that an issuer has a duty to disclose material related party transactions. In particular, Financial +Accounting Standards Board Accounting Standards Codification Topic 850 (“ASC 850”), formerly known as +Statement of Financial Accounting Standards No. 57, provides that financial statements shall include disclosures of +material related party transactions. ASC 850 specifically enumerates purchases, borrowings, lendings, and guarantees +as “[e]xamples of common [related party] transactions.” + + 4 +Keyuan Failed to Disclose Material Related Party Transactions in Financial Statements +Audited and Reviewed by P&Z + +9. Keyuan, a China-based corporation, engages in the petrochemical business +through its wholly-owned subsidiary, Ningbo Keyuan Plastics Co., Ltd. (“Ningbo Keyuan +Plastics”). Chunfeng Tao, the CEO and Chairman of Keyuan, founded Ningbo Keyuan Plastics +in 2007, along with Keyuan’s controlling shareholders, Jicun Wang and Peijun Chen. In April +2010, Ningbo Keyuan Plastics consummated a reverse merger with a dormant Nevada shell +corporation, which was renamed as Keyuan Petrochemicals. + +10. P&Z was retained in September 2009 prior to the reverse merger and served as +Keyuan’s independent auditor in connection with the company’s initial public filings with the +Commission. Zhao served as the engagement partner for the Keyuan Audits and Keyuan Interim +Reviews. Accordingly, he had the final responsibility for the Keyuan Audits and Keyuan Interim +Reviews, including all accounting and auditing judgments made in connection with those +engagements. In connection with the Keyuan Audits, P&Z issued audit reports with an +unqualified opinion for 2008 and 2009. In connection with the Keyuan Interim Reviews, P&Z +issued interim review reports for the first, second and third quarters of 2010. + +11. Between May 2010 and January 2011, Keyuan filed two registration statements +on Form S-1. During this period, Keyuan further filed quarterly reports for the second and third +quarters of 2010 on Form 10-Q. P&Z’s audit opinions for 2008 and 2009 were included in +Keyuan’s registration statements. P&Z’s interim review reports for the second and third quarters +of 2010 were included in the relevant 10-Qs filed by Keyuan. + +12. In January 2011, Keyuan replaced P&Z with a new accounting firm to audit the +company’s December 31, 2010 (“2010”) financial statements. As part of its 2010 audit, in early +2011, the new accounting firm, among other things, identified previously-undisclosed related +party transactions involving Keyuan and its officers, directors, and controlling shareholders. + +13. In October 2011, Keyuan filed its 10-K for 2010. The following month, in +November 2011, Keyuan filed restated 10-Qs for the second and third quarters of 2010. In the +2010 10-K and the restated 10-Qs, Keyuan disclosed for the first time numerous material related +party transactions that occurred in 2009 and the first three quarters of 2010, periods that were the +subject of the audit and interim reviews by P&Z. The related party transactions—which included +loan guarantees, purchases of raw materials, sales of products, and short term cash transfers for +financing purposes—included transactions between the company and its CEO and controlling +shareholders as well as entities controlled by or affiliated with those persons. + +Related Party Transactions were a Significant Risk Area in the Keyuan Audits + +14. From the outset, Zhao had reason to view the Keyuan engagement as high risk. +Zhao was aware that Keyuan was a new company with a limited operating history that was +seeking to obtain a U.S exchange listing. He was further aware that Keyuan did not have any +employees knowledgeable about U.S. accounting requirements and was reliant on an outside + 5 +consultant to prepare its U.S. GAAP financial statements. More generally, Zhao considered the +firm’s Chinese audit clients to be high risk, and he further had a general understanding at the +time that it was common for Chinese companies to engage in related party transactions. Notably, +audit planning documents that Zhao reviewed and prepared specifically identified the company’s +lack of U.S. GAAP experience and related party transactions as audit risk areas. + +15. During the course of the Keyuan Audits, Zhao encountered red flags that Keyuan +had not properly identified and disclosed related parties and related party transactions. For +instance, during the audit planning, Zhao requested Keyuan’s Vice President of Accounting to +provide a list of Keyuan’s related parties and related party transactions. The Vice President of +Accounting informed Zhao that there were none. Moreover, the initial draft financial statements +prepared by the outside consultant and provided to P&Z did not identify any related parties or +disclose any related party transactions. + +16. Thereafter, however, P&Z audit staff obtained a list of related parties from +Keyuan and further identified related party transactions involving Keyuan, thus contradicting +Keyuan’s initial representations that there were no related parties or related party transactions. +For instance, audit workpapers and planning documents reflect the existence of related party +transactions in the form of loan guarantees, sales, other payables, and notes payables. Several +documents specifically noted the existence of related party transactions, while others indicated +that “further procedures and disclosures [of related party transactions] were necessary.” + +17. Zhao encountered yet additional red flags. The list of related parties provided by +Keyuan’s management did not include several entities identified as related parties in either audit +planning documents or audit workpapers prepared by P&Z audit staff. In addition, P&Z audit +workpapers indicate that audit staff identified transactions with entities identified as related +parties or members of Keyuan’s management that did not have proper approval. Finally, P&Z +was provided a management representation letter at the conclusion of the audit, signed by the +CEO, that stated that material related party transactions, including sales, payables, and +guarantees, had been properly recorded or disclosed in the financial statements; however, there +were no such disclosures anywhere in the financial statements. + +Zhao Failed to Conduct the Keyuan Audits in Accordance with PCAOB Standards + +Failure to exercise due professional care + +18. PCAOB standards require auditors to exercise due professional care when +conducting an audit and preparing a report. (AU § 230.01) Under this standard, auditors must +maintain an attitude of professional skepticism, which includes “a questioning mind and a critical +assessment of audit evidence.” (AU § 230.07) An auditor should view related party transactions +within the framework of existing accounting pronouncements, placing primary emphasis on the +adequacy of disclosure. (AU § 334.02) + +19. Zhao failed to exercise the requisite level of care and professional skepticism. He +prepared and reviewed 12/31/08 and 12/31/09 audit planning documents that reflected related + 6 +parties and material related party transactions and further reviewed numerous 12/31/08 and +12/31/09 audit schedules that reflected the existence of material related party transactions. These +transactions took the form of loan guarantees, sales, other payables/financings, and notes +payables. However, Zhao failed to perform a critical assessment of the audit evidence and ensure +that P&Z issued the appropriate audit opinion since no related party disclosures were included in +Keyuan’s financial statements, as required by U.S. GAAP, and otherwise failed to design or +perform procedures to determine the extent of the related party transactions and why Keyuan had +not disclosed such transactions. + + Improper reliance on representations by management + +20. PCAOB standards provide that representations from management are part of the +audit evidence the auditor obtains to complement other audit procedures. (AU § 333.03) If a +management representation is contradicted by other audit evidence, the auditor should +investigate the circumstances of the contradiction and consider the reliability of those +representations. (AU § 333.04) + +21. The primary related party audit procedure relied on by P&Z involved the use of a +list of related parties provided by Keyuan’s management. That list was purportedly used to +identify related party transactions during the Keyuan Audits. + +22. However, Zhao and members of the audit team came across audit evidence that +cast substantial doubts on the reliability of the management-provided list. For instance, P&Z +audit staff identified several additional related parties that were not included on the list provided +by management. Moreover, P&Z identified numerous transactions with related parties, including +transactions with persons and entities on the list provided by management. These subsequent +findings by P&Z, which were reviewed by Zhao, contradicted the initial management +representations to P&Z that Keyuan was not engaged in related party transactions. + +23. In these circumstances, PCAOB standards required Zhao to investigate the +circumstances behind the conflict between management’s representations regarding related +parties and related party transactions and the other audit evidence gathered by P&Z audit staff. +Zhao, however, did not direct the performance of any such procedures. Because Zhao failed to +further investigate these contradictions, he failed to comply with PCAOB standards and lacked a +basis to rely on the representations made by management. + +Failure to obtain sufficient competent evidential matter and properly audit related +party transactions + +24. PCAOB standards require an auditor to obtain sufficient competent evidential +matter to afford a reasonable basis for an opinion regarding the financial statements under audit. +(AU + § 326.01) In selecting particular substantive tests to achieve the audit objectives, an auditor +considers, among other things, the risk of material misstatement of the financial statements. (AU +§ 326.11) With respect to related party transactions, PCAOB standards require that after an +auditor identifies related party transactions, he or she should apply the procedures considered + 7 +necessary to obtain satisfaction concerning their purpose, nature, and extent and their effect on +the financial statements. (AU § 334.09) For each related party transaction for which disclosure +is required, PCAOB standards require that the auditor satisfy himself that the transaction is +adequately disclosed in the financial statements. (AU § 334.11) The higher the auditor’s +assessment of risk regarding related party transactions, the more extensive or effective the audit +tests should be. (AU § 9334.19) + +25. Zhao failed to obtain sufficient audit evidence to support an unqualified audit +opinion on Keyuan’s 2008 and 2009 financial statements. In particular, Zhao failed to obtain +audit evidence justifying why the material related party transactions reflected in the audit +documentation he reviewed (i.e., loan guarantees, sales, other payables/financings, and notes +payables) were not disclosed by Keyuan. Zhao also failed to perform adequate procedures to +determine the extent of Keyuan’s related party transactions and obtain sufficient evidence to +support the lack of related party disclosures by Keyuan in its 2008 and 2009 financial statements. + +Failure to ensure adequate audit documentation + +26. PCAOB Auditing Standard No. 3 requires, in part, that audit documentation +contain sufficient information to enable an experienced auditor, having no previous connection +with the engagement, to understand the procedures performed, the evidence obtained, and the +conclusions reached; who performed and reviewed the work; and the dates such work was +completed and reviewed. (AS 3.06) Zhao failed to comply with, and failed to ensure audit staff +under his supervision complied with, the applicable audit documentation standards. + +27. As an initial matter, P&Z’s audit documentation does not reflect several key +procedures purportedly employed by the engagement team to audit related party transactions: for +instance, there is no documentation reflecting that P&Z made an inquiry of Keyuan for an +identification of related parties and related party transactions (or management’s response that +there were no such transactions); that management provided a list of related parties; or that P&Z +audit staff used such a list to identify and test related party transactions. + +28. Audit documentation also does not reflect P&Z’s conclusions and findings on the +issue of related party transactions. For instance, audit documentation does not reflect why the +material related party transactions reflected in P&Z’s workpapers were not disclosed by Keyuan. +In addition, there is no explanation for how or why certain entities—although not on the +management-provided list—were identified by P&Z audit staff as related parties, or why +transactions with these entities were ultimately not disclosed as related party transactions in +Keyuan’s financial statements. Moreover, audit documentation does not reflect sufficient +information to explain and reconcile otherwise conflicting information regarding certain entities +identified as related parties. In addition, although related party transactions were identified as a +risk area for the Keyuan Audits, P&Z did not document what procedures were performed with +respect to the presentation and disclosure of related party transactions. + +29. Zhao also failed to fully document his review of audit workpapers and ensure +audit staff under his supervision properly documented their review of workpapers. None of the + 8 +2008 and 2009 audit testing workpapers bear any evidence of review by Zhao, the audit manager +or the audit senior. However, in the relevant audit documentation checklists, Zhao checked “yes” +to indicate that he had signed off and dated workpapers he had reviewed. Moreover, Zhao +reviewed audit documentation checklists which reflected that the audit senior had checked “yes” +to indicate that workpapers contained reviewer signatures when, in fact, none of the testing +workpapers contained any such evidence of review. + +30. Moreover, P&Z did not prepare an engagement completion document for the +Keyuan Audits that documented significant findings or issues, including, as it relates to related +party transactions. Zhao, however, checked “yes” in audit documentation checklists indicating +that he had prepared and/or reviewed the engagement completion document. +7 + +Other violations of PCAOB standards + +31. Zhao violated additional PCOAB standards based on the conduct described +above. First, Zhao did not adequately plan the audit—he failed to design procedures to identify +related parties beyond those identified by management as well as to identify all material +transactions with those parties. +8 Zhao also failed to design procedures to investigate, as noted +above, the conflict between management representations and certain other audit evidence +gathered by P&Z audit staff. + +32. Zhao also failed to develop audit procedures that were tailored to the risk +presented by the company’s related party transactions. In particular, audit planning documents +indicate that a risk assessment was conducted, and that related party transactions were +specifically identified as a risk area. However, there is no indication that Zhao designed any +heightened procedures for auditing this risk area. + +33. Zhao further improperly issued an unqualified audit opinion on Keyuan’s 2008 +and 2009 financial statements, which failed to include required disclosures under GAAP of +material related party transactions. +9 + +Zhao Failed to Conduct the Keyuan Interim Reviews in Accordance with PCAOB +Standards + + +7 PCAOB Auditing Standard No. 3.13 states: “The auditor must identify all significant findings or issues in +an engagement completion document.” + +8 When planning the audit, the auditor should consider conditions that may require extension or modification +of audit tests, such as the existence of related party transactions. (AU § 311.03g) Additionally, an audit of financial +statements is a cumulative process and the audit evidence obtained may cause the auditor to modify the planned +procedures. (AU § 312.33) + +9 An auditor should express a qualified or an adverse opinion on financial statements that fail to include +required disclosures under GAAP. (AU § 431.03) + + 9 +34. In connection with an interim review, PCAOB standards provide that an auditor +should exercise due professional care and professional skepticism (AU § 722.01); should obtain +a basis for communicating whether he is aware of any material modifications that should be +made to the interim financial information for it to conform with GAAP (AU § 722.07); and +should follow general documentation standards (AS 3, AU § 722.51-.52). + +35. Zhao served as engagement partner for P&Z’s interim reviews of Keyuan’s +financial statements for the first, second, and third quarters of 2010. Several violations of +PCAOB standards similar to some of those described above also occurred during the Keyuan +Interim Reviews. As an initial matter, workpapers for each of the interim review periods, which +Zhao reviewed, reflect numerous related party loan guarantees; none of these loan guarantees, +however, were disclosed by Keyuan in its financial statements as related party transactions. +10 + +36. P&Z also failed to perform required analytical procedures in connection with the +quarterly reviews. In particular, PCAOB standards provide that an auditor, as part of an interim +review, should apply analytical procedures to the interim financial information, which should +include comparing current period and prior period information as well as comparing current +period amounts against the auditor’s expectations that were based on plausible relationships. +(AU § 722.16) P&Z did not perform the required analytical procedures for the first and second +quarter 2010 interim reviews. With respect to the analytical procedures for the third quarter 2010 +review, although procedures were performed, P&Z failed to perform procedures that were +consistent with the requirements of PCAOB standards, as they failed to include a comparison of +the current interim information to an auditor’s expectations that were based on plausible +relationships. + +37. Zhao also failed to ensure that appropriate documentation was prepared in +connection with the 2010 interim reviews. Numerous workpapers contain no preparer and/or +reviewer sign-offs by Zhao (or by other audit staff), even though Zhao indicated in interim +review checklists that he had signed off and dated all workpapers he had reviewed. Zhao also +failed to ensure preparation of engagement completion documents for the interim reviews, even +though review programs that Zhao reviewed and signed-off on indicated that such a document +had been prepared. + +Zhao Failed to Investigate Subsequent Discovery of Facts + +38. PCAOB standards provide that when an auditor becomes aware of information +which relates to the financial statements previously reported on by him, but which was not +known to him at the date of his report, and which is of such a nature from such a source that he +would have investigated it had it come to his attention during the course of the audit, he should, +as soon as practicable, undertake to determine whether the information is reliable, and whether + +10 The accountant performing a review of interim financial information should make additional inquiries or +perform other procedures when he or she becomes aware of information that leads him or her to believe that the +interim financial information may not be in conformity with GAAP in all material respects. (AU § 722.22) +Additionally, the accountant should modify their report if information the accountant believes is necessary for +adequate disclosure in conformity with GAAP is not included in the interim financial information. (AU § 722.43) + 10 +the facts existed at the date of his report. (AU § 561.04; see also AU § 722.46) This undertaking +must be performed even when the auditor has resigned or been discharged. (AU § 9561.02) + +39. Zhao failed to investigate subsequently discovered facts existing as of the date of +the P&Z audit reports that may have affected the firm’s opinions on Keyuan’s 2008 and 2009 +financial statements and review reports on the financial statements for the 2010 quarterly +periods. In particular, in early 2011, several months after P&Z had been replaced as Keyuan’s +auditor, Zhao was informed by Keyuan’s senior management that the successor audit firm had +refused to sign off on the 2010 audit report because, in part, it had identified an off-balance sheet +cash account as well as undisclosed related party transactions (some of which involved entities +that had not been previously identified by P&Z as related parties). + +40. Zhao’s response to the serious revelations being made by Keyuan’s management +was inadequate. Zhao did not take steps to determine whether the information learned regarding +potentially new undisclosed related party transactions and the off-balance sheet account was +reliable and whether the facts existed as of the dates of P&Z’s 2008 and 2009 audit opinions and +the interim review reports for 2010. For instance, Zhao made no inquiry to determine the +identities of the undisclosed related parties; what undisclosed related party transactions had been +noted by the successor audit firm; or the periods in which the undisclosed related party +transactions occurred. Zhao also made no inquiry regarding the off-balance sheet cash account, +including the dates when the account was in use and the amount of the transactions conducted +through the account. Zhao failed to inquire further as required by AU § 561 notwithstanding the +fact that, based on the information provided to him by Keyuan’s management, he had developed +substantial concerns around this time as to the audit opinions his firm had previously issued. + +E. VIOLATIONS + +Rule 102(e) and Section 4C of the Exchange Act + +41. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C of the Exchange Act and Rule +102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission to have engaged in improper professional conduct. Section 4C(b) +and Rule 102(e)(1)(iv) define improper professional conduct with respect to persons licensed to +practice as accountants. + +42. 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. + +43. Respondents’ failures to abide by PCAOB standards in the Keyuan Audits and the +Keyuan Interim Reviews constitute repeated instances of unreasonable conduct, and also satisfy + 11 +the highly unreasonable conduct standard since the audit area of related party transactions +warranted heightened scrutiny.11 Any one of Respondents’ auditing failures would have been +highly problematic, but taken together the failures are deemed by the Commission to be +egregious. In short, Respondents conducted the Keyuan Audits and Keyuan Interim Reviews in a +manner that no other reasonable auditor would have done so under the circumstances with +respect to related party transactions. + +P&Z and Zhao were a Cause of Keyuan’s +Violations of Sections 17(a)(2) and (a)(3) of the Securities Act and +Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder + +44. Under Section 21C of the Exchange Act, the Commission may enter a cease-and- +desist order against any person who is or was a “cause” of another’s primary violation if the +person knew or should have known that his act or omission would contribute to the primary +violation. Negligence is sufficient to establish “causing” liability under Section 21C of the +Exchange Act when a person is alleged to have caused a primary violation that does not require +scienter. See KPMG LLP v. SEC, 289 F.3d 109, 112 (D.C. Cir. 2002). + +45. Keyuan violated Sections 17(a)(2) and (a)(3) of the Securities Act of 1933 +(“Securities Act”) by failing to disclose material related party transactions in registration +statements filed with the Commission between May 2010 and January 2011. Keyuan further +violated Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder by failing to +disclose material related party transactions in its 10-Qs for the second and third quarters of 2010, +as required by GAAP. With respect to both the registration statements and the quarterly reports, +the material related party loan guarantees, sales, other payables/financings, and notes payables +reflected in P&Z’s workpapers should have been disclosed by Keyuan pursuant to GAAP and/or +Commission regulations. + +46. For each of the periods in which Keyuan failed to disclose material related party +transactions, P&Z issued an audit report or an interim review report. In particular, for 2008 and +2009, P&Z issued audit reports containing an unqualified opinion stating that P&Z conducted an +audit of Keyuan’s financial statements in accordance with PCAOB standards and that Keyuan’s +financial statements were presented in conformity with GAAP. P&Z consented to the inclusion +of these audit reports in Keyuan’s Form S-1 registration statements filed with the Commission +between May 2010 and January 2011. For the second and third quarters of 2010, P&Z issued +interim review reports stating that P&Z conducted reviews of Keyuan’s quarterly financial +statements in accordance with PCAOB standards and that P&Z was not aware of any material +modifications that should be made to Keyuan’s financial statements for them to conform with + +11 As noted above, Zhao received conflicting information from management regarding the existence of related +parties and related party transactions. Zhao also knew that Keyuan was a relatively new China -based company and +that its accounting staff lacked U.S. GAAP experience. More generally, courts have found that related party +transactions warrant heightened scrutiny and must be appropriately vetted and scrutinized by auditors to a greater +degree because of the risk that they may not be conducted on an arms-length basis. See McCurdy v. SEC, 396 F.3d +1258, 1261 (D.C. Cir. 2005) (noting that related party transactions “are viewed with extreme skepticism in all areas +of finance”); see also AU § 334 (recognizing the need for care in the examination of material related party +transactions). + 12 +GAAP. P&Z consented to the inclusion of these interim review reports in Keyuan’s 10-Qs for +the second and third quarters of 2010. + +47. Neither P&Z’s audit reports or its interim review reports were accurate, however, +because P&Z failed to conduct the Keyuan Audits and Keyuan Interim Reviews in accordance +with PCAOB standards and because Keyuan’s financial statements were not prepared in +conformity with GAAP. Zhao knew or should have known that as a consequence Keyuan filed +financial statements with the Commission that failed to disclose material related party +transactions as required by GAAP and Commission regulations. P&Z and Zhao were thus a +cause of Keyuan’s failure to accurately disclose material related party transactions and Keyuan’s +resulting violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 thereunder. + +P&Z and Zhao Violated Exchange Act § 10A(a)(2) + +48. Section 10A(a)(2) of the Exchange Act requires each audit conducted of an issuer +by a registered public accounting firm to include “procedures designed to identify related party +transactions that are material to the financial statements or otherwise require disclosure therein.” +No showing of scienter is necessary to establish a violation of Section 10A. See SEC v. Solucorp +Indus., Ltd., 197 F. Supp. 2d. 4, 10-11 (S.D.N.Y. 2002). + +49. P&Z and Zhao, in connection with the Keyuan Audits, violated Section 10A(a)(2) +of the Exchange Act because they failed to include auditing procedures designed to identify +material related party transactions. As noted above, P&Z audit workpapers reflected the +existence of material related party transactions; the audit, however, lacked adequate procedures +to ensure that those transactions were disclosed as such by Keyuan in financial statements that +were the subject of the Keyuan Audits and Keyuan Interim Reviews. Moreover, P&Z and Zhao +failed to appropriately design procedures to identify Keyuan’s related party transactions, +including investigating the conflicting information provided by management regarding the +identification of related parties and related party transactions. + +F. FINDINGS + +50. Based on the foregoing, the Commission finds that P&Z and Zhao engaged in +improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice and Section 4C of the Exchange Act. + +51. Additionally, the Commission finds that P&Z and Zhao were a cause of Keyuan’s +violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the Exchange +Act and Rules 12b-20 and 13a-13 thereunder. + +52. Additionally, the Commission finds that P&Z and Zhao violated Section +10A(a)(2) of the Exchange Act. + + 13 +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. P&Z shall cease and desist from committing or causing any violations and any +future violations of Section 10A(a)(2) of the Exchange Act and from causing any violations and any +future violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 promulgated thereunder. + + B. P&Z is denied the privilege of appearing or practicing before the Commission as an +accountant pursuant to Rule 102(e)(i)(ii) of the Commission’s Rules of Practice and Section 4C of +the Exchange Act. + + C. After three years from the date of this order, P&Z may request that the Commission +consider its reinstatement by submitting an application (attention: Office of the Chief Accountant) +to resume appearing or practicing before the Commission as an independent accountant. Such an +application must satisfy the Commission that: + + 1. P&Z 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; + + 2. P&Z 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 P&Z’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 P&Z’s +employees will not receive appropriate supervision. P&Z 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 P&Z, 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 P&Z, 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. + + 14 + 3. P&Z has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + 4. P&Z 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, concurring partner reviews and quality control standards. + +D. P&Z shall, within 30 days of the entry of this Order, pay a civil money penalty in +the amount of $30,000 to 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; +12 +(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 P&Z +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Stephen L. Cohen, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + E. Zhao shall cease and desist from committing or causing any violations and any +future violations of Section 10A(a)(2) of the Exchange Act and from causing any violations and any +future violations of Sections 17(a)(2) and (a)(3) of the Securities Act and Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 promulgated thereunder. + + F. Zhao is denied the privilege of appearing or practicing before the Commission as an +accountant pursuant to Rule 102(e)(i)(ii) of the Commission’s Rules of Practice and Section 4C of +the Exchange Act. + + +12 The minimum threshold for transmission of payment electronically is $50,000.00 as of April 1, 2012. This +threshold will be increased to $1,000,000 by December 31, 2012. For amounts below the threshold, respondents +must make payments pursuant to option (2) or (3) above. + 15 + G. After three years from the date of this order, Zhao may request that the +Commission consider its reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Zhao’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Zhao, 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) Zhao, 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 Zhao’s or the firm’s quality control system that would indicate that +Zhao will not receive appropriate supervision; + (c) Zhao 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) Zhao acknowledges his responsibility, as long as Zhao 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. + +H. The Commission will consider an application by Zhao 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 Zhao’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + 16 + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3501.pdf b/raw/aaer/2013/AAER-3501.pdf new file mode 100644 index 0000000000000000000000000000000000000000..d0118aa24060274084999a1fc114959d0bf6a066 Binary files /dev/null and b/raw/aaer/2013/AAER-3501.pdf differ diff --git a/raw/aaer/2013/AAER-3501.txt b/raw/aaer/2013/AAER-3501.txt new file mode 100644 index 0000000000000000000000000000000000000000..84683e94c7196e4d04647f3d2fd75acf8f0e9d36 --- /dev/null +++ b/raw/aaer/2013/AAER-3501.txt @@ -0,0 +1,473 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70564 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3501 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15535 + + + +In the Matter of + + +Malcolm L. Pollard, CPA and +Malcolm L. Pollard, Inc. + +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 +Malcolm L. Pollard, CPA (“Pollard”) and Malcolm L. Pollard, Inc. (the “firm” or “Pollard, Inc.”) +(collectively “Respondents”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to +possess the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to +have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully +aided and abetted the violation of, any provision of the securities laws or the rules and regulations +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + 2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (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 +3 that: + +SUMMARY + + This matter concerns multiple failures of Respondents to comply with Public Company +Accounting Oversight Board (“PCAOB”) Standards in connection with annual audits and quarterly +reviews of the financial statements of three microcap issuers, herein referred to as Issuers A, B and +C. + + Respondents repeatedly engaged in unreasonable conduct that resulted in violations of +applicable professional standards and which demonstrate a lack of competence to practice before +the Commission. Among other things, Respondents repeatedly failed to prepare and maintain +adequate audit work papers, consider and document fraud risks, obtain engagement quality +reviews, and obtain written management representations. In addition, after Respondents became +aware that Issuer B included their audit report in its Form 10-K filing with the Commission +without permission, Respondents failed to inform Issuer B’s management or the audit committee +of its board of directors of the illegal act. In addition, Respondents failed to design procedures as +part of their audit to detect illegal acts. Respondents also claimed in each of their audit reports that +they complied with PCAOB Standards when they had not. + + + + 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’ Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + 3 +RESPONDENTS + 1. Malcolm L. Pollard (“Pollard”), age 72, resides in Erie, Pennsylvania. Pollard +has been licensed as a certified public accountant in the Commonwealth of Pennsylvania since +1981.4 Pollard operates as the sole shareholder and employee of Pollard, Inc., a Pennsylvania +corporation he formed in May 1993 and which he registered with the PCAOB in January 2010. +Pollard withdrew the firm’s PCAOB registration in November 2011. + 2. Malcolm L. Pollard, Inc. (the “firm” or “Pollard, Inc.”) is a Pennsylvania +corporation with its principal place of business in Erie, Pennsylvania. Pollard, conducted the +audits at issue in this matter, through his firm Pollard, Inc. which was registered with the +PCAOB in January 2010. The firm withdrew its PCAOB registration in November 2011. +Pollard owns and controls Pollard, Inc., and is its sole shareholder and employee. + +RELATED ENTITIES +3. Issuer A is a Nevada corporation with its principal place of business in Carson +City, Nevada. Issuer A’s common stock is registered with the Commission pursuant to Section +12(g) of the Exchange Act and is traded on the OTC Market. Issuer A 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. Issuer B is a Wyoming corporation with its principal place of business in Wayne, +Pennsylvania. Issuer B’s common stock is registered with the Commission pursuant to Section +12(g) of the Exchange Act and is traded on the OTC Market. Issuer B 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. +5. Issuer C is a Nevada corporation with its principal place of business in +Hollywood, Florida. Issuer C’s common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act and is traded on the OTC Market. Issuer C files periodic +reports, including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the +Exchange Act and related rules thereunder. + +FACTS + +ISSUER A + +6. Issuer A’s public filings state that it offers air-combat training, aerial refueling, +aircraft maintenance training, disaster relief services, and other aerospace/defense services to the +United States and foreign militaries and agencies. Issuer A had no revenues for the fiscal years +ended December 31, 2009 and 2010, and sustained net losses of $1,418,332 for fiscal year 2010. +As of December 31, 2010, Issuer A had two full-time employees. Respondents issued an audit + +4 Pollard is also an attorney and is licensed to practice in Pennsylvania. The conduct at issue in this Order is based +on Pollard’s conduct as a CPA and not as an attorney. + 4 +report on May 12, 2011 on Issuer A fiscal year 2010 financial statements and claimed to have +conducted their audit in accordance with PCAOB Standards. Respondents, however, repeatedly +failed to adhere to those standards in the performance of their audit. +Failure to Prepare and Retain Adequate Audit Documentation + +7. PCAOB Standards require an auditor to document the procedures performed, +evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. Audit documentation must clearly demonstrate that the work was in fact performed +and must contain sufficient information to enable an experienced auditor, having no previous +connection with the engagement: (1) to understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions reached, and (2) to determine who +performed the work and the date such work was completed as well as the person who reviewed +the work and the date of such review. AS No. 3, Audit Documentation, at .06. In addition, an +auditor must identify all significant findings or issues in an engagement completion document. +AS No. 3, Audit Documentation, at .13. + +8. Respondents’ audit documentation for the fiscal year 2010 audit of Issuer A was +seriously deficient. +5 The work papers did not include audit programs or memoranda describing +procedures performed. The work papers did not include any notations or evidence of the +procedures performed or conclusions reached based on the work performed. Further, none of the +work papers contained evidence indicating who had performed the work and the date such work +was completed. + +9. Respondents also failed to prepare an engagement completion document. The +engagement completion document identifies the significant findings or issues of the audit which +are substantive matters that are important to understanding the procedures performed, evidence +obtained, or conclusions reached during the audit. + +Failure to Consider Fraud Risks + +10. PCAOB Standards require an auditor to consider fraud in a financial statement +audit and document: (1) the procedures performed to obtain information necessary to identify and +assess the risks of material misstatement due to fraud; (2) specific risks of material misstatement +due to fraud that were identified, and a description of the auditor’s response to those risks; and (3) +the results of the procedures performed to further address the risk of management override of +controls. AU § 316, Consideration of Fraud in a Financial Statement Audit, at .83. + +11. Respondents’ work papers were devoid of any documentation that they considered +fraud risks in their fiscal year 2010 financial statement audit of Issuer A. The work papers +contained no documentation of the procedures performed to identify and assess fraud risks, the +fraud risks identified, or the results of procedures performed to address fraud risks. + + + +5 See AS No. 3 at ¶4 for examples of audit documentation. + 5 +Failure to Perform an Engagement Quality Review + +12. PCAOB Standards require an engagement quality review and concurring approval +of issuance for each audit engagement and for each engagement to review interim financial +information. The objective of the engagement quality reviewer is to perform an evaluation of the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the engagement report, to +determine whether to provide concurring approval of issuance. The PCAOB Standards provide +further that the engagement quality reviewer must be an associated person of a registered public +accounting firm and that, to maintain objectivity, the reviewer (and any others who assist) should +not make decisions on behalf of the engagement team or assume any of the responsibilities of the +engagement team. The engagement partner remains responsible for the engagement and its +performance, notwithstanding the involvement of the engagement quality reviewer and others who +assist the reviewer. AS No. 7, Engagement Quality Review, at .01-.03, .07. +13. As noted above, PCAOB Standards require an engagement quality review and +concurring approval of issuance for each audit engagement. AS No. 7, Engagement Quality +Review, at .01. Respondents failed to obtain an engagement quality review for their audit of Issuer +A. +ISSUER B + +14. Issuer B’s public filings state that it develops and markets a unique line of +vitamin-enriched gourmet spices. According to its Form 10-K for fiscal year ended December +31, 2010, Issuer B’s initial product line featured ground pepper, cinnamon, granulated garlic and +crushed red pepper packaged in plastic screw-top shakers, and its products under development +included ketchup, mustard and salad dressing which will include its vitamin-enriched spices. +Issuer B had no sales until the first quarter of fiscal year 2010. Its gross revenues for fiscal year +2010 were $18,901. Its total expenses were $2,056,059, for a net operating loss of $2,037,568. +As of December 31, 2010, Issuer B had one employee, its President and CEO. +15. Respondents audited Issuer B’s fiscal year 2009 and 2010 financial statements. +Respondents’ audits, however, failed to comply with PCAOB Standards. Respondents also +failed to have procedures in place to detect illegal acts and failed to investigate a potential illegal +act on the part of Issuer B despite knowledge that an illegal act had occurred. +Failure to Prepare and Retain Adequate Audit Documentation +16. As described above, PCAOB Standards require that audit documentation clearly +demonstrate that the work was in fact performed. AS No. 3, Audit Documentation, at .06. +Because audit documentation is the written record that provides the support for the +representations in the auditor's report, it should: (a) demonstrate that the engagement complied +with the standards of the PCAOB; (b) support the basis for the auditor's conclusions concerning +every relevant financial statement assertion; and (c) demonstrate that the underlying accounting +records agreed or reconciled with the financial statements. AS No. 3, Audit Documentation, at +.05. The PCAOB Standards also provide that the auditor must retain audit documentation for + 6 +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 or, if a report is not issued, seven years +from the date that fieldwork was substantially complete. AS No. 3, Audit Documentation, at .14. +17. The audit documentation for Respondents’ fiscal year 2009 and 2010 Issuer B +audits was grossly inadequate. Respondents’ work papers consisted only of a Management +Representation letter signed by the CEO of Issuer B stating that the letter was provided to +Respondents in connection with their audits for the years ended December 31, 2010 and 2009, +and a draft of Issuer B’s Form 10-Q for the period ended September 30, 2010. These documents +failed to demonstrate that Respondents’ engagement complied with PCAOB Standards, failed to +support the basis for Respondents’ conclusions concerning relevant financial statement +assertions, and failed to demonstrate that the underlying accounting records agreed or reconciled +with the financial statements. Indeed, the dearth of documents suggests that no audit work was +in fact performed by Respondents. +Failure to Perform an Engagement Quality Review + +18. As noted above, PCAOB Standards require an engagement quality review and +concurring approval of issuance for each audit engagement and for each engagement to review +interim financial information. AS No. 7, Engagement Quality Review, at .01. Respondents failed +to obtain an engagement quality review for their audit of Issuer B for the year ended December 31, +2010. +Failure to Have Procedures to Detect Illegal Acts and to Investigate a Potential Illegal Act + +19. Section 10A(a)(1) provides that each audit by a registered public accounting firm +shall include . . . procedures designed to provide reasonable assurance of detecting illegal acts that +would have a direct and material effect on the determination of financial statement amounts. In +addition, Section 10A(b)(1) provides that if, in the course of conducting an audit . . . the registered +public accounting firm detects or otherwise becomes aware of information indicating that an illegal +act (whether or not perceived to have a material effect on the financial statements of the issuer) has +or may have occurred, the firm shall . . . determine whether it is likely that an illegal act has +occurred, and, if so, determine and consider the possible effect of the illegal act on the financial +statements of the issuer . . . and as soon as practicable, inform the appropriate level of the +management of the issuer and assure that the audit committee of the issuer, or the board of +directors of the issuer in the absence of such a committee, is adequately informed with respect to +illegal acts that have been detected or have otherwise come to the attention of such firm in the +course of the audit, unless the illegal act is clearly inconsequential. + 20. Respondents gave a draft audit report to Issuer B but did not give the Company +permission to include their report in the Company’s Form 10-K filing, which Issuer B filed with +the Commission on April 15, 2011. The report that was in the 10-K filing was not the draft that +Respondents provided the Company. Respondents did not do any evaluation to ascertain +whether an illegal act actually occurred and did not evaluate the possible effect of the act on the +financial statements. Respondents were aware that an audit report bearing the firm’s name had +been included in the Form 10-K filed with the Commission. Despite this knowledge, + 7 +Respondents did not inform Issuer B’s management that the Company had included their audit +report without permission and did not assure that the audit committee (or the board of directors) +was adequately informed of that fact. In addition, Respondents audit had no procedures in place +to detect illegal acts. +ISSUER C + + 21. Issuer C currently operates an e-commerce website that enables businesses to +establish an on-line retail presence. Issuer C had $28,351 in gross revenues for fiscal year 2010 +and an accumulated deficit of approximately $9 million as of December 31, 2010. + +22. Respondents issued an audit report on March 18, 2011 on Issuer C’s fiscal year +2008 and 2009 financial statements,6 and an audit report on April 12, 2011 on Issuer C’s fiscal +year 2009 and 2010 financial statements. For each, Respondents claimed to have conducted the +audit in accordance with PCAOB Standards. Respondents also conducted quarterly reviews for +June 30, 2010, September 30, 2010, March 31, 2011, and June 30, 2011 for Issuer C. +Respondents failed repeatedly to adhere to PCAOB Standards in the performance of their Issuer +C audits and reviews. +Failure to Prepare and Retain Adequate Audit Documentation + +23. As noted above, PCAOB Standards include requirements for documentation the +auditor should prepare and retain. AS No. 3, Audit Documentation, at .01. Respondents’ audit +documentation for the audits for the fiscal years ended December 31, 2008, 2009 and 2010 of +Issuer C was woefully inadequate. The audits failed to include evidence of the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial statement +assertions. For example, the work papers did not include audit programs or memoranda describing +procedures performed. The work papers did not include any notations or evidence of the +procedures performed or conclusions reached based on the work performed. Further, none of the +work papers contained evidence indicating who had performed the work and the date such work +was completed. +Failure to Consider Fraud Risks + +24. PCAOB Standards require an auditor to consider fraud in a financial statement +audit and document: (1) the procedures performed to obtain information necessary to identify and +assess the risks of material misstatement due to fraud; (2) specific risks of material misstatement +due to fraud that were identified, and a description of the auditor’s response to those risks; and (3) +the results of the procedures performed to further address the risk of management override of +controls. AU § 316, Consideration of Fraud in a Financial Statement Audit, at .83. + + +6 The fiscal years ended December 31, 2009 and 2008 were audited by a predecessor firm and included in Issuer C’s +Form 10-K filed with the Commission on April 15, 2010. On October 19, 2010, the PCAOB permanently revoked +the registration of the predecessor firm. Respondents’ March 18, 2011 opinion and audit report for fiscal years 2009 +and 2008 were included in Issuer C’s amended Form 10-K filed with the Commission on April 7, 2011. + 8 +25. Respondents’ work papers contained no documentation showing that they +considered fraud in connection with the audits of Issuer C for fiscal years 2008, 2009 and 2010. +The work papers contained no documentation of the procedures performed to identify and assess +fraud risks, the fraud risks identified, or the results of procedures performed to address fraud +risks. + +Failure to Perform an Engagement Quality Review + +26. As discussed above, PCAOB Standards require an engagement quality review and +concurring approval of issuance for each audit engagement and for each engagement to review +interim financial information. AS No. 7, Engagement Quality Review, at .01. Respondents failed +to obtain engagement quality reviews for their audit of Issuer C for the fiscal year ended December +31, 2010 and for the four quarterly reviews performed for the quarters ended June 30, 2010, +September 30, 2010, March 31, 2011 and June 30, 2011. +Failure to Obtain Written Management Representations +27. PCAOB Standards require an independent auditor to obtain written +representations from management as a part of an audit of financial statements and they should be +obtained for all financial statements and periods covered by the auditor’s report. The written +representations ordinarily confirm representations explicitly or implicitly given to the auditor, +indicate and document the continuing appropriateness of such representations, and reduce the +possibility of misunderstanding concerning the matters that are the subject of the representations. +AU § 333, Management Representations, at .01-.02, .05. + +28. Respondents failed to obtain written representations from Issuer C’s management +as part of their audits for fiscal years ended December 31, 2008 and 2009. + +VIOLATIONS + +Improper Professional Conduct + +29. Rule 102(e)(1)(ii) of the Commission’s Rules of Practice provides, 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. Rule 102(e)(1)(iv) defines improper professional conduct with +respect to persons licensed to practice as accountants. As applicable here, improper professional +conduct means a violation of applicable professional standards that resulted from “repeated +instances of unreasonable conduct . . . that indicate a lack of competence to practice before the +Commission.” “Unreasonable conduct,” as used in this provision, means ordinary negligence. See +In the Matter of Dohan & Co. CPA, Release No. 420 (June 27, 2011). + +30. Respondents engaged in repeated instances of unreasonable conduct that indicate a +lack of competence to practice before the Commission. Due to their number and seriousness, any +one of Respondents’ auditing failures described above amount to negligent misconduct. +Respondents conducted the audits in question in a manner in which no other reasonable auditor + 9 +would act. Specifically, Respondents failed: (i) to obtain written management representations in +their fiscal year 2008 and 2009 audits of Issuer C. (AU § 333) (ii) to prepare and maintain +adequate audit work papers for their fiscal year 2010 audit of Issuer A, fiscal year 2009 and 2010 +audits of Issuer B, and fiscal year 2008, 2009 and 2010 audits of Issuer C, and to include an +engagement completion document in their fiscal year 2010 audit of Issuer A (AS No. 3); (iii) to +consider and document fraud in their fiscal year 2010 audit of Issuer A and their fiscal year 2008, +2009 and 2010 audits of Issuer C (AU § 316. 83); and (iv) to obtain engagement quality reviews in +their fiscal year 2010 audit of Issuer A, fiscal year 2010 audit of Issuer B, fiscal year 2010 audit of +Issuer C, and for the quarterly reviews for quarters ended June 30, 2010, September 30, 2010, +March 31, 2011 and June 30, 2011 of Issuer C (AS No. 7). + +Violations of Sections 10A(a)(1) and (b)(1) of the Exchange Act + +31. Section 10A(a)(1) of the Exchange Act provides that “[e]ach audit…by a +registered public accounting firm shall include” procedures designed to detect illegal acts that +would have a material effect on the determination of the financial statement amounts. +32. Section 10A(b)(1) of the Exchange Act provides that if “the registered public +accounting firm detects or otherwise becomes aware of information indicating that an illegal act +(whether or not perceived to have a material effect on the financial statements of the issuer) has +or may have occurred, the firm shall . . . determine whether it is likely that an illegal act has +occurred; and . . . if so, determine and consider the possible effect of the illegal act on the +financial statements of the issuer . . . .” Section 10A(b)(1) further requires the public +accounting firm to “inform the appropriate level of the management of the issuer and assure that +the audit committee of the issuer, or the board of directors of the issuer in the absence of such a +committee, is adequately informed with respect to illegal acts that have been detected or have +otherwise come to the attention of such firm in the course of the audit, unless the illegal act is +clearly inconsequential.” +33. Respondents gave Issuer B a draft audit report but did not give the Company +permission to include their report in the Company’s Form 10-K filing which Issuer B filed with +the Commission on April 15, 2011. Respondents did not do any evaluation to ascertain whether +an illegal act actually occurred and did not evaluate the possible effect of the act on the financial +statements. Respondents knew that Issuer B filed an audit report bearing the firm’s name. +Despite knowing that this illegal act had occurred, Respondents did not inform Issuer B’s +management that the Company had included Respondents’ audit report without Respondents’ +permission and did not assure that the audit committee (or the board of directors) was +adequately informed of that fact. Moreover, Respondents had no procedures in place during the +audit to detect illegal acts. Accordingly, Respondents willfully violated Sections 10A(a)(1) and +(b)(1) of the Exchange Act. +Violation of Exchange Act Rule 2-02 of Regulation S-X +34. Rule 2-02(b)(1) of Regulation S-X mandates that an accountant’s report “state +whether the audit was made in accordance with generally accepted auditing standards . . . .” +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS + 10 +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 In the Matter of KMJ +Corbin & Co., Release No. 3185 (Sept. 13, 2010). Thus, an auditor violates Regulation S-X 2- +02(b)(1) if it issues a report stating that it had conducted its audit in accordance with PCAOB +Standards when it had not. See In the Matter of Andrew Sims, CPA, Release No. 2950 (March 17, +2009). +35. Each of Respondents’ audit reports stated that they had conducted their audits in +accordance with PCAOB Standards. Respondents, however, did not conduct their audits in +accordance with PCAOB Standards. As described above, Respondents committed repeated audit +failures in violation of those standards. Respondents failed to: (1) obtain written management +representations; (2) prepare and maintain adequate audit documentation; (3) consider and +document fraud; and (4) obtain engagement quality reviews. Accordingly, Respondents willfully +violated Rule 2-02(b)(1). + +FINDINGS + +36. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. + +37. Based on the foregoing, the Commission finds that Respondents willfully violated +Exchange Act Sections 10A(a)(1) and (b)(1). + +38. Based on the foregoing, the Commission finds that Respondents willfully violated +Exchange Act Rule 2-02 of Regulation S-X. + +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: + + + + + + + + + + + + + 11 + A. Respondents shall cease and desist from committing or causing any violations and +any future violations of Exchange Act Sections 10A(a)(1) and (b)(1). + + B. Respondents shall cease and desist from committing or causing any violations and +any future violations of Exchange Act Rule 2-02 of Regulation S-X. + + C. Respondents are denied the privilege of appearing or practicing before the +Commission as an accountant. + + + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3502.txt b/raw/aaer/2013/AAER-3502.txt new file mode 100644 index 0000000000000000000000000000000000000000..22fe14d512a9829ab7d870faee68b6c869cd3ff8 --- /dev/null +++ b/raw/aaer/2013/AAER-3502.txt @@ -0,0 +1,495 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70566 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3502 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15536 + + + +In the Matter of + +JOHN KINROSS-KENNEDY, +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 + +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 Kinross-Kennedy, CPA (“Respondent” or “Kinross”) pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) and (iii) of the Commission’s Rule of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking +in character or integrity, or to have engaged in unethical or improper professional conduct; or (3) +to have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + + 2 + +II. + +After an investigation, the Division of Enforcement and the Office of the Chief +Accountant allege: + + A. RESPONDENT + +John Kinross-Kennedy, age 85, of Irvine, California, is a certified public +accountant licensed in California. Kinross has operated as an unincorporated sole proprietor +since 1993 and has been registered with the PCAOB since 2005. As of July 15, 2013, +Kinross is the independent public accountant for six public companies. Since 2009, at any +one time, he has been the independent accountant for as many as 23 public companies. + + B. RELEVANT ISSUERS + +1. At all relevant times, Issuer A’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was traded on the OTC +Bulletin Board, and its fiscal year ended on the last day of March. +2. At all relevant times, Issuer B filed reports with the Commission pursuant to +Section 15(d) of the Exchange Act, its common stock was traded on the OTC Market, and +its fiscal year ended on the last day of August. +3. At all relevant times, Issuer C’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was traded on the OTC +Market, and its fiscal year ended on the last day of September. +4. At all relevant times, Issuer D’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was traded on the OTC +Bulletin Board, and its fiscal year ended on the last day of December. +5. At all relevant times, Issuer E filed reports with the Commission pursuant to +Section 15(d) of the Exchange Act, its common stock was traded on the OTC Bulletin +Board, and its fiscal year ended on the last day of December. + +C. KINROSS’S IMPROPER PROFESSIONAL CONDUCT + +1. During 2011 and 2012, Kinross issued six unqualified audit reports listed in +the table below in connection with his audits of the financial statements of five issuers (the + +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 +“Issuer Audits”), as well as audit reports for approximately 20 other issuers. In each of +these six audit reports, Kinross represents that he conducted his audits in accordance with +PCAOB standards. Kinross failed, however, to conduct each of the six audits of the five +issuer’s financial statements in accordance with PCAOB standards, as described below. +Issuer Report Date Fiscal Periods +Issuer A June 21, 2011 Periods from inception, March 31, 2009, to March 31, 2010 and +2011 +Issuer A June 25, 2012 Periods from inception, March 31, 2009, to March 31, 2011 and +2012 +Issuer B Oct. 31, 2011 Years ended and periods from inception, August 22, 2008, to +August 31, 2011 and 2010 +Issuer C Dec. 22, 2011 Years ended and periods from inception, August 2, 2005, to +September 30, 2011 and 2010 +Issuer D March 26, +2012 +Years ended and periods from inception, December 22, 2006, to +December 31, 2011 and 2010 +Issuer E Feb. 29, 2012 Years ended December 31, 2011 and 2010 + +AU §230, Due Professional Care in the Performance of Work +2. Kinross failed to exercise due professional care in each of the six Issuer +Audits. See AU §230.02-.06. Kinross does not possess the degree of skill commonly +possessed by other auditors and failed to exercise reasonable care and diligence. +AU §230.02-.05. Kinross’s lack of knowledge and skill is demonstrated by his admitted +familiarity with PCAOB requirements to perform certain auditing procedures, e.g. annual +written confirmation of his independence (See PCAOB Rule 3526), and his failure to +communicate with the predecessor auditor (See AU §315) and communicate with the audit +committee (See AU §380). He also is unaware of certain changes in GAAP, such as the +2001 shift from amortization of goodwill to non-amortization of goodwill (changed by +Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets (June +2001)). +3. Kinross also failed to exercise due professional care on fundamental aspects +of the audits by using outdated audit templates to document his audit planning and +performance of certain audit procedures on each of the audits without any apparent effort to +adapt those templates for subsequent changes in auditing standards. Kinross relied upon +checklists published in 1993, the year he formed his audit practice and ten years before the +creation of the PCAOB, for client acceptance, internal control evaluation, and transactional +audit plans for small organizations. Kinross’s audit work papers for Issuer D’s +December 31, 2011 financial statements included a copy of the cover page and an index of +a 1993-checklist, but did not include the checklist itself. Not only was the checklist +outdated, the cover page indicated that it pertained to GAAP disclosure requirements for +financial statements of a nonpublic commercial business. + 4 +4. Kinross’s inappropriate use of client personnel to perform audit steps also +illustrates his lack of due professional care. For example, for Issuer E’s December 31, +2011 audit, Kinross instructed client personnel to select one invoice per month for the +sample to be subjected to audit testing. Even though he was present at the time the client +made the selection, Kinross should have made sure that all items were available for +selection, selected the items, and made sure that the sample was expected to be +representative of the population.3 +AU §326, Evidential Matter and Auditing Standard No. 15, Audit Evidence +5. Under AU §326, Evidential Matter, which was in effect for the pertinent +periods beginning before December 15, 2010, an auditor was required to obtain sufficient +competent evidential matter to afford a reasonable basis for his opinion. See AU §326.01 +and 22-24; and AU §150.02, Generally Accepted Auditing Standards. Auditing Standard +No. 15, Audit Evidence (“AS 15”), which is effective for fiscal periods beginning on or +after December 15, 2010, requires that an auditor plan and perform audit procedures to +obtain sufficient appropriate audit evidence to provide a reasonable basis for his opinion. +See AS 15, ¶4. For each of the six Issuer Audits, Kinross failed to obtain the requisite level +of evidential matter or audit evidence to support his opinion. +6. For the three audits of fiscal years beginning before December 15, 2010, +Kinross failed to obtain sufficient competent evidential matter to afford a reasonable basis +for his opinion. For issuer A, Kinross issued an unqualified audit report on Issuer A’s +financial statements as of March 31, 2010 and 2011 and the periods from inception (March +31, 2009), despite the fact that he had performed no audit procedures as of March 31, 2010 +or for the period from inception (March 31, 2009) to March 31, 2010. Kinross issued an +unqualified audit report on Issuer B’s August 31, 2011 financial statements. Issuer B’s sole +operating subsidiary accounted for 100 percent of Issuer B’s revenues and cost of revenues +and 15 percent of its expenses. Yet, Kinross performed no audit procedures on the +subsidiary’s revenues or its expenses. Instead, Kinross conducted a “balance sheet audit,” +relying on the change in net equity to validate the subsidiary’s net income and limiting the +testing of Issue B’s expenses. With respect Issuer C, which recorded a $42 million gain +upon deconsolidation of Issuer B and a corresponding $42 million investment in Issuer B +(See FASB ASC 810-10-40-5, Consolidation: Derecognition), Kinross failed to consider +potential impairment of Issuer C’s $42 million investment in Issuer B despite Issuer B’s +stock price having declined by 94 percent by Issuer C’s fiscal year end. +7. For the three audits of fiscal years beginning on or after December 15, 2010, +Kinross failed to plan and perform audit procedures to obtain sufficient appropriate audit +evidence to provide a reasonable basis for his opinion. For issuer A, Kinross issued an + +3 AU §350.03 Audit Sampling, “[R]equire[s] that the auditor use professional judgment in +planning, performing, and evaluating a sample and in relating the evidential matter produced by +the sample to other evidential matter when forming a conclusion about the related account +balance or class of transactions.” Additionally, AU §350.39 provides that the sample should be +selected in such a way that the sample can be expected to be representative of the population and +that each item in the population should have an opportunity to be selected. + 5 +unqualified audit report on Issuer A’s financial statements as of March 31, 2011 and 2012 +and the periods from inception (March 31, 2009), despite the fact that he had performed no +audit procedures as of March 31, 2010 or for the period from inception (March 31, 2009) to +March 31, 2010. With respect to his audit of Issuer D’s December 31, 2011 financial +statements, Kinross inadequately tested revenues and cost of goods sold. Despite Issuer D +having only one customer and relatively few transactions, Kinross did not review sales +contracts or purchase orders with customers or suppliers to identify terms that might affect +the timing of revenue recognition or cost of goods sold. Additionally, Kinross +inappropriately relied upon documents that he could not read, either because the documents +were written in Chinese or because the copies were illegible. With respect to Issuer E, +Kinross inadequately tested revenues and failed to investigate material, unidentified +differences between schedules detailing sales transactions and the amount of recorded sales +revenue. +Auditing Standard No. 8, Audit Risk +8. Kinross failed to obtain sufficient audit evidence by failing to conduct three +audits in compliance with Auditing Standard No. 8, Audit Risk (“AS 8”), which is effective +for audits of fiscal years beginning on or after December 15, 2010. AS 8 requires an +auditor to plan and perform the audit to obtain reasonable assurance about whether the +financial statements are free of material misstatement due to error or fraud. An auditor +obtains reasonable assurance by reducing audit risk to an appropriately low level through +applying due professional care, including obtaining sufficient appropriate audit evidence. +See AS 8, ¶3. Kinross did not exercise due professional care and did not obtain sufficient +appropriate audit evidence for Issuer D’s and Issuer E’s December 31, 2011 audits or Issuer +A’s March 31, 2012 audit. Consequently, Kinross did not conduct these audits in a manner +designed to reduce risk to an appropriately low level. + +AU §333, Management Representations + +9. Under AU §333, Management Representations, an independent auditor +must obtain written representations from management for all financial statements and all +periods covered by the audit report. Kinross failed to satisfy this auditing standard for each +of the Issuer Audits because he issued audit reports on both the current and prior year’s +financial statements even though he obtained written representations from management +only for the current year’s financial statements. See AU §333.05. + +Auditing Standard No. 3, Audit Documentation + +10. For each of the Issuer Audits, Kinross’s audit documentation was deficient. +Auditing Standard No. 3, Audit Documentation (“AS 3”) establishes the requirements for +documentation that the auditor should prepare and retain in connection with engagements +to support the auditor’s conclusions and representations contained in the auditor’s report. +See AS 3, ¶2. Audit documentation must contain sufficient information to enable an +experienced auditor, having no previous connection with the engagement to (a) understand +the nature, timing, extent, and results of the procedures performed, evidence obtained, and +conclusion reached; and (b) determine who performed the work and the date such work + 6 +was completed as well as the person who reviewed the work and the date of such review. +See AS 3 ¶6. Kinross failed to prepare documentation that sufficiently described the +procedures he performed, the evidence he obtained, and the conclusions he reached. +Kinross’s documentation also did not identify the person who performed the work and the +date such work was completed, or the person who reviewed the work and the date of the +review. Kinross performed substantially all of the audit procedures, but he frequently did +not sign or initial and date his audit work papers. Additionally, Kinross did not include +written audit programs or document the conclusions he reached for most audit areas other +than cash. See AS 3, ¶¶4-6. Finally, he did not prepare an engagement completion +document identifying significant findings or issues. See AS 3, ¶13. + +11. Kinross added information to his audit work papers after the documentation +completion date without identifying who prepared the additional documentation and +explaining why it was added. In some instances, he failed to specify the date he added the +information. See AS 3, ¶16. + +12. Kinross did not retain audit documentation for the required seven years. +Kinross was unable to locate documentation to support his audit reports on Issuer B’s fiscal +year 2008 and Issuer C’s fiscal year 2008 financial statements, the earliest years covered by +his initial audit reports for these issuers. See AS 3, ¶14. + +Auditing Standard No. 7, Engagement Quality Review + +13. Kinross failed to obtain required Engagement Quality Reviews (“EQR”) for +the vast majority of his audit engagements, and he engaged an unqualified person to +perform the few EQRs that he did obtain. Under Auditing Standard No. 7, Engagement +Quality Review (“AS 7”), an auditor must obtain an EQR and concurring approval to issue +the engagement report for each audit and interim review engagement. +4 Kinross engaged +Wilfred W. Hanson to conduct EQRs on the engagements for five of the 40 audit reports he +issued on financial statements for fiscal years beginning on or after December 15, 2009.5 +For the same period, however, Kinross also did not obtain the required EQRs for any of the +other 35 audits he conducted or for any reviews of interim financial information. See AS 7, +¶1. +14. Kinross engaged Hanson to conduct an EQR on the audits of Issuer A’s +March 31, 2012 financial statements, Issuer B’s August 31, 2011 financial statements, +Issuer C’s September 30, 2011 financial statements, Issuer D’s December 30, 2011 +financial statements, and Issuer E’s December 31, 2011 financial statements. In connection +with these audits, Kinross did not ascertain whether Hanson was qualified to perform the +review. An engagement quality reviewer must be, among other things, competent, i.e., +possessing the level of knowledge and competence related to accounting, auditing and + +4 AS 7 is effective for audits and interim reviews for fiscal years beginning on or after +December 15, 2009. + +5 In the Matter of Wilfred W. Hanson, CPA. Admin Pro. File No. 3-______ + + 7 +financial reporting required to serve as the engagement partner on the engagement under +review. See AS 7, ¶¶4-5. Additionally, Kinross did not establish quality control policies +and procedures to provide him with reasonable assurance that the engagement quality +reviewer has sufficient competence, among other things, to perform the EQR. See AS 7, +¶4.6 Finally, Kinross did not determine whether Hanson prepared audit document in +connection with the EQRs. See AS 7, ¶¶9-11 and ¶¶19-20. +15. With respect to Issuer D, Kinross requested that Hanson act as the +engagement quality reviewer but did not request him to provide concurring approval of +issuance of Kinross’s audit report. Instead, Kinross improperly signed as the engagement +quality review partner and provided concurring approval to issue the audit report, even +though Kinross was the engagement partner responsible for supervising the audit. +AU §508, Reports on Audited Financial Statements +16. Under AU §508, Reports on Audited Financial Statements, an auditor may +issue an unqualified opinion on historical financial statements only when the auditor has +formed such an opinion on the basis of an audit performed in accordance with PCAOB +standards. See AU §508.07. Kinross failed to conduct each of the Issuer Audits in +accordance with PCAOB standards. Kinross should not have issued audit reports +expressing an unqualified opinion and asserting he had conducted his audits in accordance +with PCAOB standards. +Communications with Audit Committees +17. For each of the Issuer Audits, Kinross failed to make required +communications to the audit committee or to others responsible for the oversight of the +issuer’s financial reporting process. See AU §380, Communications With Audit +Committees, Section 10A(k) of the Exchange Act, Rule 2-07 of Regulation S-X, and +PCAOB Rule 3526, Communication with Audit Committees Concerning Independence. +Kinross did not make or document that he had made the required communications to the +audit committee (or board of directors for an entities without an audit committee), +including: i) the auditor’s responsibility under PCAOB standards, ii) significant accounting +policies, iii) management’s judgments and accounting estimates, iv) audit adjustments, v) +the auditor’s judgment about the quality of the company’s accounting principles, vi) other +information in documents containing audited financial statements, vii) disagreements with +management, viii) consultation with other accountants, ix) major issues discussed with +management prior to retention, and x) difficulties encountered in performing the audit. See +AU §380.03-.16. + +6 PCAOB standard QC §40, The Personnel Management Element of a Firm's System of +Quality Control-Competencies Required by a Practitioner-in-Charge of an Attest Engagement +states, in part, that policies and procedures should be established to provide the firm with +reasonable assurance that “those hired possess the appropriate characteristics to enable them to +perform competently” and “[w]ork is assigned to personnel having the degree of technical +training and proficiency required in the circumstances.” QC §40, ¶.02. + 8 +18. For each of the Issuer Audits, Kinross neglected to report information +regarding: i) all critical accounting policies and practices to be used, ii) all alternative +treatments of financial information within GAAP for policies and practices related to +material items that have been discussed with management, including ramifications of the +use of such alternative disclosures and treatments, and the treatment preferred by the +registered public accounting firm, and iii) other material written communications between +the registered public accounting firm and management (management letter, summary of +unadjusted differences). See Section 10A(k) of the Exchange Act and Rule 2-07 of +Regulation S-X. +19. With respect to Issuer A, Kinross failed to affirm to the audit committee7, in +writing, prior to accepting his initial engagement pursuant to standards of the PCAOB that +he was in compliance with PCAOB Rule 3520, Auditor Independence. Similarly, with +respect to continuation of engagements for Issuers A, B, C, D, and E, Kinross failed to +affirm to the audit committee, in writing, at least annually that he was in compliance with +PCAOB Rule 3520. +AU §315, Communication Between Predecessor and Successor Auditors +20. Kinross failed to make required communications with the predecessor +auditor or obtain sufficient competent evidential matter to afford a reasonable basis for his +opinion on Issuer A’s fiscal year 2010 financial statements, which were included in his +unqualified audit report on Issuer A’s financial statements for the fiscal years ending March +31, 2011 and March 31, 2010. As the successor auditor, Kinross was required to obtain +sufficient competent evidential matter to afford a reasonable basis for expressing an +opinion on Issuer A’s financial statements, including making an inquiry of the predecessor +auditor and requesting to review its work papers. See AU §315, Communications Between +Predecessor and Successor Auditors, ¶¶.03 and ¶¶.07-.13. For the fiscal year ending +March 31, 2010, Kinross never contacted Issuer A’s predecessor auditor. Instead, he relied +exclusively on the predecessor’s audit report on Issuer A’s March 31, 2010 financial +statements as the basis for his opinion on Issuer A’s March 31, 2010 financial statements, +even though he had not spoken with the predecessor auditor or reviewed the predecessor +auditor’s work papers. Because Kinross performed no audit procedures as of March 31, +2010 or for the period then ended, he failed to obtain sufficient competent evidential matter +to afford a reasonable basis for his opinion on Issuer A’s March 31, 2010 and 2011 +financial statements. See AU §326 and AU §315.12. +AU § 330, The Confirmation Process +21. With respect to Issuer A, and consistent with his practice, Kinross did not +control the confirmation process. The purpose of the confirmation process, which includes +communicating the confirmation request to the appropriate third party, is to obtain evidence +directly from a third party about management’s financial statements. See AU §330.28. +Kinross failed to maintain control over the confirmation requests and did not establish + +7 Section 3(a)(58) of the Exchange Act states, in part, that the term “audit committee” +means the entire board of directors if the issuer does not have an audit committee. + 9 +direct communication with the intended recipients. Kinross knew that the auditor should +control the confirmation process, but he instructed his clients to prepare and mail +confirmation requests on his behalf. +AU §334, Related Parties +22. With respect to Issuer D, Kinross failed to evaluate and assess the adequacy +of the issuer’s disclosure of related party transactions. Kinross knew that Issuer D derived +100 percent of its revenues and cost of revenues from a company that owned 93 percent of +Issuer D’s common stock, and with which Issuer D shared its officers and its principal +place of business. Kinross also knew or should have known that the transactions with its +parent company were material and required disclosure. See FASB ASC 850-10-50, +Related Party Disclosures. Kinross failed to consider whether he had obtained sufficient +appropriate evidential matter to understand the relationship of the parties and the effects of +the transactions on the financial statements. Similarly, he failed to evaluate all the +information available and satisfy himself that Issuer D adequately disclosed related party +transactions in its financial statements. See AU §334.11. In fact, Issuer D did not make +required disclosures regarding related parties transactions in its December 31, 2011 +financial statements. +Auditing Standard No. 14, Evaluating Audit Results +23. For Issuers C and D, Kinross failed to aggregate uncorrected differences +that were clearly not inconsequential, and evaluate whether material, either individually or +in combination with other misstatements. AS 14, Evaluating Audit Results, (“AS 14”). +8 +Kinross determined planning materiality based on an amount equal to five percent of total +expenses. During the audit, Kinross identified, but did not address differences that +exceeded five percent of total expenses, i.e., planning materiality. Kinross failed to +evaluate whether the uncorrected differences were material, individually or in combination +with other misstatements. See AS 14, ¶¶11-18. +Section 10A (j) of the Exchange Act, Audit Partner Rotation +24. Section 10A (j) of the Exchange Act, Audit Partner Rotation. Kinross was +Issuer D’s registered public accounting firm 2007 until he resigned in November 2012. +During this period, Kinross issued audit reports for Issuer D’s financial statements for each +of the five years in the period ended December 31, 2011. Kinross continued to provide +audit services in connection with reviews of Issuer D’s interim financial information for the +quarters ended March 31, June 30 and September 30, 2012. As a result, Kinross was not +independent with respect to the audit services he provided in connection with his review of +Issuer D’s 2012 interim financial statements. +9 + +8 AS 14 is effective for audits of fiscal years beginning on or after December 15, 2010. +9 Kinross does not qualify for the audit partner rotation exemption pursuant to Rule 2- +01(c)(6)(ii) of Regulation S-X because Kinross was the auditor for five or more issuer clients at +all relevant times. + 10 + D. VIOLATIONS + + 1. As a result of the conduct described above, Kinross willfully +violated Sections 10A(j), Audit Partner Rotation, and 10A(k), Reports to Audit +Committees, of the Exchange Act; + + 2. As a result of the conduct described above, Kinross willfully +violated Rule 2-02(b)(1), Representations as to the Audit included in Accountants' Reports, +and Rule 2-07, Communication with Audit Committees, of Regulation S-X. + + 3. As a result of the conduct described above, Kinross engaged in +improper professional conduct as defined in Rule 102(e)(1)(iv)(B)(2) in that his conduct +constituted negligent conduct, consisting of repeated instances of unreasonable conduct, +each resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. + + 4. As a result of the conduct described above, Kinross willfully +violated certain provisions of the Federal securities laws and the rules and regulations +thereunder pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +III. + +In view of the allegations made by the Division of Enforcement and the Office of +the Chief Accountant, the Commission deems it necessary and appropriate in the public +interest that public administrative and cease-and-desist proceedings be instituted to +determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondent an opportunity to establish any defenses to such +allegations; + +B. What, if any, remedial action is appropriate against Respondent pursuant to +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice, +including, but not limited to, censure or denying, temporarily or permanently, the privilege +of appearing or practicing before the Commission; + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should +be ordered to cease and desist from committing or causing violations of and any future +violations of Section 10A(j) and (k) of the Exchange Act and Rules 2-02(b)(1) and 2-07 of +Regulation S-X, whether Respondent should be ordered to pay a civil penalty pursuant to +Section 21B(a) of the Exchange Act, and whether Respondent should be ordered to pay +disgorgement pursuant to Sections 21B(e) and 21C(e) of the Exchange Act. + +IV. + + 11 +IT IS ORDERED that a public hearing for the purpose of taking evidence on the +questions set forth in Section III hereof shall be convened not earlier than 30 days and not +later than 60 days from service of this Order at a time and place to be fixed, and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission's Rules of Practice, 17 C.F.R. §201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by +Rule 220 of the Commission's Rules of Practice, 17 C.F.R. §201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after +being duly notified, the Respondent may be deemed in default and the proceedings may be +determined against him upon consideration of this Order, the allegations of which may be +deemed to be true as provided by Rules 155(a), 220(f), 221(f), and 310 of the Commission's +Rules of Practice, 17 C.F.R. §§201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent personally or by certified +mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an +initial decision no later than 300 days from the date of service of this Order, pursuant to +Rule 360(a)(2) of the Commission’s Rules of Practice. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3503.pdf b/raw/aaer/2013/AAER-3503.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0d877d1ab5287f662d9f301e683d657f634da75e Binary files /dev/null and b/raw/aaer/2013/AAER-3503.pdf differ diff --git a/raw/aaer/2013/AAER-3503.txt b/raw/aaer/2013/AAER-3503.txt new file mode 100644 index 0000000000000000000000000000000000000000..ecf80111b6ff00c28bf9b02b77169ca5a048638a --- /dev/null +++ b/raw/aaer/2013/AAER-3503.txt @@ -0,0 +1,284 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70567 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3503 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15537 + + + + +In the Matter of + +Wilfred W. Hanson, 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 Wilfred W. Hanson, CPA +(“Respondent” or “Hanson”) pursuant to Section 4C +1 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 poss ess the +requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + 2 +II. + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + A. RESPONDENT + +Wilfred W. Hanson, age 69, is a California-licensed certified public accountant. From +1971 to 1976, Hanson was an auditor for Arthur Young & Co. From 1976 until he retired in 1994, +Hanson held various positions at The Times Mirror Company, including, from 1987 to 1991, as the +director of auditing, and, from 1992 to 1994, as the assistant controller. Between 1994 and 2009, +Hanson operated a family-owned manufacturing business. Since 2009, Hanson has provided +forensic accounting, litigation support, and expert witness testimony in the areas of business +valuation and the loss of company or individual earnings for an Irvine, California-based forensic +accounting firm (the “Forensic Firm”). The Forensic Firm does not provide audit services and is +not registered with the Public Company Accounting Oversight Board (“PCAOB”). + + B. OTHER RELEVANT PARTIES + +1. John Kinross-Kennedy, CPA (“Kinross”) is a certified public accountant licensed in +the state of California and, since 1993, has operated as a sole proprietor. Kinross is registered with +the PCAOB as John Kinross-Kennedy, CPA. During the relevant period covered by this Order, +Kinross served as the independent public accountant conducting each of the Issuer Audits. Kinross +rents an office from the Forensic Firm, but he is not an associate of the firm nor is the firm or its +staff associated with Kinross’s audit engagements. +2. At all relevant times, Issuer A’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act, was traded on the OTC Bulletin Board, and its +fiscal year ended on the last day of March. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + 3 +3. At all relevant times, Issuer B filed reports with the Commission pursuant to +Section 15(d) of the Exchange Act, its common stock was traded on the OTC Market, and its fiscal +year ended on the last day of August. +4. At all relevant times, Issuer C’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act, was traded on the OTC Market, and its fiscal year +ended on the last day of September. +5. At all relevant times, Issuer D’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act, was traded on the OTC Bulletin Board, and its +fiscal year ended on the last day of December. +6. At all relevant times, Issuer E filed reports with the Commission pursuant to +Section 15(d) of the Exchange Act, its common stock was traded on the OTC Bulletin Board, and +its fiscal year ended on the last day of December. + C. RESPONDENT’S IMPROPER PROFESSIONAL CONDUCT + Background +1. Hanson initially obtained a license as a CPA in the state of California in 1973, but +allowed it to be cancelled in 1996 following his retirement in 1994. In 2009, he applied to the +California Board of Accountancy and obtained a new license as a CPA. Since obtaining his new +CPA license, Hanson has twice failed to obtain and report required continuing professional +education timely, causing his CPA license to expire – from May to August 2010 and from May to +August 2012. +2. Hanson obtained and reported a total of 13 hours of continuing professional +education hours specifically related to PCAOB Standards in connection with his application for the +issuance of a new CPA license and his subsequent annual renewals. In 2009, Hanson reported 13 +hours of continuing professional education relating to PCAOB Auditing Standards Numbers 8 +through 15. In 2010, 2011, and 2012, Hanson reported a total of 75 hours of continuing +professional education, none of which relate to PCAOB standards. The majority of Hanson’s +continuing professional education relates to business valuation, bankruptcy, and litigation support +services. +3. Between October 2011 and June 2012, Kinross retained Hanson to conduct +engagement quality reviews of certain of Kinross’s public company issuer audits. Hanson acted as +the engagement quality reviewer on the audits of Issuer A’s March 31, 2012 financial statements, +Issuer B’s August 31, 2011 financial statements, Issuer C’s September 30, 2011 financial +statements, Issuer D’s December 30, 2011 financial statements, and Issuer E’s December 31, 2011 +financial statements, (the “Issuer Audits”). Hanson did not act as the engagement quality reviewer +for any reviews of interim financial information. Previously, Hanson had no involvement with +Kinross’s audit engagements. + 4 +Applicable Professional Standards +4. PCAOB Standard No. 7, Engagement Quality Review (“AS 7”), which is effective +for engagement quality reviews of audits and interim reviews for fiscal years beginning on or after +December 15, 2009, defines the required qualifications of an engagement quality reviewer, what +should be done when conducting an engagement quality review, and what information should be +documented. +5. The engagement quality reviewer must possess the level of knowledge and +competence related to accounting, auditing, and financial reporting required to serve as the +engagement partner on the engagement under review.4 See AS 7, ¶5. On an audit of the financial +statements of a public company, the engagement partner should be technically proficient, which +includes having an understanding of applicable auditing standards and SEC reporting +requirements. The necessary competence can ordinarily be gained through recent accounting, +auditing, or industry experience and supplemented by continuing professional education and +consultation (emphasis added). See PCAOB standard QC §40, ¶¶.05-.08. +6. In conducting an engagement quality review of an audit engagement, the +engagement quality reviewer should, among other things, evaluate the significant judgments +related to engagement planning and assessments and audit response to significant risks identified +by the engagement team; review the engagement completion document; read other information in +documents containing the financial statements to be filed with the Commission; and evaluate +whether appropriate matters have been communicated, or identified for communication, to the +audit committee, management, and other parties, such as regulatory bodies. See AS 7, ¶¶9-11. +Additionally, the documentation of an engagement quality review should contain sufficient +information that identifies: a) the engagement quality reviewer; b) the documents reviewed by the +engagement quality reviewer, and c) the date the engagement quality reviewer provided concurring +approval of issuance or, if no concurring approval of issuance was provided, the reasons for not +providing the approval. See AS 7, ¶19. +7. In connection with an audit, the engagement quality reviewer may provide +concurring approval of issuance only if, after performing with due professional care the review +required by AS 7, he or she is not aware of a significant engagement deficiency (See AS 7, ¶12). +Due professional care entails possessing the degree of skill commonly possessed by other auditors +and exercising it with reasonable care and diligence. See AU §230.03-.05, Due Professional Care +in the Performance of Work. +Hanson Failed to Comply with Applicable Professional Standards +8. Hanson is not competent to serve as the engagement partner on an audit of the +financial statements of a public company. He does not have any recent accounting, auditing, or +financial reporting experience. He has not participated in an audit of the financial statements of a +public company in over 35 years, has never before participated in an audit conducted in accordance + +4 The term "engagement partner" has the same meaning as the "practitioner-in-charge of an engagement" in +PCAOB interim quality control standard QC §40, The Personnel Management Element of a Firm's System of +Quality Control-Competencies Required by a Practitioner-in-Charge of an Attest Engagement. + 5 +with PCAOB standards, and has never served as the engagement partner for any audit of the +financial statements of any company. He has had neither relevant accounting nor financial +reporting industry experience in the last 19 years. Additionally, he has not otherwise gained the +necessary competence through continuing professional education. Of the 206 hours of continuing +professional education Hanson obtained and reported in connection with the issuance of his CPA +license in 2009 and subsequent renewals through 2012, only 13 hours relate to PCAOB standards +and none specifically relate to AS 7. +9. Hanson was also not competent to serve as the engagement quality review partner +for Issuer A’s audit because, at the time he conducted his review, he did not possess the requisite +qualifications as his CPA license had expired. Rule 2-01(a) of Regulation S-X provides that the +Commission will not recognize any person as either a public accountant or certified public +accountant who is not in good standing as such under the laws of the place of his residence or +principal office. Between May and August 2012, Hanson was not duly registered and in good +standing under the laws of the state of California, where he resided and maintained his principal +office. Accordingly, Hanson was not recognized as an accountant by the Commission in June +2012 when he acted as the engagement quality reviewer for the fiscal year 2012 audit of Issuer A. +10. Hanson failed to exercise due professional care in conducting engagement quality +reviews of the Issuer Audits. Hanson provided concurring approval of issuance without +performing, with due professional care, the engagement quality reviews of the Issuer Audits. First, +he did not possess the degree of skill commonly possessed by other auditors and was not qualified +to serve as the engagement partner. Second, he did not exercise reasonable care and diligence. +11. Hanson did not read AS 7 in preparation for his engagement to conduct engagement +quality reviews of the Issuer Audits. Hanson also did not inquire about or otherwise investigate the +requirements for conducting an engagement quality review or the qualifications or responsibilities +of a person serving as an engagement quality reviewer. As such, he was unfamiliar with the level +of knowledge and competence that a person serving as the engagement quality reviewer of an audit +must have and unfamiliar with PCAOB standards for conducting an engagement quality review of +an audit. Furthermore, Hanson did not conduct the engagement quality review pursuant to the +procedures in AS 7. Accordingly, Hanson failed to exercise due professional care. +12. In connection with his engagement quality reviews of the Issuer Audits, Hanson +merely reviewed the financial statements and Kinross’s checklist to make sure all procedures were +initialed and dated. Hanson documented his review by signing a 1993-vintage checklist, affirming +only that he was satisfied that the detail review and partner review sections of the checklist were +completed, that he had reviewed a draft of the financial statements and the auditor’s report, and +that he approved the issuance of the audit report. Among other things, Hanson did not review +critical documents, such as the engagement completion document, which did not exist, nor did he +evaluate whether matters had been communicated to the audit committee. Furthermore, Hanson +did not properly reflect the date of his EQR and his concurring partner approval of issuance—at +times, at Kinross’s request, he dated his signature prior to the date he conducted his review. +13. By performing the above procedures, Hanson did not perform the procedures that +AS 7 states should be performed in conducting an engagement quality review. Specifically, he did + 6 +not: a) evaluate the significant judgments related to engagement planning and assessments and +audit response to significant risks identified by the engagement team; b) review the engagement +completion document, or recognize that the audit work papers did not comply with the PCAOB +Auditing Standard No. 3, Audit Documentation, requirement that an engagement completion +document be prepared; c) read the Forms 10-K containing the financial statements to be filed with +the Commission; and d) evaluate whether appropriate matters have been communicated, or +identified for communication, to the audit committee, management, and other parties, such as +regulatory bodies. Additionally, his documentation is deficient in two respects. First, it does not +contain sufficient information to identify the documents he reviewed. Second, the documentation +does not always reflect the date Hanson provided concurring approval of issuance, because he, at +times, dated his signature prior to the date he conducted his review. +D. VIOLATIONS + +As a result of the conduct described above, Hanson engaged in improper professional +conduct as defined in Rule 102(e)(1)(ii) and 102(e)(1)(iv)(B)(2) in that his conduct constituted +negligent conduct, consisting of repeated instances of unreasonable conduct by Hanson, each +resulting in a violation of applicable professional standards, that indicate a lack of competence to +practice before the Commission. +E. FINDINGS +Based on the foregoing, the Commission finds that Hanson engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) and +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Hanson is denied the privilege of appearing or practicing before the Commission as +an accountant. + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. +Such an application must satisfy the Commission that Respondent’s work in his practice +before the Commission will be reviewed either by the independent audit committee of the +public company for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + 7 + 2. an independent accountant. Such an application must satisfy the +Commission that: + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, +and such registration continues to be effective; + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the PCAOB and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions imposed by the PCAOB (other +than reinstatement by the Commission); and + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, including, but not limited to, +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. +C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. +By the Commission. + + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3504.txt b/raw/aaer/2013/AAER-3504.txt new file mode 100644 index 0000000000000000000000000000000000000000..a6ea51dfc3a3a0de530299c23d86cd47f8e01cd9 --- /dev/null +++ b/raw/aaer/2013/AAER-3504.txt @@ -0,0 +1,397 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70579 / September 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3504 / September 30, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15544 + + +In the Matter of + +CHINA RUITAI +INTERNATIONAL +HOLDINGS CO., LTD., +DIAN MIN MA, GANG +MA, AND JIN TIAN, + +Respondents. + + + + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS AND +NOTICE OF HEARING PURSUANT +TO SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(E) OF THE +COMMISSION’S RULES OF +PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +and in the public interest that public administrative and cease-and-desist proceedings be, +and hereby are, instituted pursuant to Sections 4C1 and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice2 + +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 rule s and regulations +thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + 2 +against China Ruitai International Holdings Co., Ltd. (“China Ruitai”), Dian Min Ma, +Gang Ma, Jin Tian (collectively “Respondents”). + +II. + +After an investigation, the Division of Enforcement alleges that: + + A. RESPONDENTS + + 1. Respondent China Ruitai, incorporated in Delaware in 1955 and +located in the People’s Republic of China (“PRC”), is a manufacturer of deeply processed +chemicals used primarily in the production of PVC, cosmetics, foods, and paints. At all +relevant times, China Ruitai’s common stock was registered with the Commission pursuant +to Section 12(g) of the Exchange Act and is quoted on OTC Link operated by OTC Markets +Group, Inc. and formerly known as the Pink Sheets (“OTC Link”) under the ticker symbol +“CRUI.” + + 2. Respondent Dian Min Ma, age 46, resides in the PRC and has been a +Director and Chief Executive Officer (“CEO”) of China Ruitai since 2007. Dian Min Ma, +along with Xing Fu Lu, the President of China Ruitai, owns 100% of the capital stock of +Shandong Ruitai Chemical Co., Ltd., a related party to China Ruitai. Dian Min Ma also +serves as the Finance Manager for Taian Ruitai Cellulose Co., Ltd., a majority-owned (99%) +subsidiary of China Ruitai. + + 3. Respondent Gang Ma, age 40, resides in the PRC and has been Chief +Financial Officer (“CFO”) of China Ruitai since 2007. Gang Ma is also the Director of the +Financial Department for Taian Ruitai Cellulose Co., Ltd. + + 4. Respondent Jin Tian, age 38, resides in the PRC and has been a +Director and Chief Accounting Officer (“CAO”) of China Ruitai since 2007. Jin Tian is +also an accountant for Taian Ruitai Cellulose Co., Ltd. + +B. RELATED ENTITIES + + 1. Taian Ruitai Cellulose Co., Ltd. (“Taian Ruitai”), located in the PRC, +is a majority-owned (99%) subsidiary of China Ruitai and is the operational subsidiary of +China Ruitai. + + 2. Shandong Ruitai Chemical Co., Ltd. (“Shandong Ruitai”), located in +the PRC, is a related party to China Ruitai and holds 1% of the capital stock of Taian Ruitai. +Shandong Ruitai is 100% owned by Dian Min Ma and Xing Fu Lu, the President of China +Ruitai. Shandong Ruitai is a dealer of hot steam, which it sells to Taian Ruitai. + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully viola ted, or willfully aided and +abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. + + 3 + +C. FRAUDULENT AND ILLEGAL ACTIVITY + + 1. From approximately January to December 2011, Respondents +orchestrated a scheme to fraudulently obtain up to $40 million in bank financing using +falsified documents. China Ruitai, through its subsidiary, Taian Ruitai, falsified purchase +orders to purchase steam from Shandong Ruitai. Aided by the cooperation of Shandong +Ruitai, Taian Ruitai obtained invoices from Shandong Ruitai for the fake purchase orders. +Taian Ruitai then presented the fake invoices and purchase orders to various banks to +obtain bank acceptance notes. Per the terms of the acceptance notes, China Ruitai +deposited between 30% and 100% of the invoice amount with the bank, and the bank paid +the stated invoice amount to Shandong Ruitai. The amounts that China Ruitai placed on +deposit with the banks were held in reserve until China Ruitai repaid the bank acceptance +notes. + + 2. After Shandong Ruitai received funds from the banks, Shandong +Ruitai typically provided the funds to Taian Ruitai to be used as operating capital. At other +times, Shandong Ruitai retained a portion of the funds for its own operational needs. In +either scenario, the scheme was effectuated by the efforts of China Ruitai as the creditor +with the banks and the originator of the purchase orders. + + 3. During the time period of the scheme, China Ruitai filed Forms 10- +Q for the periods ended March 31, 2011, June 30, 2011, and September 30, 2011, and a +Form 10-Q/A for the period ended June 30, 2011. In each of the Forms 10-Q and Form 10- +Q/A, China Ruitai failed to make the disclosures of China Ruitai’s obligations to the banks, +the scheme China Ruitai was utilizing to provide working capital, and the risks associated +with the ongoing scheme. As a result of the scheme, China Ruitai’s related party +obligations to Shandong Ruitai increased over 1600% from December 31, 2010 to +December 31, 2011. As of September 30, 2011, these obligations represented over 36% of +China Ruitai’s liabilities. The failure to disclose the obligations to the bank and the nature +of the activity to obtain bank financing materially misrepresented the actual operations, +obligations, solvency, and liquidity of China Ruitai. The misstatements made it appear that +China Ruitai was meeting its working capital requirements with cash flows generated from +business activities, rather than financing from banks. In its footnotes to the financial +statements, China Ruitai described the resulting obligations as only related party notes +payable that were “non-interest bearing for the purpose of financing the Company’s +operations due to a lack of working capital and have no fixed terms of repayment.” These +statements were false and materially misleading because they failed to disclose the nature +and terms of the obligations to the banks. Furthermore, the loans could result in +undisclosed risk to the company, especially if the illegal nature of the loans was challenged +or exposed by the banks, regulators, or others. + + 4. Dian Min Ma and Gang Ma each signed China Ruitai’s periodic +reports filed with the Commission for the first three quarters of 2011. In addition, Dian +Min Ma and Gang Ma each signed certifications for the quarterly reports. Those filings +incorrectly state that the reports did not “contain any untrue statement of a material fact or + 4 +omit to state a material fact necessary to make the statements made, in light of the +circumstances under which such statements were made, not misleading with respect to the +period covered by this report.” The statements and representations in China Ruitai’s filings +were materially misleading. + + 5. Dian Min Ma, Gang Ma, and Jin Tian facilitated China Ruitai’s +violations by perpetuating the illegal scheme and directly and indirectly filing or causing to +be filed with the Commission quarterly reports on Form 10-Q and Form 10-Q/A that were +inaccurate and materially misleading. CEO, Dian Min Ma, and CFO, Gang Ma signed +certifications for those reports and attested to their accuracy. These were blatant +misrepresentations because Dian Min Ma, Gang Ma, and Jin Tian knew or were reckless in +not knowing that the bank financing transactions were illegal and that China Ruitai failed to +disclose its obligations to the banks. China Ruitai could not have continued its scheme +without the substantial assistance of the officers. The officers’ fraudulent conduct is +imputable to China Ruitai. + + 6. During fiscal year 2011, China Ruitai retained the independent +registered public accounting firm of Marcum Bernstein & Pinchuk LLP (“Marcum”), a +New York CPA firm with offices in the PRC. Marcum performed the review procedures +for each of the first three quarters of 2011. In each of these quarters, China Ruitai provided +to Marcum management representation letters signed by Dian Min Ma, Gang Ma, and Jin +Tian. The representation letters included materially misleading statements that: (1) +management had no knowledge of any fraud; (2) all related party transactions had been +properly disclosed; and (3) there had been no violations of laws. These statements were +materially misleading because China Ruitai’s scheme was a violation of PRC laws, and the +description of the related party obligations misrepresented the true nature of the activity. +Because of their management positions as CEO, CFO, and CAO respectively, Dian Min +Ma, Gang Ma, and Jin Tian knew or were reckless in not knowing the true nature of the +transactions and that the financing was obtained fraudulently and illegally. They knew or +were reckless in not knowing that the material misrepresentations would be incorporated +into China Ruitai’s public filings and that the public filings materially misrepresented the +true nature of the transactions. + + 7. Marcum also performed audit procedures for fiscal year end in +preparation for filing of China Ruitai’s Form 10-K. As part of these audit procedures, +Marcum performed substantive and analytical procedures on the related party balances +between Taian Ruitai and Shandong Ruitai. Marcum made repeated inquiries regarding the +related party balances from employees of China Ruitai, but the employees were +uncooperative. Despite the lack of cooperation, Marcum identified at least $66.7 million in +potentially fake purchase orders. When confronted with this information, Gang Ma +admitted that the purchase orders and corresponding invoices between Shandong Ruitai +and Taian Ruitai were fictitious. + + 8. As a result of its discovery, Marcum demanded that China Ruitai +obtain a legal opinion regarding the legality of the above-described conduct in relation to +PRC law. China Ruitai obtained a legal opinion, dated April 12, 2012, which concluded + 5 +that the conduct violated Article 10 of the Negotiable Instruments Law. Marcum obtained +a separate legal opinion, which came to the same conclusion. + + 9. As a result of its discovery and the legal opinions it obtained, +Marcum reported the matter to China Ruitai’s Board of Directors on May 21, 2012, +pursuant to Section 10A(b)(1) of the Exchange Act, which requires the auditor to inform +management that it has information indicating an illegal act has or may have occurred. +Dian Min Ma, Gang Ma, and Jin Tian all received the letter. China Ruitai failed to take +any remedial action in response to the letter. + + 10. On July 25, 2012, Marcum issued a notice to China Ruitai, pursuant +to Section 10A(b)(2) of the Exchange Act, indicating an illegal act had occurred and that +failure of the company to take remedial action would warrant resignation of Marcum as the +independent registered public accountants of China Ruitai. Furthermore, the notice +informed China Ruitai that China Ruitai was required to notify the Commission no later +than one business day after it received Marcum’s report, pursuant to Section 10A(b)(3) of +the Exchange Act. + + 11. China Ruitai failed to report the matter to the Commission. +Therefore, on July 27, 2012, Marcum issued a letter pursuant to Section 10A(b)(3) of the +Exchange Act to both China Ruitai and the Commission. That letter provided notice to +company management that Marcum was resigning from the audit engagement, effective +immediately. The July 27, 2012 notice also informed China Ruitai that Marcum no longer +wished to be associated with the Forms 10-Q for the periods ended March 31, 2011, June +30, 2011, and September 30, 2011. The letter further requested that the company file a +Form 8-K disclosing to the SEC and users of the quarterly reports that Marcum should no +longer be associated with the quarterly reports, and that such financial statements were “not +reviewed.” + + 12. To this date, China Ruitai has not complied with its obligation to +report the matter to the Commission pursuant to Section 10A(b)(3) of the Exchange Act. +China Ruitai failed to respond to Marcum’s requests and cut off contact with Marcum. In +addition, China Ruitai did not file a Form 8-K to announce the resignation of its auditor, as +required by Section 13(a) of the Exchange Act and Item 4.01 to Form 8-K + + 13. Since Marcum resigned as China Ruitai’s auditor, China Ruitai has +failed to file its required periodic reports. China Ruitai’s last filing was a Form NT 10-K, +filed on March 30, 2012. China Ruitai’s last periodic report filed with the Commission was +for the period ending September 30, 2011 and was filed on November 14, 2011. As a +result, China Ruitai is delinquent with at least its 2011 and 2012 Forms 10-K, as well as +Forms 10-Q for 2012 and 2013. + + D. VIOLATIONS + + 1. As a result of the conduct described above, China Ruitai and Dian +Min Ma violated, and Gang Ma willfully violated, Section 10(b) of the Exchange Act and + 6 +Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with the purchase +or sale of securities. + + 2. As a result of the conduct described above, Jin Tian willfully +violated Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) thereunder and aided +and abetted and caused China Ruitai’s violations of Section 10(b) of the Exchange Act and +Rule 10b-5(b) thereunder. + + 3. As a result of the conduct described above, China Ruitai violated +Section 10(b) of the Exchange Act and Rules 10b-5 and 12b-20 thereunder by including +materially false and misleading information in filings that misrepresented the true nature of +obligations to banks and by misrepresenting that the obligations were related party +transactions in its quarterly reports on Forms 10-Q and Form 10-Q/A for the first three +quarters of 2011. + + 4. As a result of the conduct described above, China Ruitai violated +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder, which require that an issuer with securities registered under Section 12 of the +Exchange Act file annual, quarterly, and current reports with the Commission. + + 5. As a result of the conduct described above, Dian Min Ma caused, +and Gang Ma and Jin Tian willfully aided and abetted and caused China Ruitai’s violations +of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder. + + 6. As a result of the conduct described above, Dian Min Ma violated, +and Gang Ma willfully violated Exchange Act Rule 13a-14, which requires that the +principal executive and principal financial officers of an issuer with securities registered +under Section 12 of the Exchange Act sign a certification that, based on their knowledge, +the annual and quarterly reports filed with the Commission do not contain any untrue +statement of material fact or omit to state a material fact necessary to make the statements +made, in light of the circumstances under which such statements were made, not +misleading. + + 7. As a result of the conduct described above, China Ruitai violated +Section 13(b)(2)(A) of the Exchange Act, which requires that an issuer with securities +registered under Section 12 of the Exchange Act make and keep books, records, and +accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. + + 8. As a result of the conduct described above, Dian Min Ma caused, +and Gang Ma and Jin Tian willfully aided and abetted and caused China Ruitai’s violations +of Section 13(b)(2)(A) of the Exchange Act, and Dian Min Ma violated, and Gang Ma and +Jin Tian willfully violated Exchange Act Rule 13b2-1, 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; and Exchange Act Rule 13b2-2(a), + 7 +which prohibits an officer or director of an issuer with securities registered under Section +12 of the Exchange Act to make or cause to be made a materially false or misleading +statement to an accountant in connection with the preparation or filing of any document or +report required to be filed with the Commission. + + 9. As a result of the conduct described above, China Ruitai violated +Section 10A(b)(3), which requires an issuer with securities registered under Section 12 of +the Exchange Act, to notify the Commission that the issuer has received from its auditor a +report pursuant to Section 10A(b)(2) of the Exchange Act indicating that illegal acts have +been detected within one business day of the receipt of such report. + +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 21B of the Exchange Act including, but not limited to, +disgorgement, prejudgment interest, and civil penalties pursuant to Section 21B of the +Exchange Act; + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent China +Ruitai should be ordered to cease and desist from committing or causing violations of and +any future violations of Sections 10(b), 10A(b)(3), 13(a), and 13(b)(2)(A) of the Exchange +Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13, thereunder. + +D. Whether, pursuant to Section 21C of the Exchange Act, Respondent Dian +Min Ma should be ordered to cease and desist from committing or causing violations of and +any future violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and +Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2(a)thereunder. + +E. Whether, pursuant to Section 21C of the Exchange Act, Respondent Gang +Ma should be ordered to cease and desist from committing or causing violations of and any +future violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules +10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2(a) thereunder. + +G. Whether, pursuant to Section 21C of the Exchange Act, Respondent Jin Tian +should be ordered to cease and desist from committing or causing violations of and any +future violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules +10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2(a) thereunder. + 8 +H. Whether, pursuant to Section 21C(f) of the Exchange Act, Respondents Dian +Min Ma, Gang Ma, and Jin Tian should be prohibited, conditionally or unconditionally, and +permanently or for such period of time as it shall determine, 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. + +I. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) +of the Commission’s Rules of Practice, Respondents Gang Ma and Jin Tian should be +denied, temporarily or permanently, the privilege of appearing or practicing before the +Commission as an accountant. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the +questions set forth in Section III hereof shall be convened not earlier than 30 days and not +later than 60 days from service of this Order at a time and place to be fixed, and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission's Rules of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the +allegations contained in this Order within twenty (20) days after service of this Order, as +provided by Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondents fail to file the directed answer, or fail to appear at a hearing after +being duly notified, the Respondents may be deemed in default and the proceedings may be +determined against them upon consideration of this Order, the allegations of which may be +deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's +Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondents personally or by certified +mail or in accordance with the Hague Service Convention. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an +initial decision no later than 300 days from the date of service of this Order, pursuant to +Rule 360(a)(2) of the Commission’s Rules of Practice. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, + + 9 +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. + + + + Elizabeth M. Murphy + Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3505.txt b/raw/aaer/2013/AAER-3505.txt new file mode 100644 index 0000000000000000000000000000000000000000..8ab21047cbec92c2f6ac3ff59a15251a21574aa7 --- /dev/null +++ b/raw/aaer/2013/AAER-3505.txt @@ -0,0 +1,157 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70602 / October 2, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3505 / October 2, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15550 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Jing Xie, : 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 Jing Xie +(“Respondent” or “Xie”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +herein, except as to the Commission’s jurisdiction over himself and the subject matter of these +proceedings, and the findings contained in Section III.3. below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Xie, age 32, represents that he is and has been a member of the Association +of Credited Chartered Accountants. He served as Chief Financial Officer of Universal Travel +Group (“UTG”) from February 13, 2009 to August 17, 2009, as interim Chief Financial Officer of +UTG from August 17, 2010 to February 9, 2013, and as director and Secretary of UTG from +December 29, 2006 to February 9, 2013. + + 2. UTG was, at all relevant times, a Nevada corporation with its headquarters in +Shenzhen, People’s Republic of China (“PRC”). UTG claimed to be engaged in the business of +selling travel services. At all relevant times, UTG’s common stock was registered with the +Commission pursuant to Section 12(g) or Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”). On October 27, 2009, UTG common stock was listed and traded on the New +York Stock Exchange (“NYSE”). Previous to that, on May 29, 2009, UTG common stock was +listed and traded on the NYSE AMEX. Previous to that, UTG common stock was traded on the +Over The Counter Bulletin Board. On April 26, 2012, UTG voluntarily delisted its stock from the +NYSE. + + 3. On September 30, 2013, a final judgment was entered against Xie by +consent, permanently enjoining him from future violations of Section 17(a) of the Securities Act of +1933 and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14 and 13b2-1 +thereunder, and from aiding and abetting future violations of Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, in the civil +action entitled Securities and Exchange Commission v. Universal Travel Group et al., Civil Action +Number 13 CV-1492, in the United States District Court for the District of Columbia. Xie was +also ordered to pay a $60,000 civil money penalty and was barred for five years from serving as an +officer or director of a company with securities registered with the Commission pursuant to Section +12 of the Exchange Act. + + 4. The Commission’s complaint alleged, among other things, that Xie violated +the antifraud provisions of the securities laws by making materially false and misleading +statements and omissions concerning, inter alia, UTG’s risky transfer of $41 million in U.S. stock +offering proceeds to numerous unaffiliated third parties in Hong Kong and the PRC, UTG’s +intended use of public offering proceeds, UTG’s risky uses of cash and cash controls, UTG’s +corporate organization, and UTG’s revenues and profits during the first three quarters of 2010. +The Complaint alleged that Xie aided and abetted UTG’s reporting violations, UTG’s failure to +devise and implement proper internal accounting controls, and UTG’s failure to create proper + 3 +records of cash transactions. In addition, the complaint alleged that Xie knowingly failed to +implement a system of internal accounting controls, signed a false certification as to UTG’s +internal controls over financial reporting, and caused to be falsified certain UTG records. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Xies’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Xie is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + 4 + +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his status as an accountant is +current and he has resolved all other disciplinary issues with the applicable state or national +boards of accountancy. However, if licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3506.pdf b/raw/aaer/2013/AAER-3506.pdf new file mode 100644 index 0000000000000000000000000000000000000000..83c2fddfdf76e0bf5d04eb9b05b7f9d34e3efb5c Binary files /dev/null and b/raw/aaer/2013/AAER-3506.pdf differ diff --git a/raw/aaer/2013/AAER-3506.txt b/raw/aaer/2013/AAER-3506.txt new file mode 100644 index 0000000000000000000000000000000000000000..75fa8c97f5f543a42d4a6ad03af0e0057db49941 --- /dev/null +++ b/raw/aaer/2013/AAER-3506.txt @@ -0,0 +1,113 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70658 / October 10, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3506 / October 10, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15563 + + : + : + : + In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + JOHN LAZORCHAK : 102(e) OF THE COMMISSION’S RULES OF + (CPA), : PRACTICE, MAKING FINDINGS, AND + : IMPOSING REMEDIAL SANCTIONS + Respondent. : + : + : +____________________________________ : + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against John +Lazorchak (“Respondent” or “Lazorchak”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice. +1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and admitting the Commission’s jurisdiction +over him, the subject matter of these proceedings and the findings contained in Section III., +paragraph 2 below, 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. Lazorchak, age 42, is and has been a certified public accountant licensed to +practice in the State of New Jersey. From 2007 until his termination in November 2012, Lazorchak +served as Director of Financial Reporting at Celgene Corp., a biopharmaceutical company +incorporated in Delaware with its principal place of business in Summit, New Jersey. At all +relevant times, Celgene’s common stock was registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the NASDAQ +National Market. + + 2. On November 19, 2012, the Commission filed a complaint against +Lazorchak in SEC v. Lazorchak, et al., Civ. Act. No. 12-7164 (KSH) (D. N.J.). On October 7, +2013, the Court entered a Judgment permanently enjoining Lazorchak, by consent, from future +violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder +and imposing an officer and director bar on him pursuant to Section 21(d)(2) of the Exchange Act. +Lazorchak also was ordered to pay disgorgement of $63,800 and prejudgment interest of +$7,246.83, for a total payment of $71,046.83. + + 3. The Commission’s complaint alleged, among other things, that, as part of +an insider trading scheme, Lazorchak used his position at Celgene, and his access to the +company’s confidential information, to tip material, nonpublic information to downstream +tippees, both directly and through an intermediary participant in the scheme. These tips included +material, nonpublic information regarding Celgene’s acquisitions of Pharmion Corp. and +Abraxis Bioscience, Inc., Celgene’s corporate earnings, and Celgene’s withdrawal of a request to +expand the use of the drug Revlemid. In addition, the complaint alleged that an insider at +Stryker Corp., who was a friend of Lazorchak, tipped material, nonpublic information regarding +Orthovita Inc.’s impending acquisition of Stryker Corp. to Lazorchak, and that Lazorchak again +tipped that information both directly and through an intermediary to downstream tippees. The +complaint further alleged that, as part of this scheme, Lazorchak received kickbacks in the form +of cash payments in exchange for the information he tipped. Finally, the complaint alleged that +in the spring of 2008, Lazorchak misled regulators during an inquiry into trading preceding the +Celgene/ Pharmion transaction. + + + + 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 Lazorchak’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Lazorchak is suspended +from appearing or practicing before the Commission as an accountant. + + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3507.pdf b/raw/aaer/2013/AAER-3507.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c51e62e422765edc6be4b42e64c8e9c23595e5a5 Binary files /dev/null and b/raw/aaer/2013/AAER-3507.pdf differ diff --git a/raw/aaer/2013/AAER-3507.txt b/raw/aaer/2013/AAER-3507.txt new file mode 100644 index 0000000000000000000000000000000000000000..d3e3938785d1087d97287a40a9635c1c2edea6dc --- /dev/null +++ b/raw/aaer/2013/AAER-3507.txt @@ -0,0 +1,111 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70659 / October 10, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3507 / October 10, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15564 + + : + : + : + In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + MARK S. CUPO (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 Mark S. +Cupo (“Respondent” or “Cupo”) 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 admitting the Commission’s jurisdiction +over him, the subject matter of these proceedings and the findings contained in Section III., +paragraph 2 below, 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. Cupo, age 52, is and has been a certified public accountant licensed to +practice in the State of New Jersey. From 2002 until 2010, Cupo served as Senior Director of +Accounting and Reporting at Sanofi, a pharmaceutical company incorporated in France with the +principal office of its U.S. subsidiary located in Bridgewater, New Jersey. From 2010 to his +resignation in November 2012, Cupo served as Director of Shared Services at Sanofi. At all +relevant times, Sanofi’s common stock was registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), and traded on the New York Stock +Exchange. + + 2. On November 19, 2012, the Commission filed a complaint against Cupo in +SEC v. Lazorchak, et al., Civ. Act. No. 12-7164 (KSH) (D. N.J.). On October 8, 2013, the Court +entered a Judgment permanently enjoining Cupo, by consent, from future violations of Sections +10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder and imposing an +officer and director bar on him pursuant to Section 21(d)(2) of the Exchange Act. Cupo also was +ordered to pay disgorgement of $65,800 and prejudgment interest of $6,670.94, for a total payment +of $72,470.94. + + 3. The Commission’s complaint alleged, among other things, that, as part of a +carefully-orchestrated insider trading scheme, an insider at Celgene Corp. (“Celgene”) tipped +material, nonpublic information to Cupo regarding Celgene’s acquisitions of Pharmion Corp. +and Abraxis Bioscience, Inc., Celgene’s corporate earnings, and Celgene’s withdrawal of a +request to expand the use of the drug Revlemid. The complaint also alleged that Cupo, acting as +the middle-man in this scheme, then tipped that information to two downstream tippees. In +addition, the complaint alleged that an insider at Stryker Corp. tipped material, nonpublic +information regarding Orthovita Inc.’s impending acquisition of Stryker Corp. indirectly to +Cupo, and that Cupo tipped that information to two downstream tippees. Further, the complaint +alleged that Cupo used his position at Sanofi, and his access to the company’s confidential +information, to tip material, nonpublic information regarding Sanofi’s acquisition of Chattem, +Inc. to two downstream tippees. Finally, the complaint alleged that, as part of this scheme, Cupo +received kickbacks in the form of cash payments in exchange for the information he tipped. + + + + + 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 Cupo’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that Cupo is suspended from +appearing or practicing before the Commission as an accountant. + + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3508.txt b/raw/aaer/2013/AAER-3508.txt new file mode 100644 index 0000000000000000000000000000000000000000..add607dad3831e0266aa2d8b1a1c749b808391df --- /dev/null +++ b/raw/aaer/2013/AAER-3508.txt @@ -0,0 +1,1376 @@ + + + + + + + + + + + + + + + + SEC.gov | JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. + + + + + + + + !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\/514776","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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JBI, Inc., John Bordynuik and Ronald Baldwin, Jr. , Civil Action No. 1:12-cv-10012-RBC (District of Massachusetts, Complaint filed January 4, 2012) + + Court Enters Final Judgment by Consent Against Defendant Ronald Baldwin, Jr. + + + The Commission announced today that a Massachusetts federal court entered a final judgment by consent on October 16, 2013 against Ronald Baldwin, Jr. ("Baldwin"), the only remaining defendant in a fraud action filed by the Commission in 2012. The Commission alleged in its complaint that JBI, Inc. ("JBI"), its CEO, John Bordynuik ("Bordynuik"), and its former CFO, Baldwin, engaged in a scheme to commit securities and accounting fraud in 2009. In the consent judgment, the Court ordered Baldwin to pay $25,000 in civil monetary penalties. The final judgment against Baldwin successfully concludes this litigation, as the Court has previously entered final judgments against JBI and Bordynuik. + + The Commission filed its action on January 4, 2012, alleging that during two reporting periods in 2009 and in contravention of Generally Accepted Accounting Principles ("GAAP"), JBI stated materially false and inaccurate financial information on its financial statements. The Complaint alleged that the defendants misrepresented and overstated the actual value of certain assets, known as media credits, by almost 1,000%, in an effort to bolster JBI's balance sheet. JBI then used the overvalued financial statements in two private capital raising efforts (Private Investment in Public Equity or PIPES) that raised over $8.4 million from unwitting investors just before the company issued a public statement indicating its financial statements could no longer be relied upon, in part, due to the erroneous valuation of the media credits and other assets on the balance sheet. According to the Complaint, despite being aware of the issues regarding the valuation of the media credits, and of the significance of the value of the media credits for JBI's balance sheets and other financials, Baldwin failed to conduct any reasonable due diligence on the appropriate accounting for the media credits when he certified the financial statements contained in JBI's Form 10-K for the year ended 2009. In addition, the Complaint alleged that Baldwin misrepresented JBI's financial position during a presentation to shareholders after JBI filed the Form 10-K. + + Without admitting or denying the allegations in the Commission's complaint, Baldwin consented to a final judgment entered by the Court. The final judgment permanently enjoins Baldwin from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder, and orders Baldwin to pay a civil penalty of $25,000. Baldwin is also barred for five years from acting as an officer or director of a public company. + + The Commission considered Baldwin's financial condition as part of its agreement to accept a $25,000 civil penalty. + + The Court previously entered final judgments by consent against JBI (on March 20, 2013) and Bordynuik (on June 26, 2013). JBI was ordered to pay a civil monetary penalty of $150,000 and Bordynuik was ordered to pay a penalty of $110,000. Bordynuik was also barred for five years from acting as an officer or director of a public company. + + For further information, see Lit. Release No. 22220 (January 4, 2012) [Complaint filed] and Lit Release No. 22735 (June 27, 2013) [JBI and Bordynuik settlement]. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Diebold, Inc. , Civil Action No. 1:13-cv-01609 (D.D.C.) + + SEC Charges Diebold with FCPA Violations in China, Indonesia, and Russia + + + The Securities and Exchange Commission today charged Diebold, Inc. ("Diebold"), an Ohio corporation that is a global provider of ATMs and bank security systems, with violations of the Foreign Corrupt Practices Act ("FCPA") for lavishing international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia, and for paying other bribes in connection with the sale of ATMs to private banks in Russia. The SEC's complaint, filed in the United States District Court for the District of Columbia, alleges that Diebold paid approximately $3 million in illicit payments in these countries from 2005 through 2010. To settle the SEC's charges, Diebold has agreed to consent to final judgment, which is subject to court approval, ordering a permanent injunction, payment of $22,972,942 in disgorgement and prejudgment interest, and appointment of independent compliance monitor. + + As alleged in the SEC's complaint, from 2005 through 2010, through its Chinese subsidiary Diebold Financial Equipment Company (China), Ltd., Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. The SEC alleges that Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, the SEC alleges, Diebold spent over $147,000 on leisure trips and entertainment for officials of government banks in Indonesia. As alleged in the complaint, Diebold executives in charge of the company's operations in Asia knew of these improper payments, which were falsely recorded in Diebold's books and records as training or other legitimate business expenses. + + The SEC's complaint further alleges that from 2005 through 2008, through its Russian subsidiary Diebold Self-Service Ltd., Diebold paid bribes on the sale of ATMs to private banks in Russia. As alleged in the complaint, these bribes totaled approximately $1.2 million, and were funneled through a Diebold distributor in Russia. According to the complaint, Diebold's Russian subsidiary executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses. + + The SEC's complaint charges Diebold with violating Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Diebold has agreed to consent to a final judgment that permanently enjoins the company from future violations of these provisions, orders Diebold to pay $22,972,942 in disgorgement and prejudgment interest, and requires the appointment of an independent compliance monitor. In a parallel criminal proceeding, Diebold has agreed to pay a $25.2 million criminal fine as part of a deferred prosecution agreement with the U.S. Department of Justice. + + The SEC's investigation was led by Devon A. Brown and Brian O. Quinn with assistance from Jennifer Baskin of the FCPA Unit and Kristen Dieter. The SEC thanks the U.S. Department of Justice's Fraud Section, the United States Attorney's Office for the Northern District of Ohio, and the Federal Bureau of Investigation, for their assistance in this matter. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Greene + + + + + + + + !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\/514821","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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Greene + + + + + + + + + + + + Paul V. Greene + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22856 / October 28, 2013 + Accounting and Auditing Enforcement Release No. 3510 / October 28, 2013 + Securities and Exchange Commission v. Paul V. Greene , Civil Action No. 1:12-CV-00119 (JEB/JMF) (D.D.C.) + + SEC Obtains Permanent Injunction and $100,000 Civil Penalty Against Cellular Telephone Company President for Role in Fraudulent Scheme + + + The Securities and Exchange Commission today announced that on October 24, 2013, the Honorable James E. Boasberg, United States District Judge for the District of Columbia, entered a final judgment against defendant Paul V. Greene, President of privately-held Americas Premiere Corporation (APC), a former vendor of InPhonic, Inc. (InPhonic), a now-bankrupt online retailer of cellular phones. The final judgment permanently enjoins Greene from violating the antifraud, books and records and reporting provisions of the securities laws and orders him to pay a $100,000 penalty. + + According to the Commission's complaint, starting in the third quarter of 2005, and in each quarter of 2006, Greene and Len A. Familant, then an InPhonic Senior Vice President, engaged in a series of undisclosed "round-trip transactions" to help InPhonic artificially inflate its financial results. After the end of the quarters, but before InPhonic publically reported its financial results, Familant obtained APC credits from Greene. At the same time, however, Familant and Greene entered into an oral side agreement under which InPhonic would repay the credits through future purchases of certain cell phone models at inflated prices and by paying for inflated and fake repairs. The complaint further alleges Greene hid the scheme from InPhonic's independent auditors even after APC's accountant had informed Greene that APC's sham credit transactions with InPhonic were illegal. InPhonic improperly recorded a total of almost $10 million in credits from APC as a decrease in cost of goods sold, which allowed InPhonic to materially understate its losses and meet its quarterly and annual financial targets in reports filed with the Commission. A final judgment against defendant Len Familant was previously entered by the Court. + + Without admitting or denying the allegations in the Commission's complaint, Greene consented to the entry of the final judgment permanently enjoining him from violating the antifraud provisions, Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), and books and records provision, Exchange Act Rule 13b2-1, and aiding and abetting violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5(a) and (c), books and records provision, Section 13(b)(2)(A) of the Exchange Act, and reporting provisions, Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13, and ordering him to pay a $100,000 civil penalty. + + For further information, please see Litigation Release No. 22237 (January 25, 2012). + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3511.txt b/raw/aaer/2013/AAER-3511.txt new file mode 100644 index 0000000000000000000000000000000000000000..330329c67f37615757af8f91331c215b2f05e1c0 --- /dev/null +++ b/raw/aaer/2013/AAER-3511.txt @@ -0,0 +1,155 @@ + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70767 / October 29, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3511 / October 29, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15591 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Ronald Baldwin, Jr. 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 Ronald +Baldwin, Jr. (“Respondent” or “Baldwin”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + + + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) +of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Baldwin, age 53, is and has been a certified public accountant licensed to +practice in the State of Florida since 1996. He served as Chief Financial Officer of JBI, Inc. (“JBI”) +from January 1, 2010 until his resignation effective March 28, 2011. + + 2. JBI was, at all relevant times, a Nevada corporation with its principal place +of business for a portion of the relevant period in Cambridge, Massachusetts and, later, in Thorhold, +Ontario, Canada, with operations in New York, Florida, Ohio and Pennsylvania. JBI was a +technology company focused on data restoration and recovery and environmentally engineered +product development. At all relevant times, JBI’s common stock was registered with the +Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), +and was quoted on the OTC Bulletin Board. + + 3. On January 4, 2012, the Commission filed a complaint against Baldwin in +SEC v. JBI, Inc., et al. (Civil Action No. 1:12-cv-10012-MLW). On October 16, 2013, the court +entered an order permanently enjoining Baldwin, by consent, from future violations of Section 17(a) +of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and +13b2-1 and Rule 13a-14 thereunder, and aiding and abetting violations of Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Baldwin +was also prohibited for five years from acting as an officer or director of any issuer that has a class +of securities registered under Section 12 of the Exchange Act or that is required to file reports +pursuant to Section 15(d) of the Exchange Act. In addition, Baldwin was ordered to pay a $25,000 +civil money penalty. + + 4. The Commission’s complaint alleged, among other things, that Baldwin and +others engaged in a scheme to commit securities fraud by stating materially false and inaccurate +financial information on the financial statements of JBI for two reporting periods during 2009. +Specifically, the complaint alleged that in an effort to boost JBI’s value as a company, Baldwin and +others overstated by almost 1,000% the value of certain of JBI’s assets on the company’s financial +statements for the third quarter of 2009 and the year end 2009. JBI and others then used the + 3 +overvalued financial statements in two private capital raising efforts that raised more than $8.4 +million from unwitting investors. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Baldwin’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Baldwin is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection did not identify any criticisms +of or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. + + 4 +C. The Commission will consider an application by Respondent to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he/she has resolved all other disciplinary issues with the applicable state boards +of accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent’s character, integrity, professional conduct, +or qualifications to appear or practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3512.txt b/raw/aaer/2013/AAER-3512.txt new file mode 100644 index 0000000000000000000000000000000000000000..e887ea5baa1fd3af7302b7cd3e0039a632696f66 --- /dev/null +++ b/raw/aaer/2013/AAER-3512.txt @@ -0,0 +1,1380 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70823 / November 6, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3512 / November 6, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15609 + + + +In the Matter of + +SHERB & CO., LLP, +STEVEN J. SHERB, CPA, +CHRISTOPHER A. VALLEAU, +CPA, MARK MYCIO, CPA, and +STEVEN N. EPSTEIN, 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 CEASE-AND-DESIST +ORDER + + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the + +1 Section 4C provides, in relevant part, that: + +“The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder.” + + + 2 +Commission’s Rules of Practice2 against Sherb & Co., LLP, Steven J. Sherb, CPA, Christopher A. +Valleau, CPA, Mark Mycio,CPA, and Steven N. Epstein, CPA (collectively, “Respondents”), and +pursuant to Section 21C of the Exchange Act against Sherb & Co., LLP and Mark Mycio. +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and Cease-and-Desist Order (“Order”), as set forth +below. + +III. +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +A. SUMMARY +1. Sherb & Co., LLP (“Sherb LLP”), three of its partners, Steven J. Sherb (“Sherb”), +Christopher A. Valleau (“Valleau”) and Mark Mycio (“Mycio”), and an audit manager, Steven N. +Epstein (“Epstein”), engaged in improper professional conduct within the meaning of Rule 102(e) +of the Commission’s Rules of Practice. Sherb LLP, Sherb, Valleau and Epstein engaged in improper +professional conduct in connection with the audit of the 2007 year-end financial statements of China +Sky One Medical, Inc. (“CSKI”); Sherb LLP, Valleau, Mycio and Epstein engaged in improper +professional conduct in connection with the audit of the 2010 year-end financial statements of China +Education Alliance, Inc. (“CEU”); and Sherb LLP, Sherb, Valleau, Mycio and Epstein engaged in +improper professional conduct with respect to some or all of the audits of the financial statements of +Wowjoint Holdings Ltd. (“Wowjoint”) for the years ended August 31, 2008 and 2009, a four-month +transition period ended December 31, 2009, and the years ended December 31, 2010 and 2011. +2. Sherb LLP and Mycio also violated Section 10A(b)(1) in connection with the CEU +audit. + +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 +B. RESPONDENTS +3. Sherb & Co., LLP is a certified public accountancy partnership licensed in the +State of New York, and has been registered with the Public Company Accounting Oversight +Board (the “PCAOB”) since 2003. Sherb LLP audited and reviewed the financial statements of +CSKI for the 2007 year-end, and issued an unqualified audit report for CSKI’s 2007 financial +statements that was included in CSKI’s 2007 Form 10-K filed on March 31, 2008. Sherb LLP +ceased to be CSKI’s auditor effective May 21, 2008. Sherb LLP also audited CEU’s financial +statements for fiscal years 2007 through 2010. Sherb LLP issued an unqualified audit report for +CEU’s 2010 financial statements that was included in CEU’s 2010 Form 10-K filed on April 15, +2011. Sherb LLP ceased to be CEU’s auditor effective March 12, 2012. Sherb LLP audited +Wowjoint’s financial statements for the years ended August 31, 2008 and 2009, a four-month +transition period ended December 31, 2009, and the years ended December 31, 2010 and 2011. +Sherb LLP issued unqualified audit reports on these financial statements that were included by +Wowjoint in its Form F-1 registration statements on May 3, 2010, its ten subsequent amendments, +and three Forms 20-F filed on November 12, 2010, June 30, 2011, and April 20, 2012. Sherb LLP +resigned as Wowjoint’s auditor in April 2013. +4. Steven J. Sherb, CPA is the managing partner and sole equity partner of Sherb +LLP, and is also responsible for Sherb LLP’s quality assurance and controls for all audits. He is +a certified public accountant licensed in New York, California, Florida, Georgia and Texas. +Sherb served as the concurring partner for the audit of CSKI’s 2007 year-end financial +statements, and as the concurring partner for audits of Wowjoint’s financial statements for the +years ended August 31, 2008 and 2009, a four-month transition period ended December 31, 2009, +and as engagement quality review partner for audits of the years ended December 31, 2010 and +2011. +5. Christopher A. Valleau, CPA is a non-equity partner of Sherb LLP and is a +certified public accountant licensed in New York and Florida. During the time relevant to this +proceeding, Valleau served as the engagement partner for the audit of CSKI’s 2007 year-end +financial statements. Valleau served as the engagement quality review partner for the audit of +CEU’s 2010 year-end financial statements. Valleau was the engagement partner for the audits of +Wowjoint’s financial statements for the years ended August 31, 2008 and 2009, a four-month +transition period ended December 31, 2009, and the year ended December 31, 2010. +6. Mark Mycio, CPA is a certified public accountant licensed in New York, and was +a non-equity partner with Sherb LLP in 2011 and 2012. Mycio served as the engagement partner +for the audit of CEU’s 2010 year-end financial statements, and was also assigned to be the +engagement partner for the audits of Wowjoint’s 2010 and 2011 year-end financial statements. +From 2009 through 2011, Mycio served as Chair of the Financial Accounting Standards +Committee of the New York State Society of Certified Public Accountants. +7. Steven N. Epstein, CPA is a certified public accountant who has been licensed in +New York since 1991. Epstein joined Sherb LLP in January 2005. Epstein served as the +engagement manager for the audit of CSKI’s 2007 year-end financial statements and the audits + + 4 +of Wowjoint’s financial statements for the years ended August 31, 2008 and 2009, a four-month +transition period ended December 31, 2009, and the year ended December 31, 2010. Epstein, in +his capacity as a Sherb LLP senior audit manager, also performed key services in connection +with the audit of CEU’s 2010 year-end financial statements. +C. FACTS +2007 AUDIT OF CHINA SKY ONE MEDICAL, INC. +BACKGROUND +8. CSKI was at all relevant times a Nevada corporation headquartered in Harbin, +Heilongjiang Province, China. CSKI’s common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act until June 12, 2012, and continues to be registered +with the Commission pursuant to Section 12(g). The company’s stock traded on the Nasdaq +Global Market under the symbol “CSKI” from September 14, 2008 through February 15, 2012, +and currently trades on the OTC market. At all relevant times, CSKI purported to manufacture +and sell medicinal and diagnostic products, and all of its operations were carried out in China. +9. Sherb LLP audited CSKI’s financial statements for the 2007 year-end, and issued +an unqualified audit report for CSKI’s 2007 financial statements that was included in CSKI’s +2007 Form 10-K filed on March 31, 2008 (the “2007 CSKI Audit”). +10. Valleau served as the engagement partner for the 2007 CSKI Audit. +11. Sherb served as the concurring partner for the 2007 CSKI Audit. +12. Epstein served as the engagement manager, assisting the engagement partner for +the 2007 CSKI Audit. +CSKI AUDIT FACTS +The Commission Filed an Injunctive Action Against CSKI Based Upon Alleged +Misstatements of Revenue and Net Income in Its 2007 Form 10-K +13. In 2007, CSKI reported in its filings with the Commission that it had entered into +a strategic distribution agreement with a Malaysian distributor, pursuant to which the Malaysian +distributor was appointed as CSKI’s “exclusive” distributor in Malaysia and undertook to +generate $1 million per month in sales. In its public filings, CSKI reported export sales to + + 5 +Malaysia of over $12.2 million for 2007 (constituting 25% of its total revenues), all of which +were for one product, CSKI’s slim patch weight loss product.4 +14. CSKI’s Form 10-K for 2007 also identified its top two purported customers, +Customer A and Customer B, which together accounted for 25% of CSKI’s total revenues for +2007. CSKI claimed Customer A and Customer B were sales agents for the Malaysian +distributor, and that all of CSKI’s sales to Customer A and Customer B were export sales to +Malaysia via the Malaysian distributor. +15. In fact, the Malaysian distributor only purchased a total of $167,542 in slim +patches from CSKI for 2007, a small fraction of what was reported in CSKI’s public filings. +Moreover, the Malaysian distributor never entered into any distribution agreement with CSKI +and never had any relationship with, or purchased any goods through, Customer A or Customer +B. +16. On September 4, 2012, the Commission filed an injunctive action in federal court +against CSKI and its CEO for, among other things, fabricating export sales of its slim patch +product and materially misstating its revenues and net income for fiscal year 2007. The +Commission’s complaint alleges that $12.2 million in revenue for CSKI’s purported export sales +in 2007 were fabricated and should not have been recorded. The case against CSKI and its CEO +is pending. + +Valleau, Epstein, and Sherb LLP Failed to Adequately Plan the 2007 CSKI Audit +17. Under PCAOB Standard AU Section 311 (Planning and Supervision), an auditor +must adequately plan the audit. This standard requires that the auditor obtain a level of knowledge +of the entity’s business that will enable him to plan and perform his audit in accordance with +PCAOB Standards. That level of knowledge should enable the auditor to obtain an understanding +of the events, transactions, and practices that, in his judgment, may have a significant effect on the +financial statements. Knowledge of the entity’s business helps the auditor to identify areas that +may need special consideration, assess conditions under which accounting data are produced, +processed, reviewed and accumulated within the organization, and evaluate the reasonableness of +management representations, among others. (AU § 311.06) In planning the audit, among other +considerations, an auditor should consider matters such as the entity’s business, accounting policies +and procedures and assessed level of control risk. (AU § 311.03) +18. As the engagement partner and manager of the 2007 CSKI Audit, respectively, +Valleau and Epstein failed to adequately plan the audit. They failed to obtain a proper +understanding of CSKI’s business and environment, including its accounting policies and + +4 CSKI reported extraordinary growth for fiscal year 2007, including increasing its re venues 148% from 2006’s +$19.9 million to 2007’s $49.3 million. CSKI’s slim patch sales purportedly increased from 2006’s $1.2 million to +2007’s $12.3 million. + + 6 +procedures and internal controls. Sherb LLP’s work papers for the planning phase of the audit +process were inadequate and incomplete. +19. Sherb LLP’s work papers required for the planning phase of the audit consist of +only a few forms with generic checklists, and even these were not properly completed. +Moreover, the work papers made no reference to CSKI’s significant distribution agreement with +the Malaysian distributor, which purportedly accounted for 25% of CSKI’s total sales for 2007 +and was one of the main reasons CSKI’s revenues increased by 148% from 2006. Valleau’s and +Epstein’s inadequate understanding of CSKI’s business hampered their ability to identify the +agreement with the Malaysian distributor as a contract possessing audit significance, and requiring +additional or extended audit procedures. Valleau and Epstein failed to inquire about or review the +agreement with the Malaysian distributor, severely handicapping their chances of discovering that +the agreement was not even signed by the Malaysian distributor, and that it did not mention +Customer A and Customer B as the Malaysian distributor’s sales agents. +20. Under PCAOB Standard AU Section 316 (Consideration of Fraud in a Financial +Statement Audit), an auditor is required to plan an audit “to obtain reasonable assurance about +whether the financial statements are free of material misstatement, whether caused by error or +fraud.” Pursuant to this standard, the auditor should discuss among engagement personnel the risk +of material misstatement due to fraud, and obtain information needed to identify such risk, +including making inquiries of management and others within the company regarding such risk. +(AU § 316, at .14-.27) The auditor also should ordinarily presume that there is a risk of material +misstatement due to fraud relating to revenue recognition. (AU § 316.41) +21. Valleau and Epstein did not adequately consider the risks of material misstatement +due to fraud at CSKI in planning the 2007 CSKI Audit. For example, there is no evidence in the +work papers that they ever met to discuss the susceptibility of CSKI’s financial statements to +material misstatement due to fraud, or that they ever inquired of CSKI management or its +employees about fraud, and revenue recognition was not recognized as a fraud risk. As a result, +Valleau and Epstein failed to identify any fraud risks specific to CSKI, and did not design +sufficient procedures to address the risks of fraud. +Sherb LLP Engaged a Contract Auditor to Perform Most of the 2007 CSKI Audit +Work, but Valleau and Epstein Did Not Adequately Supervise Her +22. PCAOB Standard AU Section 311 (Planning and Supervision) requires that +assistants be properly supervised. This standard states that supervision involves directing the +efforts of assistants who are involved in accomplishing the objectives of the audit and +determining whether those objectives are accomplished. Elements of supervision include +instructing assistants, keeping informed of significant problems encountered, and reviewing the +work performed, among others. The extent of supervision appropriate in a given instance +depends on many factors, including the complexity of the subject matter and the qualifications of +persons performing the work. (AU § 311.11-.13) + + 7 +23. Sherb LLP engaged a Hong Kong-based auditor (“contract auditor”) and her three- +person staff to perform all of the audit fieldwork for CSKI’s Chinese operations, which consisted +of over 98% of CSKI’s total assets. The contract auditor was the person who had introduced Sherb +LLP to CSKI. The contract auditor and her firm were not registered with the PCAOB. +24. Valleau and Epstein did not have a complete understanding of the contract auditor’s +qualifications. The only inquiry Valleau and Epstein made into the contract auditor and her firm +was to have a senior auditor from Sherb LLP, who spoke Chinese, call and question the contract +auditor regarding her background. There is no evidence that anyone from Sherb LLP verified the +qualifications of the contract auditor, her firm, or her staff, to ensure they possessed adequate +technical training and proficiency to work on the audit. As a result, Valleau’s and Epstein’s +supervision of the contract auditor and her staff was inadequate. Since Valleau and Epstein never +worked with the contract auditor and did not have an understanding of her background and +qualifications, they should have closely supervised her to ensure the audit was executed properly. +Valleau did not adequately supervise the contract auditor and only reviewed the work papers she +prepared at the end of the audit. Although Epstein purportedly was the primary contact with the +contract auditor, there is no audit documentation evidencing the contract auditor’s communication +with Epstein or participation in any meetings with the engagement team except for a single email +between Epstein and the contract auditor. +25. The work papers purportedly completed by the contract auditor and her staff +contained numerous obvious errors and were incomplete. In particular, the work papers showed +instances of audit programs not being followed. Additionally, the work papers were not correctly +signed off by the contract auditor and the contract auditor failed to document her procedures in +sufficient detail to provide a clear understanding of their purposes, sources, and the conclusions +reached. Valleau and Epstein signed off on all the deficient work papers prepared by the contract +auditor and her staff. +The Audit Work Performed by the Contract Auditor, and Signed Off by Valleau +and Epstein, Raised Red Flags that Valleau and Epstein Did Not Properly +Investigate +26. Under PCAOB Standard AU Section 326 (Evidential Matter), an auditor is required +to 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. In developing his opinion, an auditor should consider relevant evidential matter regardless +of whether it appears to corroborate or to contradict the assertions in the financial statements. +(AU § 326.25) PCAOB Standards also state that evidential matter obtained from independent +sources outside the entity provides greater assurance of reliability than information obtained +solely within the entity. (AU § 326.21) In addressing an identified risk of material misstatement +due to fraud, an auditor may need to change the nature, timing and extent of auditing procedures +to obtain evidence that is more reliable or to obtain additional corroborative information. For +example, more evidential matter may be needed from independent sources outside the audited +entity, such as information from public records about the existence and nature of key customers, +vendors, or counterparties in a major transaction. (AU § 316.52) + + 8 +27. Valleau and Epstein failed to obtain sufficient competent evidence to support Sherb +LLP’s audit report for the 2007 CSKI Audit. The contract auditor performed transaction testing of +CSKI’s sales. Over 80% of the sales transaction samples tested by the contract auditor were sales +made to Customer A and Customer B. Despite this, Valleau, Epstein and the contract auditor did +not make any inquiries about Customer A or Customer B, did not attempt to identify their +purported relationship with the Malaysian distributor, and did not ask to review the agreement +between CSKI and the Malaysian distributor. +28. During the sales testing, the auditors discovered that CSKI did not have any value- +added tax (“VAT”) sales invoices in its records for its sales to Customer A and Customer B. There +were VAT invoices for other CSKI customers. VAT invoices are one of the main documents +Chinese companies use to record and track sales revenues.5 The VAT invoices would have been a +way for the auditors to substantiate the purported significant sales to Customer A and Customer B. +29. When the contract auditor discovered that there were no VAT sales invoices for +CSKI’s sales to Customers A and B, she made an inquiry with CSKI. A CSKI manager told the +contract auditor that there were no VAT sales invoices because Customer A and Customer B were +sales agents for overseas customers and that those customers did not request VAT sales invoices. +This explanation is highly suspect because VAT invoices are one of the main ways in which an +overseas customer would have been able to claim a credit for or refunds of VAT from the Chinese +government. Because Customer A and Customer B would have been entitled to a VAT refund of +over $2 million, CSKI’s explanation that Customer A and Customer B never requested VAT +invoices was a significant red flag warranting further inquiry. Furthermore, the audit team’s VAT +payable testing indicated that VAT was paid by all customers including Customer A and Customer +B. Valleau and Epstein nonetheless accepted the explanation given by the CSKI manager that the +overseas customers did not request VAT invoices, and included that explanation in Sherb LLP’s +work papers without expressing any concerns about that unlikely explanation. +30. The contract auditor performed additional audit procedures for sales made to +Customer A and Customer B by inspecting CSKI’s “goods delivery notes” and bank statements. +However, such procedures did not produce sufficient competent evidence that the purported sales +were actually made and revenues were earned. According to the audit work papers, the “goods +delivery notes” the contract auditor inspected appeared to be generated internally by CSKI. +These basic forms reflected the product name, unit, and sales price, but did not evidence that the +goods were actually sold, shipped to or accepted by Customer A and Customer B. In fact, there +is not even a customer address printed on the notes. The contract auditor also traced sales +amounts to bank statements. Yet this testing was insufficient because the bank statements did +not identify payor information, and the contract auditor did not review any documents to +determine whether the deposits shown on the bank statements actually reflected cash collected +for sales made to Customer A and Customer B. Indeed, the sales proceeds purportedly deposited +by Customer A and Customer B took place before the purchases (sometimes over 20 days prior + +5 In China, a standard VAT of 17% is imposed on all sales of goods, imports and certain services. Exports outside +China are entitled to refunds of VAT. + + 9 +to the purchase), which is inconsistent with both CSKI’s credit policy and its agreement with the +Malaysian distributor. +31. Valleau and Epstein signed off on the contract auditor’s sales testing, without +properly inquiring about the red flags identified by the lack of VAT invoices and CSKI’s +problematic explanation, and without properly evaluating the additional procedures performed and +evidence reviewed by the contract auditor. Valleau and Epstein should have heightened their +professional skepticism when presented with these red flags, because sales had been identified as a +high risk area for the CSKI audit. +Valleau and Epstein Failed to Exercise Due Professional Care +32. Under PCAOB Standard AU Section 230 (Due Professional Care in the +Performance of Work), auditors are required to exercise due professional care throughout the audit. +Due professional care requires that the auditor exercise professional skepticism. Under this +standard, “[p]rofessional skepticism is an attitude that includes a questioning mind and a critical +assessment of audit evidence.” +33. Valleau and Epstein failed to exercise due professional care when planning the +2007 CSKI Audit and reviewing the audit procedures with respect to sales revenues and the +preparation of the audit report. Valleau and Epstein failed to plan and perform the audit properly +to provide reasonable assurance of detecting material errors or irregularities in the financial +statements, and failed to exercise sufficient professional skepticism. Valleau and Epstein also +failed to be skeptical about the sales testing and CSKI’s explanation for the missing VAT invoices, +and failed to probe how sales made to Customer A and Customer B were processed, approved, and +recorded, and ignored the inconsistencies presented in the evidence and explanations obtained. +Sherb Failed to Perform an Adequate Concurring Partner Review +34. Sherb served as concurring partner on the CSKI audit engagement, including the +2007 CSKI Audit. As such, he was required to perform an objective review of significant auditing, +accounting, and financial reporting matters and to conclude, based on all the relevant facts and +circumstances of which he had knowledge, that no matters had come to his attention that would +cause him to believe that CSKI’s financial statements were not in conformity with GAAP in all +material respects or that the audit was not performed in accordance with PCAOB Standards.6 +35. Sherb did not perform the required review. Sherb did not participate in any +meetings or discussions with Valleau or the engagement team about the identification and audit of +high-risk transactions and account balances. Even though Sherb signed off on two concurring +review checklists, he did not note the extremely inadequate planning and risk assessment + +6 See Interim Quality Control Standards, AICPA SEC Practice Section (“SECPS”) § 1000.08(f) and Appendix E of +SECPS § 1000.39. These standards were adopted by the PCAOB in April 2003. Sher b LLP was a member of the +AICPA SEC Practice Section. Therefore, these standards were applicable at the time of the relevant conduct. + + 10 +process, and did not raise concerns about the quality and documentation of the process. As a +result, Sherb failed to review or obtain sufficient information necessary for him to perform a +meaningful concurring partner review. +Valleau, Epstein and Sherb LLP Failed to Prepare and Retain Adequate Audit +Work Papers +36. Under PCAOB Standard No. 3 (Audit Documentation), “[a]udit documentation +must contain sufficient information to enable an experienced auditor, having no previous +connection with the engagement: (a) to understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions reached, and (b) to determine who +performed the work and the date such work was completed as well as the person who reviewed the +work and the date of such review.” +37. Valleau, Epstein and Sherb LLP failed to ensure that the audit team documented the +work they performed in a manner consistent with PCAOB Standard No. 3. For example, Valleau +and Epstein repeatedly claimed they had performed planning and risk assessment procedures for +the 2007 CSKI Audit, but no audit documentation regarding their claimed work exists in the work +papers of Sherb LLP. They were also unable to explain or understand certain evidence and +conclusions documented by the contract auditor and her staff. +Sherb LLP Failed to Issue an Accurate Audit Report +38. PCAOB Standards require that the auditor’s report contain an opinion on the +financial statements taken as a whole and contain a clear indication of the character of the auditor’s +work. Under PCAOB Standard AU Section 508 (Reports on Audited Financial Statements), the +auditor can determine that he is able to issue an audit report containing an unqualified opinion only +if he has conducted his audit in accordance with PCAOB Standards. +39. As the engagement partner with final responsibility for the CSKI audit, Valleau +approved the issuance of the unqualified audit report that falsely stated that the auditors conducted +their audit in accordance with PCAOB Standards, when in reality they had not. +Valleau and Sherb LLP Failed to Communicate with CSKI’s Predecessor Auditors +40. Under PCAOB Standard AU Section 315 (Communications Between Predecessor +and Successor Auditors), an auditor should not accept an engagement until certain communications +have been evaluated. Those communications include inquiries of the predecessor auditors about the +integrity of management, disagreements with management regarding accounting principles or +auditing procedures, communications with the audit committee regarding client fraud or illegal acts, +and the reason for the change of auditors. + +41. Valleau and Sherb LLP failed to timely undertake this “necessary procedure”. They +did not communicate with CSKI’s former auditors before agreeing to the audit engagement with +CSKI. Only after Sherb LLP accepted CSKI as a client did the firm send inquiry letters to the + + 11 + +former auditors. Moreover, Valleau did not properly follow up with their inquiries. One of the +former auditors responded to the inquiries on March 24, 2008, and the other responded on March +31, 2008 - the same day CSKI filed its Form 10-K. +2010 AUDIT OF CHINA EDUCATION ALLIANCE, INC. +BACKGROUND +42. China Eduation Alliance, Inc. (“CEU”) is a North Carolina corporation with +headquarters and operations in Harbin, China. CEU claims that it provides educational products +and tutoring services to primary school students online and through training centers located in +China. CEU has never had any business operations in the United States. CEU’s common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act. The company’s +stock was traded on the New York Stock Exchange from January 27, 2010 through December 28, +2011, and currently trades on the OTC market. +43. Sherb LLP issued an unqualified audit report for CEU’s 2010 financial statements +that were included in CEU’s 2010 Form 10-K filed on April 15, 2011. +44. Mycio served as the engagement partner and supervised and conducted Sherb +LLP’s audit of CEU’s 2010 financial statements (hereinafter, the “2010 CEU Audit”). As the +engagement partner, Mycio was responsible for the issuance of Sherb LLP’s unqualified audit +report for CEU’s 2010 financial statements, and was responsible for ensuring that the audit was +conducted in accordance with PCAOB Standards. +45. Epstein, in his capacity as a Sherb LLP senior audit manager, performed key +services in connection with the audit of CEU’s 2010 year-end financial statements. +46. Valleau served as the engagement quality review partner for the 2010 CEU Audit. +CEU AUDIT FACTS +Mycio and Sherb LLP Failed to Adequately Plan and Supervise the Audit +47. Under PCAOB Standard AU Section 311 (Planning and Supervision), an auditor +must adequately plan and supervise the audit. This standard provides guidance on the +considerations and procedures applicable to planning and supervision, including preparing an audit +program, obtaining knowledge of the entity’s business, and dealing with differences of opinion +among firm personnel. +48. Mycio failed to conduct any formal audit planning meetings or to formulate an +audit plan before commencing work on the 2010 CEU Audit. Mycio also failed to conduct +sufficient inquiry into CEU’s business developments and public filings both prior to and during the +2010 CEU Audit. Further, although Sherb LLP engaged a Hong Kong-based contract auditor to + + 12 +perform much of the audit fieldwork, Mycio failed to provide adequate instructions to the contract +auditor prior to the commencement of her fieldwork. +49. Mycio also failed to adequately supervise the Sherb LLP staff auditors working on +the 2010 CEU Audit. In particular, Mycio did not provide these staff auditors with specific +guidance on the performance of audit procedures to be conducted to verify CEU’s bank account +balances and revenue. Mycio also failed to adequately review the work performed by his staff. +For example, Mycio assigned Epstein to perform certain procedures for the verification of CEU’s +fixed assets, but never communicated with him to confirm that those procedures had been +performed. In fact, Epstein did not perform the assigned asset verification. +50. PCAOB Standard AU Section 316 (Consideration of Fraud in a Financial +Statement Audit) provide that an auditor is required to plan an audit to obtain reasonable assurance +about whether the financial statements are free of material misstatement, whether caused by error +or fraud. (AU § 316.01.) +51. Mycio failed to conduct an adequate assessment of audit risks prior to the 2010 +CEU Audit fieldwork. Mycio photocopied a fraud risk assessment memorandum from a prior +audit of CEU in which he had not been involved, changed several dates, crossed out the name of +the prior engagement partner, and inserted his own name. In that memorandum, Mycio purported +that he conducted audit risk interviews with members of CEU’s management, a member of CEU’s +audit committee, and a CEU employee. In fact, Mycio did not conduct any audit risk interviews. +Mycio also failed to complete a risk assessment summary form, which is intended to document +specific audit risks and planned responses. The 2010 CEU Audit work papers contained a risk +assessment summary form that Mycio had initialed but otherwise left blank. +Mycio, Epstein, and Sherb LLP Failed to Obtain Sufficient Evidential Matter +52. Under PCAOB Standard AU Section 326 (Evidential Matter at .01), an auditor is +required to 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. Under PCAOB Standard AU Section 330 (The Confirmation Process at .28), an +auditor performing confirmation procedures should establish direct communication between the +intended recipient and the auditor to minimize the possibility that the results will be biased because +of interception and alteration of the confirmation requests or responses. +53. Mycio and the engagement team failed to obtain sufficient competent evidence +through confirmation of CEU’s bank account balances. CEU reported that a vast majority of its +assets at year-end 2010 were held as cash deposits at a number of banks. CEU also purported that +it conducted a significant amount of business activities in cash throughout the year. These factors +posed significant audit risks and required specific audit procedures to address those risks. +Moreover, by early 2011, Mycio and Epstein had become aware of information that warranted +heightened audit scrutiny of CEU’s bank account cash balances, including media reports of fraud +involving China-based issuers and specific public allegations of fraud at CEU. + + 13 +54. On several occasions in connection with the 2010 CEU Audit, Mycio, Epstein and +the audit team failed to obtain adequate verification of CEU’s bank account balances. During a +field visit to Harbin in early March 2011, a Sherb LLP staff auditor attempted unsuccessfully to +obtain bank statements directly from the banks where CEU claimed that it held its accounts. At +one bank, a bank employee told the staff auditor that the bank could not print out CEU’s bank +statements, even though the staff auditor had called that same bank anonymously beforehand and +had been told that statements could be printed for a small fee. In late March 2011, another team +under Mycio’s supervision attempted to obtain bank statements directly from the banks. The banks +refused to provide bank statements to this team as well. +55. In April 2011, days before Sherb LLP issued an unqualified report for CEU’s 2010 +financial statements, Epstein, at Mycio’s direction, visited Harbin to make a third and final attempt +to obtain bank statements directly from the banks. Prior to his visit, Epstein specifically requested +CEU management that he personally obtain CEU’s bank statements from branch managers at the +banks. Despite these instructions, a CEU employee went to the first bank prior to Epstein’s arrival +and purportedly obtained the bank statements from the bank. The CEU employee then gave the +purported bank statements to Epstein in the lobby of the bank when he arrived. Epstein was unable +to meet with any bank official at that bank nor did he witness the procurement of the bank +statements. At the second bank, Epstein was given a set of bank statements by a purported bank +teller who refused to provide her name. A purported manager at that bank refused to give Epstein +her business card and declined to authenticate the bank statements. Despite his inability to obtain +the account statements directly from the banks as called for by the planned audit procedures, +Epstein drafted a memorandum for the audit engagement team expressing the conclusion that the +bank statements he obtained were authentic. Thus, despite multiple field visits to Harbin in March +and April 2011, Mycio, Epstein and the audit team failed to complete audit procedures and obtain +sufficient competent evidence for the verification of CEU’s bank account balances. +56. Mycio and the engagement team also failed to obtain sufficient competent evidence +to confirm CEU’s reported training center revenue. In March 2011, Sherb LLP staff auditors +under Mycio’s supervision attempted to visit various training centers operated by CEU, and to +review student records at those training centers. The Sherb LLP staff auditors allowed CEU +management to select the training center locations they would visit, and kept no records of the +training centers that they visited. When the audit team asked the staff at one of the training centers +to allow them to review student application records, the CEU manager accompanying the audit +team asserted that those records were confidential and the audit team was not allowed to review +them. Moreover, at one training center purportedly operated by CEU, the center’s staff demanded +to know the identities of the CEU managers and the Sherb LLP auditors and the purpose of their +visit. According to the Sherb LLP staff auditor, the CEU managers then hastily exited from that +training center with the Sherb LLP staff auditors, who concluded based on the unusual encounter +that the training center did not belong to CEU. Despite receiving a report from a staff auditor +expressing concern regarding these irregularities, Mycio did not undertake any further procedures +to obtain the necessary information or to address the concerns raised by the suspicious encounters +at the training centers. During his visit to Harbin in April 2011, Epstein visited certain purported +CEU training centers. Epstein, however, did not select which training centers he was taken to and + + 14 +then only walked through the training centers, but did not perform any substantive audit procedures +regarding CEU’s reported training center revenue. +57. Mycio and the engagement team also failed to obtain sufficient competent evidence +regarding CEU’s fixed assets. CEU reported a 51% increase in its fixed assets at year-end 2010 +from the prior year. Despite this, Mycio did not conduct any physical inspection of fixed assets or +undertake any analytical procedures to evaluate whether the quantity and type of those fixed assets +were reasonable for the nature and scale of CEU’s purported business operations. In April 2011, +Mycio directed Epstein to perform certain limited procedures to verify CEU’s fixed assets during +Epstein’s visit to Harbin. However, Epstein accepted questionable explanations from CEU and did +not perform those limited procedures. Finally, Mycio failed to communicate with Epstein about +whether the limited procedures were appropriately completed and the results of those procedures. +Mycio, Epstein, and Sherb LLP Failed to Exercise Due Professional Care +58. Under PCAOB Standard AU Section 230 (Due Professional Care in the +Performance of Work), auditors are required to exercise due professional care throughout the audit. +Due professional care requires that the auditor exercise professional skepticism. Under this +standard, professional skepticism is an attitude that includes a questioning mind and a critical +assessment of audit evidence. (AU § 230, at .01-.02, .07-.08.) Mycio failed to exercise due +professional care when planning and supervising the audit; Mycio and Epstein failed to exercise +due professional care when verifying CEU’s bank account balances and when performing +procedures on training center revenue and fixed assets. +Sherb LLP and Mycio Failed to Investigate and Report a Potentially Illegal Act +59. In March 2011, at the end of a field visit during which Sherb LLP staff auditors +under Mycio’s supervision had been unable to obtain bank statements and had been taken to a +training center that apparently did not belong to CEU, a Sherb LLP staff auditor reported to Mycio +that a CEU manager offered him an apparent bribe in an attempt to influence the 2010 CEU Audit. +Mycio failed to investigate this reported bribe, and he did not address the reported bribe with any +member of CEU’s management or board of directors. +Mycio, Epstein, and Sherb LLP Failed to Prepare and Retain Adequate Audit Work +Papers +60. Under PCAOB Standard No. 3 (Audit Documentation at .6), audit documentation +must contain sufficient information to enable an experienced auditor, having no previous +connection with the engagement to (a) understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions reached; and (b) determine who +performed the work and the date such work was completed as well as the person who reviewed the +work and the date of such review. The audit documentation also must include information the +auditor has identified relating to significant findings or issues that is inconsistent with or +contradicts the auditor's final conclusions. (AS No.3 at .8.) + + 15 +61. Mycio and Epstein failed to prepare and retain adequate audit +documentation. Mycio signed audit work papers that were left completely blank or that were +photocopied from the prior year’s audit work papers and purported to reflect audit work that was +not actually performed during the 2010 CEU Audit. Moreover, the audit work papers did not +contain any information other than the memorandum prepared by Epstein about the failed attempt +to perform bank statement verification procedures in late March 2011, the irregularities +encountered during the audit team’s attempts to visit training center locations in March 2011, or +the attempted bribe reported by a staff auditor. +Mycio and Sherb LLP Were Responsible for the Issuance of an Inaccurate Audit +Report + +62. PCAOB Standard AU Section 508 (Reports on Audited Financial Statements at .04 +and .07) requires that the auditor’s report contain an opinion on the financial statements taken as a +whole and contain a clear indication of the character of the auditor’s work. The auditor can +determine that he is able to issue an audit report containing an unqualified opinion only if he has +conducted his audit in accordance with PCAOB Standards. +63. As the engagement partner with final responsibility for the CEU audit, Mycio +approved the issuance of the unqualified audit report that falsely stated that the audit was +conducted in accordance with PCAOB Standards. +Valleau Was Disqualified to Serve As the Engagement Quality Reviewer +64. PCAOB Auditing Standard No. 7 (Engagement Quality Review at .8) provides that +the person who served as the engagement partner during either of the two audits preceding the +audit subject to the engagement quality review may not be the engagement quality reviewer. +65. Valleau served as the engagement partner for Sherb LLP’s audit of CEU’s 2008 +financial statements. Valleau thus was disqualified from serving as the engagement quality +reviewer for the 2010 Audit because he had served as the engagement partner during one of the +two preceding audits. Sherb LLP assigned Valleau as the engagement quality reviewer even +though he was disqualified from serving in that role. +Valleau Failed to Conduct an Adequate Engagement Quality Review +66. PCAOB Auditing Standard No. 7 (at .10-.11) provides that an engagement quality +reviewer should evaluate the engagement team’s significant judgments and related conclusions, +including its assessment of and responses to significant risks, and, for the documentation reviewed +by the engagement quality reviewer when performing the engagement quality review, that the +documentation 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. +67. Prior to and during the audit, Valleau became aware of information that indicated a +need for heightened audit scrutiny, including media reports of fraud involving China-based issuers + + 16 +and specific public allegations of fraud at CEU. Valleau also became aware that the audit +engagement team had failed repeatedly to perform procedures sufficient to verify CEU’s bank +account balances, and that the engagement team had encountered irregularities and red flags when +attempting to verify CEU’s training center revenue. Valleau further became aware of a staff +auditor’s report that a CEU manager had attempted to bribe him. +68. Despite this, Valleau failed to properly evaluate the audit team’s significant +judgments and its responses to significant risks. Specifically, Valleau failed to perform his own +evaluation of the audit engagement team’s conclusions with respect to the auditing of CEU’s bank +account balances and training center revenue. Valleau also failed to conduct a reasonable and +appropriate evaluation and follow-up of the field auditor’s allegation of an attempted bribe. +69. Valleau also failed to assess the engagement team’s audit documentation that he +reviewed when performing the engagement quality review. Even though he was aware of +numerous red flags and troubling irregularities encountered by the engagement team, Valleau did +not ensure that the audit work papers documented those red flags and how they were addressed by +the audit team. Valleau also signed off on forms and checklists, including a Fraud Risk +Information Form and Risk Assessment Summary Form, which were left blank or were copied +from a prior audit. +WOWJOINT AUDITS +BACKGROUND +70. Wowjoint is a Cayman Islands company with headquarters and operations in and +around Beijing, China. Wowjoint claims that its operating subsidiary, Beijing Wowjoint, designs, +engineers, and manufactures large, customized industrial equipment used in construction of +Chinese transportation infrastructure, including roads, railroads, subways, bridges, and viaducts. +Wowjoint’s ordinary shares, warrants, and units are registered with the Commission pursuant to +Section 12(b) of the Exchange Act. The company’s securities (symbols “BWOWF” and +“BWOWU”) were traded on Nasdaq in 2010, but were delisted in 2011, and currently trade on the +OTC market. +71. Sherb LLP issued audit reports for Wowjoint’s financial statements for the years +ended August 31, 2008 and 2009, a four-month transition period ended December 31, 2009, and +the years ended December 31, 2010 and 2011 that were included in Wowjoint’s Forms 20-F filed +on November 12, 2010, June 30, 2011 and April 30, 2012, respectively, and a registration +statement on Form F-1 first filed on May 3, 2010, with ten subsequent amendments filed through +December 12, 2011. +WOWJOINT AUDITS FACTS +Valleau and Epstein Failed to Adequately Plan and Supervise the Audits +72. PCAOB Standards require an auditor to adequately plan the audit and properly +supervise assistants. AU Section 150.02 (Generally Accepted Auditing Standards) and AU + + 17 +Section 311.01 (Planning and Supervision). PCAOB Standard AU 311 at .06 requires that the +auditor obtain a level of knowledge of the entity’s business that will enable him to plan and +perform his audit in accordance with PCAOB Standards. Valleau failed to properly plan the +audit and properly supervise his assistants, and failed to obtain sufficient knowledge about +Wowjoint’s business, including its accounting policies and procedures and its internal controls. +Although Valleau was the engagement partner for the 2008-2010 audits, he had minimal +involvement, if any, in these audits. Valleau was not even copied on most email communications +concerning audit issues. Valleau also did not charge any time to this client until May 2011. +Valleau’s lack of involvement left Epstein to provide most, if not all, of the day to day +supervision and management of the audits. Epstein reviewed the work papers prepared by the +audit team, including those of other audit managers. Epstein dealt directly with Wowjoint senior +management and Wowjoint’s SEC counsel. Epstein also primarily communicated Sherb LLP’s +consents and approvals to Wowjoint’s SEC counsel. Valleau’s supervision of the audit and his +review of the audit work papers were grossly deficient. +73. PCAOB Quality Control Standards require that “[Audit firms should] have in place +internal quality-control procedures to ensure that services are competently delivered and +adequately supervised.” (QC § 20.02) They also require that audit firms establish policies and +procedures “to provide the firm with reasonable assurance that…work is assigned to personnel +having the degree of technical training and proficiency required in the circumstances.” (QC § +40.02) Wowjoint’s use of the Percentage of Completion (“POC”) accounting method to compute +its contract revenue for U.S. reporting purposes, and its specialized heavy equipment +manufacturing business, requires an auditor with sufficient knowledge of that accounting method +and industry, respectively. Sherb LLP, and its managing partner Sherb, in particular, failed to +assign staff with the requisite technical training and proficiency necessary to perform the audits as +required under QC § 20.13(b). Prior to the Wowjoint engagement, Epstein had never worked on +an audit of a heavy machinery manufacturer that used the POC method to calculate revenue to be +recognized, and had an inadequate understanding of the POC method. Although Sherb LLP +assigned one staff member with experience with the POC accounting method used in Taiwan for +the audits of the periods ended August 31, 2008 and 2009, he had no experience in the audit of the +POC accounting method used in the U.S. In planning for the 2008-2010 audits, Epstein claimed +he researched and studied the POC accounting method to determine revenue for contracts, but he +could neither explain the fundamentals of the POC accounting method,7 nor how Sherb LLP +performed its testing of Wowjoint’s revenue computation. +74. PCAOB Standard AU Section 342 (Auditing Accounting Estimates at .04) states, +“The auditor is responsible for evaluating the reasonableness of accounting estimates made by +management in the context of the financial statements taken as a whole.” It also requires the +auditor to use one or a combination of the following approaches to evaluate the reasonableness +of management’s accounting estimates: (a) review and test the process used by management to + +7 While there may be complexities in determining the costs incurred to date, total estimated costs and total estimated +project revenue, the simple arithmetic for the percentage of completion for a project is total cost incurred divided by +total estimated costs for that project. + + 18 +develop the estimate; (b) develop an independent expectation of the estimate to corroborate the +reasonableness of management’s estimate; (c) review subsequent events or transactions +occurring prior to the date of the auditor’s report. (AU § 342.10.) Sherb LLP failed to plan and +design adequate audit procedures to test the reasonableness of Wowjoint’s estimates of revenue +under each contract. Valleau and Epstein failed to plan adequate procedures to test two critical +components used in the POC computation, the total estimated costs for each project and the total +costs already incurred on that project. This planning failure is especially problematic in light of +Sherb LLP’s assessment during the client acceptance process that Wowjoint’s financial reporting +system appeared to be “insufficient to provide evidence to support that transactions have occurred +and that all the transactions that should be recorded are, in fact, recorded.” Sherb LLP’s failure to +properly test those two components allowed Wowjoint’s omission of certain costs to go undetected +for the first two financial periods that Sherb LLP audited. +75. Valleau and Epstein also failed to recognize and adequately address the audit and +accounting issues related to certain contracts with unusual payment structures involving a third +party (“Wowjoint’s contract co-party”). Wowjoint’s contract co-party was a co-party with +Wowjoint on several of Wowjoint’s machinery contracts whereby Wowjoint’s customers are +required to make payments to Wowjoint’s contract co-party instead of Wowjoint. Wowjoint’s +contract co-party collected the payments for those contracts, and was supposed to reimburse +Wowjoint promptly after deductions for commissions and other fees. Wowjoint’s contract co- +party, however, withheld a significant amount of such funds, leaving Wowjoint with a large +accounts receivable balance. As of December 31, 2009, the largest outstanding receivable was due +from Wowjoint’s contract co-party, which constituted 43% of all outstanding accounts receivable. +Sherb LLP failed to evaluate the reasonableness of this unusual business arrangement, the related +accounting disclosure requirements, and how it ultimately affected the collectability of its +receivables. +The Audit Team Failed to Test Wowjoint’s Revenue Computations +76. Valleau and Epstein’s lack of proper audit planning, failure to design and perform +adequate audit procedures to test the critical components of the POC formula, lack of knowledge +of common Chinese business practices and accounting, and Epstein’s inadequate understanding of +the POC method, resulted in their failure to verify that Wowjoint correctly computed and recorded +its contract-based revenue. Due to the lack of adequate audit procedures, Valleau and Epstein +failed to detect Wowjoint’s errors in converting from cash basis accounting, a common Chinese +GAAP practice, to accrual accounting for U.S. reporting purposes. +77. U.S. GAAP requires an accrual basis of accounting. The revenue computed by +Wowjoint was purported to be based on a POC method, which generally calculates revenue to be +recognized by dividing the costs incurred as of the measurement date on an individual project into +the projected total costs for the completed project. Costs incurred but not recorded must be +accrued under U.S. GAAP. Projected total costs for a project also requires periodic updating to +reflect changes in costs and quantity of materials, inflation, and other unforeseen costs. The +quotient of costs incurred into projected total costs is factored against the projected revenue for a +project to determine the revenue to be recognized during that fiscal period (after subtracting + + 19 +revenue already recognized in prior periods) for that project. Accordingly, the numerator and +denominator in that formula are integral to revenue recognition and should have been subject to +audit procedures. The evidence gathered from the work papers prepared by the audit team and +reviewed by Valleau and Epstein, however, suggests that the projected total costs (the denominator +in the POC formula) for the individual projects, and their updates, were not subject to audit +procedures. Valleau and Epstein simply accepted Wowjoint’s estimates at face value. Valleau and +Epstein also failed to adequately test the completeness and existence of costs allegedly incurred by +Wowjoint for each project (the numerator in the POC formula), and to adequately test the proper +allocation of costs amongst the various projects and financial periods. +78. Valleau’s and Epstein’s failure to perform adequate audit procedures to test contract +costs resulted in Sherb LLP taking the numbers at face value from Wowjoint. Wowjoint, +meanwhile, did not properly compute and update its projected total costs and failed to properly +accrue and allocate costs incurred, including the cost of goods sold (“COGS”), to the correct +periods for the fiscal years ended August 31, 2008 and August 31, 2009. Valleau’s and Epstein’s +failure enabled Wowjoint to incorrectly report that its net income increased rapidly from $3.9 +million in 2008 to $9.8 million in 2009. +Epstein and Sherb LLP Failed to Conduct Sufficient Inquiry and Procedures +Following Wowjoint’s Admission of Cash Basis Accounting +79. Under PCAOB Standard AU Section 561 (Subsequent Discovery of Facts Existing +at the Date of the Auditor’s Report at .04-.08), when an auditor becomes aware of information +which relates to financial statements previously reported on by him, but which was not known to +him at the date of his report and which is of such a nature and from such a source that he would +have investigated it had it come to his attention during the course of the audit, he is required, as +soon as practicable, to undertake to determine whether the information is reliable and whether the +facts existed at the date of his report. If the information is found to be reliable and would have +affected his report, he is required to take certain actions, including actions to prevent future +reliance on his report. +80. After the two fiscal years ended August 31, 2008 and August 31, 2009, Wowjoint +filed a Form F-1, which included the comparative financial statements and consent from Sherb +LLP to include its audit reports for those two fiscal years. After filing the Form F-1, Wowjoint +changed its fiscal year end to December 31 and prepared to file financial statements for that four- +month transition period on Form 20-F, and also to include in an amendment to its Form F-1. +Wowjoint engaged Sherb LLP to audit the transition period financial statements. Wowjoint’s +financial statements for the transition period ended December 31, 2009 disclosed a dramatic swing +from profitability to a historic $6 million loss in just that four-month transition period. The swing +in profitability stemmed from a large topside journal entry. The entry recorded approximately +RMB 43 million in costs that were incurred in prior periods into COGS during the transition +period, which Epstein has acknowledged was a material amount. As part of his review of audit +work papers prepared by the audit team, Epstein sent an email to Wowjoint’s controller at the time, +raising concerns about the journal entry: + + 20 +This is an interesting situation. We have costs for contracts that have been fully completed +in prior period included in COGS for the 4 months ended December 31, 2009. Are these +costs for equipment that needed additional expenses after they were completed? Perhaps +there were problems in these equipment order, filled in the previous years, which need +fixing that was not to be offset by future revenue. Or is it costs on old contracts that were +not known at the time the contracts concluded and came about in the four months ended +December 31, 2009. Please advise. [Sics omitted.] + +Wowjoint’s controller responded in an email which was copied to Epstein and Sherb: + +Prior to December 2009, the company’s accounting book is in cash basis. They never +accrue liabilities for those inventories received or expenses incurred, but not paid. Despite +we finished equipment and we delivered to our customers, certain amount of raw materials +expenses are omitted to be recorded because we did not pay to suppliers. Even though +those raw materials are used already, their costs did not go to cost of sales because of cash +basis. As a result, underestimate of liabilities lead to understatement of cost of sales and +then overstatement of profit. [Emphasis added; sics omitted.] + +81. Wowjoint’s controller plainly informed Epstein and Sherb that the company had +been using the cash basis method of accounting for its revenue, which fails to comply with U.S. +GAAP. Moreover, Wowjoint’s controller disclosed that the use of the cash basis method, and +incorrect recordation of COGS, caused misstatements of prior financial statements. Nevertheless, +Epstein and Sherb LLP simply wrote in their work papers that “the production cost is reasonable” +without any testing or further inquiry. +82. Wowjoint’s controller’s email should have triggered immediate alarm bells for +Epstein, Sherb, and Sherb LLP. Wowjoint’s controller’s statement to Epstein and Sherb was a +clear admission that the company’s prior period financial statements were not in accordance with +U.S. GAAP and that the December 31, 2009 numbers would also be incorrect. Therefore, Epstein, +Sherb, and Sherb LLP were on notice that not only the financial statements for the transition period +were inaccurate, but that the financial statements for the two prior fiscal years, for which Sherb +LLP had already issued unqualified audit reports, were also inaccurate. Despite this information +having been provided to Epstein and Sherb, and subsequently brought to the attention of Valleau, +Sherb LLP performed no further audit procedures to analyze and verify these allegedly omitted +prior period costs or to determine the proper reallocation of these costs to the correct periods, made +no assessment of the materiality of these costs to the prior period financial statements, and did not +appear to have assessed the need to withdraw its audit reports for the prior periods. Instead, Sherb +LLP issued another unqualified audit report for the December 31, 2009 transition period. Those +financial statements were then used in Wowjoint’s Form 20-F for the transition period and in an +amended Form F-1, with Sherb LLP’s consent. + + + 21 +Epstein and the Sherb LLP Audit Team Failed to Perform Adequate Auditing +Procedures to Determine Collectability of Wowjoint’s Large and Long-Outstanding +Accounts Receivable Balance + +83. Under PCAOB Standard AU Section 326 (Evidential Matter at .01), an auditor is +required to 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. +84. Accounts receivable comprised the majority of Wowjoint’s current assets listed on +its balance sheets as of August 31, 2008, August 31, 2009, and December 31, 2009. A substantial +portion of those accounts receivable were greater than one year delinquent, raising concerns about +collectability of those purported assets. Epstein inquired about the large, outstanding receivables +for contracts finished several years earlier and asked whether Wowjoint’s allowance for +uncollectible debt was adequate. Wowjoint informed Epstein that historical records of payment +from its customers, though delayed, were sufficient to support collectability. Wowjoint also +explained that because most of its clients were Chinese government owned entities, payment was +likely, despite their slow remuneration. From these representations, Epstein accepted Wowjoint’s +conclusory rationale and representations concerning the collectability of all the receivables. This is +despite Epstein and Sherb LLP’s knowledge that Wowjoint’s largest receivable was not, in fact, +from a Chinese government owned entity. +85. A private entity that was a co-party with Wowjoint on several contracts with +unusual payment structures held the largest outstanding accounts receivable for the first three fiscal +periods audited by Sherb LLP, and most of those balances stretched back several years. The +unusual relationship between Wowjoint’s contract co-party and Wowjoint was apparent based +upon a cursory review of contracts for each of the contracts involving Wowjoint’s contract co- +party. Wowjoint’s contract co-party was a co-party on most of Wowjoint’s early contracts, not an +end-user customer. Instead, Wowjoint would produce the equipment and deliver it to the end-user +customers, and those customers would pay Wowjoint’s contract co-party, rather than Wowjoint. +According to agreements between Wowjoint and Wowjoint’s contract co-party, the payment for +the equipment would be promptly forwarded by Wowjoint’s contract co-party to Wowjoint, with +Wowjoint’s contract co-party collecting a service fee from that payment. Because the arrangement +was unlike that of an ordinary customer and manufacturer relationship, and that Wowjoint allowed +the co-party to fail to make timely payments as required by their arrangements, it warranted further +procedures to determine whether the accounts receivable recordation and classification by +Wowjoint was appropriate. +86. After some prodding by Epstein for evidence that Wowjoint’s contract co-party +would pay its long outstanding bills, Wowjoint provided Epstein with Wowjoint’s contract co- +party’s balance sheet showing its asset levels. Wowjoint asserted this as sufficient proof of +Wowjoint’s contract co-party’s ability to pay. Wowjoint also provided a bank statement for +Wowjoint’s contract co-party, showing its cash balance at that particular time, again asserted as +evidence that Wowjoint’s contract co-party was capable of paying Wowjoint. At most, these + + 22 +documents proved only Wowjoint’s contract co-party’s financial position, not its inclination to pay. +Furthermore, the validity of the cash balance shown on the bank statement was questionable +because it had been recently substantially increased by a large cash deposit just days before the +date of the statement. Prior to that date, the cash balance had been significantly lower. +87. PCAOB Standard AU Section 230 (Due Professional Care in the Performance of +Work at .01-.02, .07-.08) requires auditors to exercise due professional care and professional +skepticism throughout the audit. Epstein and Sherb LLP failed to evaluate the unusual +arrangements between Wowjoint and its contract co-party that should have heightened their +sensitivity regarding Wowjoint’s contract co-party’s inclination to pay its debts. Additional audit +procedures should have, accordingly, been planned to test whether the transactions between +Wowjoint’s contract co-party and Wowjoint were at arm’s length and whether there were unusual +payment terms that would affect the collectability and valuation of this receivable. +88. An audit procedure commonly used to assess collectability of accounts receivable is +to monitor subsequent collection following the fiscal period being audited. The audit team claimed +to have reviewed subsequent collections as a basis for measuring the adequacy of collectability and +allowance for bad debt for accounts receivable. Sherb LLP’s audit work papers, however, did not +reflect any such review of the subsequent collections. In the work papers for accounts receivable, +Sherb LLP had created two columns to document their subsequent collection testing. These two +columns were left blank. Nevertheless, the audit staff claimed it was done and wrote, +“[s]ubsequent collection test. Auditor’s field work till January 2010, and auditor check all the +subsequent collection to supporting document.”[sic omitted] Both Epstein and Valleau affixed +their initials to that work paper, indicating their review. +Valleau, Epstein and Sherb LLP Failed to Retain Adequate Audit Documentation +89. Under PCAOB Standard No. 3 (Audit Documentation at .6), “[a]udit documentation +must contain sufficient information to enable an experienced auditor, having no previous +connection with the engagement: (a) to understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions reached, and (b) to determine who +performed the work and the date such work was completed as well as the person who reviewed the +work and the date of such review.” +90. The audit documentation retained by Valleau, Epstein and Sherb LLP is deficient. +To begin with, it cannot be determined from the work papers who comprised the engagement +teams for the August 31, 2008, August 31, 2009, and December 31, 2009 Wowjoint audits. The +finalized work papers include only illegible initialing by various staff members and partners. +Many work papers do not reflect the name of the preparer nor the date they were prepared. +91. The revenue section for the December 31, 2009 transition period audit provides an +example of Valleau, Epstein and Sherb LLP’s deficient audit documentation. The revenue work +papers provide only conclusory findings with no documented support for those findings. Epstein +was unable to identify what procedures were performed to verify the profit and loss figures + + 23 +provided by Wowjoint even when he was given the opportunity to review the work papers that he +approved. +92. The audit documentation also must include information the auditor has identified +relating to significant findings or issues that is inconsistent with or contradicts the auditor's final +conclusions. (AS No.3 at .8.) The auditor must also document significant findings or issues, +actions taken to address them (including additional evidence obtained), and the basis for +conclusions reached in connection with each engagement. (AS No. 3 at .12) Sherb LLP’s work +papers failed to document the audit issues raised by the discovery of the omitted prior period costs +during the transition period audit and how Sherb LLP resolved that issue, as required by PCAOB +Auditing Standard No. 3. +Valleau’s and Epstein’s Reviews of the Work Papers were Inadequate +93. PCAOB Standards AU Section 150 (Generally Accepted Auditing Standards) and +AU Section 311 (Planning and Supervision) require an auditor to properly supervise assistants. +PCAOB Standard AU Section 230 (Due Professional Care in the Performance of Work at .01-.02, +and .07-.08) also requires auditors to exercise due professional care and professional skepticism +throughout the audit. The reviews by Valleau and Epstein, for Wowjoint’s fiscal periods ended +August 31, 2008, August 31, 2009, and December 31, 2009, were inadequate. Valleau and Epstein +aggregately initialed most pages of the work papers, indicating that they had reviewed them to +ensure their accuracy and sufficiency. Many of the pages are, however, written in full or in part in +Chinese. Neither Valleau nor Epstein speak or read Chinese. Epstein could not identify a single +line in Chinese that he understood and was unable to distinguish between Wowjoint’s different +customers in the revenue section. Epstein also signed off on work papers that reflected audit +procedures that were not completed, as well as many work papers that contained obvious errors, +demonstrating his lack of due professional care in his review of work papers. +The 2010 Wowjoint Audit was Deficient +94. PCAOB Standards AU Section 150 (Generally Accepted Auditing Standards) and +AU Section 311 (Planning and Supervision) require an auditor to properly supervise assistants. +PCAOB Standard AU Section 230 (Due Professional Care in the Performance of Work at .01-.02, +.07-.08) also requires auditors to exercise due professional care and professional skepticism +throughout the audit. Despite their knowledge of the earlier deficient audits and Wowjoint’s +failure to record costs incurred in the proper periods, Valleau and Epstein failed to implement +additional audit procedures or exercise due professional care in the 2010 audit (the “2010 +Wowjoint Audit”) to ensure that these mistakes did not occur again. Despite their knowledge of +Wowjoint’s failure to accurately estimate and update the total costs for its projects, Valleau and +Epstein did not object to the continued incorrect application of the POC method to compute its +revenue. The 2010 Wowjoint Audit performed by Sherb LLP was recklessly managed, supervised, +and performed. +95. Mycio was initially assigned to be the engagement partner for this audit. He visited +Wowjoint in China for one week to get familiar with the client, and allegedly performed some + + 24 +audit planning and answered some technical questions. However, Mycio inexplicably and +recklessly failed to continue his supervision of the 2010 Wowjoint Audit after he returned to the +U.S., without first transferring his responsibilities to another audit partner. He did not even follow +up to ascertain whether the audit was completed and whether any other audit partner was ever +assigned to the audit. Mycio failed to exercise due professional care and properly supervise +assistants as required by PCAOB Standards AU Section 230 and AU Section 311. The audit work +papers do not reflect any work performed by Mycio. +96. PCAOB Interim Quality Control Standards Section 20, System of Quality Control +for a CPA Firm’s Accounting and Auditing Practice at .02 requires that “[Audit firms should] +have in place internal quality-control procedures to ensure that services are competently delivered +and adequately supervised.” PCAOB Interim Quality Control Standards 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 at .02 requires that audit firms establish +policies and procedures “to provide the firm with reasonable assurance that…work is assigned to +personnel having the degree of technical training and proficiency required in the circumstances.” +Sherb LLP failed to ensure that the assigned personnel properly performed their duties. It is +unclear when Valleau took over this audit. Valleau signed the audit completion form and dated his +signature in March 2011. Sherb also signed off as engagement quality reviewer and dated his +initials in March 2011. However, the audit work papers reflect that the audit was still in progress +in May 2011. While Valleau’s initials appear on some work papers, they were all dated May 2011. +Alarmingly, many key audit work papers did not reflect the identity of the preparer as required +under PCAOB Auditing Standard No. 3 at .06. They only reflected Epstein’s initials. +97. Valleau stated that he had no recollection of being assigned to be the engagement +partner for the 2010 Wowjoint Audit, and stated that he was only asked by Epstein to help out on a +few work papers in May 2011. However, Valleau was not able to explain an audit completion +form bearing his signature dated March 2011. At a minimum, this indicated the audit was +recklessly supervised and managed. Nevertheless, an unqualified audit report was issued by Sherb +LLP, signed by Epstein, who for all practical purposes, was functioning as if he was the audit +partner. The approval to file was communicated to Wowjoint’s outside counsel by Epstein. +98. The audit work papers, similar to prior periods, contained many errors and forms +that were incomplete. They also reflected that Wowjoint continued to record during this audit year +costs for projects that were allegedly completed in prior periods. One work paper which +purportedly demonstrated that Sherb LLP had performed audit procedures to test costs of service +revenue was evidently just copied from a prior audit, as it reflected costs identical to a prior period +that had no relationship to service revenue earned in 2010. It was nevertheless reviewed and +approved by Epstein. +The 2011 Wowjoint Audit was Deficient +99. PCAOB Auditing Standard No. 9 Audit Planning at .4-.5 requires an auditor to +properly plan an audit and to develop an audit plan which includes planned risk assessment +procedures and planned responses to the risks of material misstatement. PCAOB Auditing + + 25 +Standard AU Section 230 (Due Professional Care in the Performance of Work at .01-.02, .07-.08) +also requires auditors to exercise due professional care and professional skepticism throughout the +audit. Mycio returned as the engagement partner for the 2011 audit. As with the earlier audits, this +audit failed to test the key components for Wowjoint’s revenue computation. Sherb LLP again +accepted Wowjoint’s numbers and computation at face value. Sherb LLP failed to notice obvious +errors in Wowjoint’s revenue computation worksheet, such as one project incorrectly computed as +50% complete when it should have been only 40% complete. Sherb LLP also raised no objection +where Wowjoint apparently accelerated its revenue recognition on a number of projects simply by +accruing for costs that had not yet been incurred. This allowed Wowjoint to recognize 100% of the +revenue on those projects even though the underlying machines had not been completed. This is +not in accordance with U.S. GAAP. Sherb LLP also failed to properly test the actual costs +allegedly incurred. +100. Under PCAOB Auditing Standard No. 15 (Audit Evidence at .4), an auditor is +required to plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion. To be appropriate, audit evidence must be both +relevant and reliable. (AS No. 15.6) Mycio violated this standard by accepting Wowjoint’s +numbers for the total estimated costs and total costs incurred for each project at face value, +without performing procedures to verify that the cost estimates calculated by Wowjoint were +reliable. +101. Under PCAOB Standard AU Section 230 (Due Professional Care in the +Performance of Work at .01-.02, .07 and .08), auditors are required to exercise due professional +care throughout the audit. Due professional care requires that the auditor exercise professional +skepticism. Under this standard, professional skepticism is an attitude that includes a +questioning mind and a critical assessment of audit evidence. Mycio failed to design adequate +audit procedures to verify the costs estimated and recorded for each project, and failed to notice +that Wowjoint had accelerated revenue recognition on certain projects by accruing for costs that +had not been incurred. +102. Under PCAOB Auditing Standard No. 3 (Audit Documentation at .6), audit +documentation must contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement to (a) understand the nature, timing, extent, and results +of the procedures performed, evidence obtained, and conclusions reached; and (b) determine who +performed the work and the date such work was completed as well as the person who reviewed +the work and the date of such review. Mycio failed to prepare and retain adequate audit +documentation, as many key audit work papers did not identify the names of the preparers and the +dates the relevant work was completed. The audit documentation also did not accurately reflect +the date the engagement quality review was purportedly performed, and any work papers reviewed +by the engagement quality reviewer. + + 26 +Sherb Failed to Perform Adequate Concurring Partner and Engagement Quality +Reviews +103. Sherb was the concurring partner for the first three audits under the superseded +standards (SECPS § 1000.08(f) and Appendix E of SECPS § 1000.39) and was the engagement +quality reviewer for the last two audits pursuant to the current standard (Auditing Standard No. +7). Given the audit team’s clearly inadequate planning, failure to properly identify and audit +high-risk transactions and account balances, and the many obvious errors in the audit work +papers, Sherb’s concurring and engagement quality reviews were obviously deficient. +104. As concurring partner and engagement quality reviewer for the five audits, Sherb +failed to properly document what significant audit issues he had discussed with the audit team, +what audit work papers he had reviewed, and his evaluation of the audit team’s judgment and +resolution on significant audit issues as required under Paras. b and c of Appendix E of SECPS § +1000.39 and AS No. 7.19. The only documentation of Sherb’s concurring partner review and +engagement quality review were a few generic checklists where he simply checked off each item +and placed his initials at the end. He did not provide any reference to audit work papers he +reviewed as the checklists requested. He signed his engagement quality review approval two +months before the completion of the 2010 audit. +105. There is no evidence that Sherb actually reviewed any audit planning work papers +for the initial audits. Had he done so, he would have realized that the initial client acceptance +form clearly indicated the audit team’s assessment that Wowjoint’s financial reporting system +appeared to be “insufficient to provide evidence to support that transactions have occurred and +that all the transactions that should be recorded are, in fact, recorded.” This is an alarming +deficiency that an auditor needs to compensate and address through properly designed +substantive audit procedures. Instead, the audit planning documents did not reflect any audit +procedures designed to address this risk. Sherb LLP did not even obtain and properly document +its understanding of Wowjoint’s internal control system. During the transition period audit, +Sherb was copied on the email exchanges between Epstein and Wowjoint’s controller regarding +the posting of material costs omitted from prior periods into the transition period. Sherb was +instrumental in convincing Valleau to allow Wowjoint to do so. Sherb should have ensured that +the audit work papers reflected how the audit team evaluated this important audit issue, how it +resolved the issue, and the basis of the audit team’s determination. Sherb failed to do so. + +Sherb’s Overall Responsibility for Quality Control + +106. Sherb is the sole equity partner and managing partner of Sherb LLP and as such +has overall and ultimate responsibilities for the firm-wide quality control policies and practices +required by PCAOB Interim Quality Control Standards Section 20 and Section 40. The +deficiencies noted above clearly demonstrated that there is a complete failure in the firm’s +quality control policies and system in actual practice. These failures include Sherb’s failures to +assign competent staff to each audit, to properly perform each audit, to properly take corrective +actions when errors were brought to his attention, to modify Sherb LLP audit approaches when +they learned of their own audit deficiencies, to ensure each engagement was clearly assigned to a + + 27 +particular partner, and the quality control deficiency which allowed the issuance of an audit +report by Epstein with partner approvals granted two months prior to the completion of the 2010 +audit. + +Valleau and Mycio Failed to Issue Accurate Audit Reports +107. PCAOB Standard AU Section 508 (Reports on Audited Financial Statements at +.04) requires that the auditor’s report contain an opinion on the financial statements taken as a +whole and a clear indication of the character of the auditor’s work. The auditor can determine that +he is able to issue an audit report containing an unqualified opinion only if he has conducted his +audit in accordance with PCAOB Standards (at .07). Here, the audit reports for which Valleau and +Mycio were responsible falsely stated that they conducted their audits in accordance with PCAOB +Standards. +D. VIOLATIONS +108. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules +of Practice define improper professional conduct with respect to persons licensed to practice as +accountants. Section 4C of the Exchange Act and Rule 102(e)(1)(iv)(B)(2) of the Commission’s +Rules of Practice provide that improper professional conduct includes “[r]epeated instances of +unreasonable conduct, each resulting in a violation of applicable professional standards, that +indicate a lack of competence to practice before the Commission.” +109. As a result of the conduct described above, Sherb LLP engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Sherb LLP’s unreasonable conduct +included the failures of Sherb, Valleau, Mycio, and Epstein with respect to the 2007 CSKI Audit, +2010 CEU Audit, and the Wowjoint audits. These repeated instances of unreasonable conduct +resulted in violations of PCAOB Standards AU Section 150, AU Section 230, AU Section 311, +AU Section 315, AU Section 316, AU Section 326, AU Section 330, AU Section 342, AU Section +508, AU Section 561, Auditing Standard No. 3, Auditing Standard No. 7, Auditing Standard No. 9, +Auditing Standard No. 15, AICPA SECPS § 1000.08(f) and Appendix E of SECPS § 1000.39, +PCAOB Interim Quality Control Standard Section 20, and PCAOB Interim Quality Control +Standard Section 40. +110. As a result of the conduct described above, Sherb engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Sherb repeatedly engaged in +unreasonable conduct with respect to the 2007 CSKI Audit and the Wowjoint audits, which +resulted in violation of Interim Quality Control Standards, AICPA SECPS § 1000.08(f) and +Appendix E of SECPS § 1000.39 and Auditing Standard No. 7, PCAOB Interim Quality Control +Standard Section 20, and PCAOB Interim Quality Control Standard Section 40. +111. As a result of the conduct described above, Valleau engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule + + 28 +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Valleau repeatedly engaged in +unreasonable conduct with respect to the 2007 CSKI Audit, 2010 CEU Audit and the Wowjoint +audits, which resulted in violations of PCAOB Standards, AU Section 150, AU Section 230, AU +Section 311, AU Section 315, AU Section 316, AU Section 326, AU Section 342, AU Section +508, AU Section 561, Auditing Standard No. 3, and Auditing Standard No. 7. +112. As a result of the conduct described above, Mycio engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Mycio repeatedly engaged in +unreasonable conduct with respect to the 2010 CEU Audit and the 2011 Wowjoint audit that +resulted in violations of PCAOB Standards AU Section 230, AU Section 311, AU Section 316, +AU Section 326, AU Section 330, AU Section 342, AU Section 508, Auditing Standard No. 3, and +Auditing Standard No. 9 and Auditing Standard No. 15. +113. As a result of the conduct described above, Epstein engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Epstein repeatedly engaged in +unreasonable conduct with respect to the 2007 CSKI Audit, 2010 CEU audit, and the 2008 to 2010 +Wowjoint audits that resulted in violations of PCAOB Standards AU Section 230, and AU Section +311, AU Section 316, AU Section 326, AU Section 330, AU Section 561, and Auditing Standard +No. 3. +114. Section 10A(b)(1) of the Exchange Act provides that if “the registered public +accounting firm detects or otherwise becomes aware of information indicating that an illegal act +(whether or not perceived to have a material effect on the financial statements of the issuer) has or +may have occurred, the firm shall . . . determine whether it is likely that an illegal act has occurred; +and . . . if so, determine and consider the possible effect of the illegal act on the financial +statements of the issuer . . . .and . . . as soon as practicable, inform the appropriate level of the +management of the issuer and assure that the audit committee of the issuer, or the board of +directors of the issuer in the absence of such a committee, is adequately informed with respect to +illegal acts that have been detected . . . .” +115. As a result of the conduct described above, Mycio and Sherb LLP willfully +violated Section 10A(b)(1) of the Exchange Act. During the performance of the audit, Mycio +became aware of a report by a Sherb LLP staff auditor that a CEU senior management official had +attempted to bribe him in an effort to influence the performance of the audit, in potential violation +of Rule 13b2-2(b)(1) under the Exchange Act. Mycio and Sherb LLP failed to undertake an +appropriate investigation to determine whether it was likely that an illegal act had occurred, failed +to consider the possible effect of the illegal act on the company’s financial statements, and failed to +inform the company’s management or board of directors as required under Section 10A(b)(1) of +the Exchange Act. + + 29 +E. FINDINGS +116. Based on the foregoing, the Commission finds that Sherb LLP, Sherb, Valleau, +Mycio and Epstein engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +117. Based on the foregoing, the Commission finds that Sherb LLP and Mycio violated +Section 10A(b)(1) of the Exchange Act. +IV. +In view of the forgoing, the Commission deems it necessary and appropriate to impose the +sanctions agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED, effective immediately, that: +Sherb LLP +A. Sherb LLP shall cease and desist from committing or causing any violations and any +future violations of Section 10A(b)(1) of the Exchange Act. + +B. Sherb LLP is denied the privilege of appearing or practicing before the Commission +as an accountant. + +C. Sherb LLP shall, within 10 days of the entry of this Order, pay a civil money penalty +in the amount of $75,000 to 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 make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) 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 +Sherb 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 Yuri B. Zelinsky, Assistant Director, + + 30 +Division of Enforcement,, Securities and Exchange Commission, 100 F Street, N.E. Washington, +DC 20549-5041. + +Sherb +A. Sherb is denied the privilege of appearing or practicing before the Commission as an +accountant. +B. After five years from the date of this order, Sherb may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) +to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Sherb’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Sherb, 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) Sherb, 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 Sherb’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + + (c) Sherb 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) Sherb acknowledges his responsibility, as long as Sherb 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 Sherb 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 + + 31 +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 Sherb’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +Valleau + +A. Valleau is denied the privilege of appearing or practicing before the Commission as +an accountant. +B. After five years from the date of this order, Valleau may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Valleau’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Valleau, 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) Valleau, 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 Valleau’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + + (c) Valleau 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) Valleau acknowledges his responsibility, as long as Valleau +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 Valleau 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, + + 32 +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 Valleau’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +Mycio + +A. Mycio shall cease and desist from committing or causing any violations and any +future violations of Section 10A(b)(1) of the Exchange Act. + +B. Mycio is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. After five years from the date of this order, Mycio may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) +to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Mycio’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Mycio, 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) Mycio, 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 Mycio’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + + (c) Mycio 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) Mycio acknowledges his responsibility, as long as Mycio 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. + + 33 + +D. The Commission will consider an application by Mycio 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 Mycio’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +Epstein + +A. Epstein is denied the privilege of appearing or practicing before the Commission as +an accountant. +B. After three years from the date of this order, Epstein may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Epstein’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Epstein, 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) Epstein, 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 Epstein’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + + (c) Epstein 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) Epstein acknowledges his responsibility, as long as Epstein +appears or practices before the Commission as an independent accountant, to comply with all + + 34 +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 Epstein 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 Epstein’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. + +By the Commission. + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3513.txt b/raw/aaer/2013/AAER-3513.txt new file mode 100644 index 0000000000000000000000000000000000000000..26669eb506c3601ac8e243f713b1d9bae8bbe246 --- /dev/null +++ b/raw/aaer/2013/AAER-3513.txt @@ -0,0 +1,1384 @@ + + + + + + + + + + + + + + + + SEC.gov | R. Gordon Jones, CPA and Mark F. Jensen, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/514916","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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Gordon Jones, CPA and Mark F. Jensen, CPA + + + + + + + + + + + + R. Gordon Jones, CPA and Mark F. Jensen, CPA + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22875 / November 21, 2013 + Accounting and Auditing Enforcement Release No. 3513 / November 21, 2013 + Securities and Exchange Commission v. R. Gordon Jones, CPA , Civil Action No. 1:13-cv-00163-BSJ (D. Utah filed November 21, 2013) + + SEC Charges Certified Public Accountant with Violating Commission Suspension Order + Seeks Disgorgement of Illicit Compensation Received During Suspending Period + + + The Securities and Exchange Commission today announced that it filed a complaint in U.S. District Court for the District of Utah against certified public accountant R. Gordon Jones. Securities and Exchange Commission v. R. Gordon Jones, C.P.A., 1:13-cv-00163-BSJ (D. Utah). Jones is a resident of Farmington, Utah, and has been licensed as a certified public accountant by the State of Utah since June 1980. + The Commission alleged in its complaint that Jones violated a May 4, 2001 Commission Order issued under Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice (the "2001 Order") that suspended Jones from appearing or practicing before the Commission as an accountant. In The Matter of R. Gordon Jones, CPA and Mark F. Jensen, CPA , Securities Exchange Act of 1934 Rel. No. 44265, Accounting and Auditing Enforcement Rel. No. 1390, Administrative Proceeding File No. 3-10210 (May 4, 2001). According to the complaint, beginning in 2001 through the present, Jones provided accounting and financial statement preparation work for public companies. The complaint alleges that Jones, through his company J&J Consultants, LLC, has, among other things, created, compiled, and edited financial statements, information and data incorporated into Forms 10-K, 10-Q and 8-K; drafted and edited footnotes to financial statements; drafted and edited Management Discussion and Analysis sections relating to financial information of public filings; drafted and edited responses to Commission comment letters relating to financial information on public filings; and provided issuers with accounting advice that was subsequently reflected in financial statements filed with the Commission. The complaint further alleges that Jones supervised the financial statement preparation work for public company clients performed by J&J employees, and was intrinsically involved in and had the final sign off on the work of the other J&J employees. Through these actions, Jones violated the 2001 Order. + The SEC's complaint seeks a district court order enforcing its 2001 Order suspending Jones from appearing or practicing before the Commission as an accountant, and asks that the court order Jones to pay disgorgement, representing illicit compensation gained as a result of his engaging in work that was proscribed by the 2001 Order, together with prejudgment interest. + The Commission's investigation was conducted by Kimberly Greer, Ian Karpel, and Donna Walker in the Denver Regional Office. The Commission's litigation will be led by Polly Atkinson. + + + + + SEC Complaint + +   + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3514.pdf b/raw/aaer/2013/AAER-3514.pdf new file mode 100644 index 0000000000000000000000000000000000000000..406b0cfb1f1cca5d5d8563fa2806f9ec63c3c041 Binary files /dev/null and b/raw/aaer/2013/AAER-3514.pdf differ diff --git a/raw/aaer/2013/AAER-3514.txt b/raw/aaer/2013/AAER-3514.txt new file mode 100644 index 0000000000000000000000000000000000000000..32aaa34f53f7ebe59dadf652a7e78450251d3ae1 --- /dev/null +++ b/raw/aaer/2013/AAER-3514.txt @@ -0,0 +1,536 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9490 / December 4, 2013 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 70983 / December 4, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3514 / December 4, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15635 + + +In the Matter of + +FIFTH THIRD BANCORP +and DANIEL POSTON + +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 CEASE- +AND-DESIST ORDERS AND PENALTIES + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Fifth Third Bancorp (“Fifth Third”) and Daniel Poston (“Poston”) (collectively, +“Respondents”) , and that public administrative proceedings be, and hereby are, instituted against +Poston pursuant to Section 4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the 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 + +2 +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 Cease- +and-Desist Orders and Penalties (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY + +This proceeding results from Fifth Third’s failure to record substantial losses during the +financial crisis by not properly accounting for a portion of its commercial real estate loan portfolio. +In the third quarter of 2008, Fifth Third decided to sell large pools of non-performing commercial +loans. When Fifth Third decided to sell the loans, Generally Accepted Accounting Principles +(“GAAP”) required the company to reclassify them from “held for investment” to “held for sale,” +and to carry them at fair value. +2 Because the fair values of these loans were significantly below +Fifth Third’s carrying values, classifying them as held for sale would have resulted in a $169 +million impairment, and increased Fifth Third’s pretax loss in the third quarter of 2008 by 132 +percent. Fifth Third’s Chief Financial Officer Daniel Poston was familiar with the company’s loan +sale efforts and understood the relevant accounting rules. Nevertheless, he failed to direct that +Fifth Third classify the loans as required, and made statements in a Fifth Third management +representation letter to Fifth Third’s auditors that, in light of the company’s loan sale activities, +were not true. Fifth Third’s and Poston’s accounting violations operated to deceive investors +during a time of significant upheaval and financial distress for the company. + +As the real estate market declined in 2007 and 2008, Fifth Third’s non-performing assets +(“NPAs”) increased substantially. In the third quarter of 2008, it became clear that Fifth Third +would no longer be able to rely on its collections and related “work-out” efforts to significantly +reduce its NPAs. The only alternative the company meaningfully considered was selling some of +its non-performing loans. In July 2008, Poston and the other members of Fifth Third’s Corporate +Credit Committee authorized the head of Fifth Third’s commercial banking division (“the EVP”) +to determine the likely sales prices for certain pools of non-performing loans. At the time, Fifth +Third was carrying these loans at about 75 percent of unpaid balances (as a result of allowances for +incurred credit losses and charge-offs taken against the unpaid principal balances). Loan brokers + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 GAAP prescribes that loans held for sale must be reported at the lower of cost or fair value. Because the +fair values of all the loans in this matter were below cost, references herein to such reclassification only refer to fair +value. See SOP 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or +Finance the Activities of Others. + + +3 +told Fifth Third that the loans would likely sell, on average, for 30 to 41 percent of unpaid +balances. + +With Fifth Third’s NPAs continuing to increase, the company’s senior management +decided to pursue a large sale of non-performing commercial loans. In September 2008, Fifth +Third executed engagement agreements with two loan brokers to market and sell loans with +combined balances of $1.5 billion.3 Poston was aware that the company’s commercial banking +division had engaged the loan brokers. + +Despite all of the actions that Fifth Third had taken with respect to these loans – including +signing engagement agreements with brokers to sell the loans – the company did not classify the +loans as held for sale and record them accordingly in its Form 10-Q for the third quarter of 2008. +Instead, Fifth Third continued to classify the loans as “held for investment,” which incorrectly +suggested that the company had not made the decision to sell the loans. Poston certified the +accuracy and completeness of Fifth Third’s Form 10-Q for the third quarter of 2008 despite his +knowledge of the company’s loan sales activities and the relevant accounting rules. + +In addition, Poston represented to the company’s auditors in Fifth Third’s November 7, +2008 management representation letter for the third quarter of 2008 that the company had no plans +or intentions that may affect the classification of loans, and that the loans Fifth Third had classified +as held for investment were those that the company had the intent and ability to hold until maturity +or for the foreseeable future. In light of Fifth Third’s intent to sell the loans, these representations +were not true. Fifth Third began receiving and accepting bids for loans that the brokers marketed +about two weeks after Fifth Third’s management representation letter was submitted to the +company’s auditor. + +In December 2008, Fifth Third senior management consulted with the company’s board of +directors about management’s decision to sell the non-performing commercial real estate loans +discussed above, as well as additional loans that Fifth Third decided in December 2008 to sell. +Fifth Third did not disclose the impairments resulting from the reclassification of all the loans until +January 22, 2009. The reclassifications resulted in a cumulative $800 million loss. Fifth Third +sold most of the loans at issue in December 2008 and in 2009. + +RESPONDENTS + +1. Fifth Third Bancorp, a diversified financial services company, is an Ohio +corporation headquartered in Cincinnati, Ohio. With $121 billion in assets, Fifth Third is the +twenty-second largest bank holding company in the United States. Fifth Third’s common stock is +registered with the Commission pursuant to Exchange Act Section 12(b) and trades on NASDAQ. + +2. Daniel Poston, 55, is a resident of Cincinnati, Ohio, and was Fifth Third’s CFO +from 2009 to October 2013. Poston was previously Fifth Third’s interim CFO (May 2008 to + +3 After receiving bids, Fifth Third had the option not to sell any of the loans at issue. Fifth Third began +receiving bids on those loans in November 2008. + +4 +November 2008), Controller (August 2007 to May 2008 and November 2008 to September 2009), +and Director of Audit (October 2001 to August 2007). Before joining Fifth Third, Poston was a +partner with a large public accounting firm. Poston was a licensed CPA in Ohio until he left public +accounting in September 2001. +FACTS + +Fifth Third Considers Loan Sales as NPAs Rise and then Takes Steps to Prepare for a Sale + +3. From the third quarter of 2007 through the second quarter of 2008, Fifth Third +considered selling pools of non-performing commercial real estate loans.4 Though it had generally +held its commercial loans until maturity, Fifth Third considered selling certain of these loans to +deal with a substantial increase in its NPAs.5 By selling these loans, Fifth Third would save the +carrying costs of the loans, such as maintaining the properties and paying property taxes; mitigate +the need for additional impairments if workout strategies failed or real estate values continued to +decline; avoid the expenses and delays of foreclosure; and allow Fifth Third to report a stronger +balance sheet. Fifth Third chose not to sell the loans during this period, however, because it +deemed the prices it expected to receive from such sales too low. + +4. In the third quarter of 2008, it became clear that Fifth Third’s efforts to work out +the non-performing loans with the borrowers would not be sufficient to significantly reduce the +company’s NPAs, and that the company needed to pursue a large loan sale. In July 2008, Poston +and the other members of Fifth Third’s Corporate Credit Committee authorized the EVP to +determine the likely sales prices for four pools of non-performing loans and review the results with +the Committee. That day, the EVP instructed his staff to prepare for loan sales. The EVP’s direct +report and the head of the commercial bank’s Special Assets Group (“SAG VP”), then told +commercial bank employees, “[o]ur intention is to do a large sale using [loan] brokers ….” By the +end of July 2008, Fifth Third had decided to use two loan brokers (“Broker A” and “Broker B”) to +handle a potential sale of loans with combined balances of $700 million. + +Fifth Third’s Interim Controller Informs Poston of Potential +Accounting Consequences from Fifth Third’s Loan Sale Activities + +5. In July and August 2008, Broker A and Broker B both discussed with Fifth Third +the potential accounting consequences of the company obtaining “indicative pricing” – i.e. the +brokers’ expert opinions of what the sales prices were likely to be for the loans. Broker A told the + +4 All of the loans discussed in this matter involved commercial properties in Michigan and Florida. During +the relevant period, the value of the collateral securing these loans, which were primarily homebuilder -related +properties, was declining at a significant rate. + +5 Fifth Third’s NPAs were loans on which the ultimate collectability of the full amount of principal and +interest was uncertain or that had been renegotiated to provide for a reduction or deferral of interest or principal +because of a deterioration in the financial position of the borrower. At year-end 2006, Fifth Third had $271 million +in commercial NPAs. By year-end 2007, commercial NPAs had more than doubled to $672 million. + + +5 +SAG VP that one of Fifth Third’s competitors had told Broker A that an audit firm had required +the competitor to re-classify loans from held for investment to held for sale when it had obtained +indicative pricing from a loan broker, and, consistent with the GAAP requirement to report the +loans at fair value, to mark the loans down to the indicative prices it had received from the loan +broker, regardless of whether the company sold the loans. After learning of this development, an +employee in Fifth Third’s risk group sought advice from Fifth Third’s interim Controller, noting +“[a]s we continue to work on potential commercial loan sales … we want to be sure that if we go +out to get indicative prices from brokers that we do not need to mark those loans to market based +on those bids.” + +6. Broker B asked the SAG VP whether Fifth Third “even wanted [indicative] +pricing” on the loans it was considering selling. Broker B told the SAG VP that their “early +indications are very low” and that Fifth Third’s “peers have not wanted this info, because of the +accounting rulings.” Broker B also asked the SAG VP whether Fifth Third “had the budget set +forth for such a large potential [charge-off].” +6 The risk group employee forwarded an email from +the SAG VP summarizing this discussion to the interim Controller, and again asked for +“confirmation from Accounting before we have the vendor send the pricing information that we +will not be forced to take a mark on the loans based on indicative pricing quotes.” + +7. In the same email chain, the risk group employee expressed his understanding to +the interim Controller that Fifth Third should not have to classify these loans as held for sale +because the company had not decided to sell them, and would be using the indicative pricing to +help it decide whether to proceed with a sale. +8. On August 4, the interim Controller recommended to his colleagues that they “hold +off on receiving any specific pricing information since it may imply an intent to sell, [and] thereby +require us to classify them as [held for sale] and take a mark to adjust the loans to those prices. . . ” +(emphasis in original). The interim Controller then forwarded the emails to Poston, who was +serving as Fifth Third’s Chief Financial Officer on an interim basis, and explained that he had +“provided verbal/tentative guidance to [the risk group employee] that the receipt of bids on specific +loans or pools of loans may be viewed as being inconsistent with the positive intent to hold a loan +to maturity and therefore might call into serious question the classification of such loans to the +extent they remained [classified as held for investment].” +7 + +6 The reference to potential charge-off refers to the impairment that Fifth Third would need to recognize to +record the loans at fair value upon the reclassification of the loans from held for investment to held for sale. + +7 The interim Controller also indicated that he and his team would research the issue and report back. The +interim Controller and his team consulted, among other things, Fifth Third’s draft policy regarding loan +classification, which mirrors the Interagency Guidance on Certain Loans Held for Sale (2001) and a 2007 speech by +an SEC accounting fellow on loan classification, which conveys the SEC staff’s belief that the classification of loans +as held for investment or held for sale is dependent on management intent, and that management should make a +positive assertion regarding its ability and intent to hold or sell loans and classify them accordingly . The interim +Controller, who believed that the company continued to have the intent to hold the loans until maturity or for the +foreseeable future, concluded that a receipt of indicative bids was not, by itself, a bright light indicator that an issuer +had decided to sell loans. + +6 +9. Fifth Third subsequently obtained indicative pricing only orally from the two loan +brokers. On August 5, Broker A prepared two pricing analyses for Fifth Third: one containing +Broker A’s most current pricing analysis and a second “that we can send to Fifth Third[]. Pricing +information has been removed. . . .” The following day, one of Broker A’s principals informed his +colleagues that he had given Fifth Third pricing orally, by broad categories. On August 5, Broker +B sent the SAG VP a list of loans that Broker B recommended for sale that included the unpaid +customer balances for each loan, but no pricing information. In an August 7 email, the SAG VP +stated he received “verbal numbers” from Broker B. +10. Poston, who had previously served as Fifth Third’s Controller and would return to +that role in November 2008, understood the relevant accounting rules. + +Fifth Third Retains Loan Brokers to Sell Loans + +11. During the August 15 meeting of the Fifth Third Enterprise Committee (which was +comprised of Fifth Third’s Chief Executive Officer and his direct reports, including Poston and the +EVP, but not the interim Controller), the EVP’s team presented an analysis of the potential loan +sales estimating that, based on the brokers’ indicative pricing, selling the $700 million of loans +they had identified would result in Fifth Third recording a $272 million impairment. The +Enterprise Committee decided to delay a decision on whether to proceed with the contemplated +loan sales until the following week’s meeting. + +12. As it saw its commercial NPAs continuing to increase, Fifth Third began +considering an even larger loan sale. Bank executives considered two options: proceeding with +the $700 million loan sale they had been contemplating or pursuing a $2 billion loan sale, which +would include the $700 million in loans they had already been discussing with the brokers. +13. During the August 22 Enterprise Committee meeting that Poston and other senior +executives attended, Fifth Third decided to pursue a larger sale than the company had been +discussing with the loan brokers. After identifying additional loans to include in a larger sale, Fifth +Third entered into engagement agreements with Broker A and Broker B in September 2008, which +evidenced that the company had formed the intent to sell the loans. The agreements provided that +the brokers would help Fifth Third market and sell loans totaling about $1.5 billion. Poston was +aware that the company’s commercial banking division had engaged the loan brokers. +8 + +Fifth Third Fails to Reclassify Loans as Required + +14. Though Fifth Third had entered into engagement agreements with the brokers to +facilitate a sale, which evidenced that the company had formed the intent to sell the loans, the +company did not reclassify the loans from held for investment to held for sale prior to the filing of +its Form 10-Q for the quarter ended September 30, 2008. + +8 In October 2008, Fifth Third received additional pricing information from the brokers and authorized them +to begin marketing the loans and soliciting bids from potential buyers. + + +7 + +15. During its earnings call in October 2008 and in the Form 10-Q that it filed in +November 2008 – which occurred during a time of significant economic upheaval and financial +distress for Fifth Third – Fifth Third reported a pretax loss of $128 million for the third quarter of +2008. Had Fifth Third reclassified the loans that were the subject of the engagement agreements as +required by GAAP, it would have reported a pretax loss of $297 million.9 As Fifth Third’s Chief +Financial Officer, Poston signed the company’s Form 10-Q for the quarter ended September 30, +2008 and certified the accuracy and completeness of its contents. + +Poston Makes Representations to Fifth Third’s Auditors +that, in Light of the Company’s Loan Sale Activities, were Not True + +16. Though he was familiar with Fifth Third’s loan sale activities and understood that +another audit firm may have required a competitor to reclassify loans based on having received +indicative pricing, neither Poston, nor anyone else at Fifth Third, sought advice from the +company’s outside auditor, Deloitte & Touche, regarding the appropriate classification of the loans +at issue. + +17. On November 7, Poston signed Fifth Third’s management representation letter to +Deloitte, which states, “[t]he Bancorp has no plans or intentions that may affect the carrying value +or classification of assets and liabilities” and “[t]he Bancorp has properly classified loans on the +condensed consolidated balance sheets as held for sale or held for investment, based on the +Bancorp’s intent with respect to those loans.” In light of Fifth Third’s intent to sell the loans, these +representations were not true. + +18. Fifth Third began receiving and accepting bids for loans that the brokers marketed +about two weeks after Fifth Third’s management representation letter was submitted to Deloitte. +Fifth Third’s senior management consulted with the company’s board of directors in December +2008 about its decision to sell the loans discussed above along with additional loans that Fifth +Third decided in December 2008 to sell. Fifth Third did not disclose the impairment resulting +from the reclassification of all the loans until January 22, 2009, when it released its earnings for the +fourth quarter of 2008. Fifth Third sold most of the loans at issue in December 2008 and in 2009. + +VIOLATIONS + +19. Securities Act Section 17(a)(2) prohibits any person from obtaining money or +property in the offer or sale of securities by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading. + + +9 The impairment from the reclassification was $169 million. This was less than the $272 million expected +impairment as of August 15 because Fifth Third increased its partial charge-offs and reserves for the loans at issue +between then and September 30. + +8 +20. Securities Act Section 17(a)(3) prohibits any person from engaging in any +transaction, practice, or course of business which operates or would operate as a fraud or deceit +upon the purchaser in the offer or sale of securities. + +21. Exchange Act Section 13(a) and Rule 13a-13 thereunder require that every issuer +of a security registered pursuant to Exchange Act Section 12 file with the Commission, among +other things, quarterly reports as the Commission may require, and, pursuant to Rule 13a-14, +mandate, among other things, that an issuer’s principal financial officer certify each periodic +report. + +22. 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. + +23. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +24. Exchange Act Rule 13b2-1 prohibits any person from directly or indirectly +falsifying or causing to be falsified any book, record or account subject to Exchange Act Section +13(b)(2)(A). + +25. Exchange Act Rule 13b2-2 prohibits, among other things, officers of issuers from +directly or indirectly making or causing to be made a materially false or misleading statement, or +omitting to state any material fact necessary in order to make statements made, in light of the +circumstances under which such statements were made, not misleading to an accountant in +connection with any quarterly review or the preparation or filing of any document or report +required to be filed with the Commission. + +26. As a result of the conduct described above, Fifth Third violated Securities Act +Sections 17(a)(2) and 17(a)(3), and Exchange Act Sections 13(a) and Rule 13a-13 because its +financial statements failed to record its commercial real estate loans appropriately under GAAP. + +27. As a result of the conduct described above, Fifth Third violated Exchange Act +Sections 13(b)(2)(A) and 13(b)(2)(B) because it failed to make and keep appropriate books and +records and devise and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that it valued its commercial real estate loans in accordance with GAAP. + +28. As a result of the conduct described above, Poston willfully violated Securities Act +Section 17(a)(3) and Exchange Act Rules 13a-14, 13b2-1, and 13b2-2 and caused and willfully +aided and abetted Fifth Third’s violations of Securities Act Sections 17(a)(2) and 17(a)(3) and +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rule 13a-13 because he failed to +ensure that Fifth Third appropriately recorded its commercial real estate loans; certified that Fifth +Third’s financial statements were prepared in accordance with GAAP; and made representations in + +9 +a Fifth Third management representation letter to Fifth Third’s auditors regarding the company’s +classification of commercial loans that, in light of Fifth Third’s intent to sell loans, were not true.10 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Fifth Third Bancorp’s and Respondent Daniel Poston’s Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Fifth Third Bancorp shall cease and desist from committing or causing any +violations and any future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange +Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rule 13a-13 thereunder. +B. Daniel Poston shall cease and desist from committing or causing any violations and +any future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections +13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder. + +C. Daniel Poston is denied the privilege of appearing or practicing before the +Commission as an accountant. + + D. After one year from the date of this order, Respondent Poston may request that +the Commission consider his reinstatement by submitting an application (attention: Office of +the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent Poston’s work in his practice before +the Commission will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent Poston, 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; + + +10 This use of the word “willful” does not reflect a finding that Poston acted with the intention to violate the +law or knowledge that he was doing so. As used in the governing provisions of law, “willfully” means only that the +actor “intentionally committed the act which constitutes the violation.” Tager v. SEC , 344 F.2d 5, 8 (2d Cir. 1965); +see also Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000). “There is no requirement that the actor also be aware +that he is violating one of the Rules or Acts . . . .” Tager, 344 F.2d at 8. + +10 + (b) Respondent Poston, or the registered public accounting firm with +which he is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + (c) Respondent Poston 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 Poston acknowledges his responsibility, as long as +Respondent Poston 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 Poston 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 Poston’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + +F. Respondent Fifth Third shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $6,500,000 to 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; +(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 Fifth +Third as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Stephen L. Cohen, Esq., Associate + +11 +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +G. Respondent Daniel Poston shall, within 14 days of the entry of this Order, pay a +civil money penalty in the amount of $100,000 to 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; +(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 +Poston as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Stephen L. Cohen, Esq., Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + H. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, the +Commission may order that any civil money penalty paid by Fifth Third and Poston be used to +create a Fair Fund for the benefit of injured investors. If the Commission does not create a Fair +Fund, the Commission will order the transfer of any civil money penalty paid by Respondents to +the United States Treasury in accordance with Section 21F(g) of the Securities Exchange Act of +1934 for the Investor Protection Fund. Regardless of whether any such Fair Fund distribution is +made, amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award +of compensatory damages by the amount of any part of Respondents’ payments of civil penalties in +this action ("Penalty Offsets"). If the court in any Related Investor Action grants such Penalty +Offsets, Respondents agree that they shall, within 30 days after entry of a final order granting +Penalty Offsets, notify the Commission's counsel in this action and pay the amounts of Penalty +Offsets to the United States Treasury or as the Commission directs. Such payments shall not be +deemed additional civil penalties and shall not be deemed to change the amounts of the civil +penalties imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" + +12 +means a private damages action brought against either Fifth Third or Poston 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. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3515.pdf b/raw/aaer/2013/AAER-3515.pdf new file mode 100644 index 0000000000000000000000000000000000000000..c4bf0933ec28d16cfa69c72dcaf3675fcf8e6e0f Binary files /dev/null and b/raw/aaer/2013/AAER-3515.pdf differ diff --git a/raw/aaer/2013/AAER-3515.txt b/raw/aaer/2013/AAER-3515.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf6d00c16543625d055507eadc77047e7586c969 --- /dev/null +++ b/raw/aaer/2013/AAER-3515.txt @@ -0,0 +1,99 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71031 / December 11, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3515 / December 11, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15638 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Craig Toll, 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 Craig +Toll (“Respondent” or “Toll”) 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, Toll 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, Toll 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 Toll’s Offer, the Commission finds that: + + 1. Toll, 64, has been a certified public accountant licensed to practice in the +State of Florida since 1980. He served as Chief Financial Officer of InnoVida Holdings, LLC from +approximately December 2007 until March 2011. From 1994 until 1999, he was Chief Financial +Officer of CHS Electronics, Inc., a publicly traded company. + + 2. On December 7, 2012, the Commission filed a complaint against Toll and +others in the United States District Court for the Southern District of Florida, styled SEC v. Craig +Toll, et al., Case No. 12-CV-24326. On November 26, 2013, the District Court entered an order +permanently enjoining Toll, by consent, from future violations of Sections 17(a) of the Securities +Act of 1933 (“Securities Act”), and Section 10(b) and Rule 10b-5 of the Securities Exchange Act +of 1934 (“Exchange Act”). The Court also barred Toll from serving as an officer or director of a +publicly traded company. + + 3. Among other things, the Commission’s complaint alleged that Toll, while +CFO of InnoVida Holdings, made misrepresentations and omissions to investors and prospective +investors in InnoVida Holdings by creating financial statements falsely inflating InnoVida +Holdings’ cash and valuation, which he and InnoVida’s CEO used to attract investors to the +company. + + 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 Toll’s Offer. + + +Accordingly, it is hereby ORDERED, effective immediately, that: + + Toll is suspended from appearing or practicing before the Commission as an accountant. + + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3516.txt b/raw/aaer/2013/AAER-3516.txt new file mode 100644 index 0000000000000000000000000000000000000000..5c3fbdfcda1805b8ac3b4c0f48b31ad95236bd75 --- /dev/null +++ b/raw/aaer/2013/AAER-3516.txt @@ -0,0 +1,560 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71050 / December 12, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3516 / December 12, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15641 + + +In the Matter of + +GLG PARTNERS, INC. and +GLG PARTNERS, L.P., + +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” 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 GLG Partners, Inc. (“GPI”) and GLG +Partners, L.P. (“GLG”) (collectively, “Respondents”). + +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 Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds1 that: + +Respondents + + 1. GPI is a Delaware corporation with its principal offices in New York, NY. During +the time period relevant to this proceeding, GPI was listed on the NYSE. GPI served as the +holding company for U.K. investment adviser GLG, which was GPI’s then-primary subsidiary, as +well as various GLG affiliates. During this time period, GLG shared senior management with GPI. +GPI’s common stock and warrants to purchase the common stock were securities registered +pursuant to Section 12(g) of the Exchange Act. On October 14, 2010, GPI was acquired by a +U.K.-listed issuer. GPI’s stock and warrants are no longer listed. + +2. GLG is a U.K. investment adviser structured as an English limited partnership, with +its headquarters in London, England. It has operated in the U.S. directly and through affiliates. +GLG is not registered with the Commission but is authorized and regulated by the U.K. Financial +Conduct Authority. GLG is the investment manager for the GLG Emerging Markets Fund (“EM +Fund”) and was the investment manager for the EM Fund’s side-pocket fund, GLG Emerging +Markets (Special Assets) Fund (“EMSA1 Fund”), prior to the EMSA1 Fund’s dissolution. The +EM and EMSA1 Funds were hedge funds, formed as Cayman Islands limited liability companies, +which had U.S. investors. GLG is not currently a subsidiary of GPI but remains its affiliate. + +Summary + + 3. This matter involves investment adviser GLG’s failure to maintain sufficient +controls relating to the valuation of fund assets. Under GLG’s asset valuation policies, assets +which were not quoted in the market and whose value could not readily be determined through +outside data sources (“Level 3 assets”) were to be priced monthly by an independent pricing +committee (“IPC”). However, GLG had established inadequate controls to ensure information +relevant to Level 3 asset valuations was provided to the IPC, and, on various occasions, GLG +failed to provide material information to the IPC. In addition, GLG had established no mechanism +for ensuring that the IPC had sufficient time to review pricing recommendations, and, in certain +instances, GLG failed to provide the IPC with enough time to review recommendations. GLG also +generally kept no record of the IPC’s basis for monthly decisions to keep Level 3 asset valuations +unchanged, which violated GLG’s Pricing Policy directive that “comprehensive documentation” +be maintained “to ensure the rationale supporting any judgments made is recorded and available +for future reference.” + + 4. As a result of these controls failures, GLG overvalued a 25% private equity stake in +an emerging market coal-mining company (“Coal Co.”) from November 2008 through November + +1 The findings herein are made pursuant to Respondents’ Offer and are not binding on any other +person or entity in this or any other proceeding. + 3 +2010. This Level 3 asset had been purchased in March 2008 by the EM Fund and transferred in +June 2008 to the EMSA1 Fund. The Coal Co. asset was overvalued by roughly $160 million for +25 months, resulting in inflated fee revenue of $7,766,667 for GLG and its parent GPI, then a U.S.- +listed issuer. The overvaluation of the asset led to misstatements in GPI’s filings with the SEC +relating to the period from 2008 through the second quarter of 2010. + + 5. By their actions, GPI violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Exchange Act Rules 13a-1, 13a-11, 13a-13, and 12b-20, and GLG was a cause +of these violations. + +Background + +GLG’s Valuation Policies and Practices + + 6. Each GLG fund’s asset valuation policies were set forth in the fund’s prospectus as +well as the Pricing and Valuation Policy for GLG Funds (“Pricing Policy”). The EM Fund +prospectus provided that a Level 3 asset would be valued as determined by the fund’s directors, in +good faith and with care, in consultation with GLG and the fund’s administrator. The summary of +terms for the EMSA1 Fund stated that the EMSA1 Fund was adopting the same valuation +principles described in the EM Fund prospectus. GLG’s use of the term “Level 3” was not +equivalent, and did not purport to be equivalent, to the concept of Level 3 inputs contained in U.S. +Generally Accepted Accounting Principles or International Financial Reporting Standards. + + 7. The Pricing Policy set forth the “framework and methodology for determination, +validation, approval, regular monitoring and review of pricing across the GLG Funds.” Pursuant to +the Pricing Policy, each fund’s directors delegated the responsibility for approving prices and +pricing mechanisms to GLG’s IPC. Furthermore, the Pricing Policy stated that documents +supporting valuations should be made and kept. + + 8. Pursuant to the Pricing Policy, the IPC met on a monthly basis, but GLG or the +fund administrator could call additional meetings “on an ad hoc basis on short notice to approve a +price of an asset, and/or provide additional information.” The IPC did not have a fixed +membership but required a “quorum” of participants from four separate groups for its meetings. +The quorum for an IPC meeting consisted of: + +1. any one Director of the relevant fund; 2. a representative of the Fund +Administrator; 3. a representative from senior management of [GLG]; 4. a +representative from the risk management team of [GLG]. + +Although not expressly stated in the Pricing Policy, only participants falling into the four +categories of quorum members could vote to approve prices, and all votes were required to be +unanimous. A senior member of GLG’s middle-office accounting staff acted as a non-voting +“chair” for the meetings, which were typically held by teleconference. + + 9. Under the Pricing Policy, “All assets priced using Level 3 prices should be referred +to the IPC on a monthly basis for ratification and approval by the IPC.” + 4 + + 10. GLG’s middle-office accounting department did not have a systematic, monthly +practice for asking GLG fund managers whether changes to the values of Level 3 assets were +warranted for any assets held in their funds’ portfolios. Instead, the middle-office accounting staff +sporadically collected some changes in Level 3 pricing recommendations and other updates from +the various GLG fund managers, then set the monthly meeting agenda and circulated the available +information to an e-mail list of potential IPC participants in advance of monthly meetings. + +11. Beginning in 2009, an undocumented supplemental practice developed for +conducting “semi-annual private-equity reviews” in January and July, at which all of the GLG +funds’ Level 3 assets were reviewed by the IPC. Commentaries and documentation relevant to +each position’s mark were prepared by the GLG fund teams, collected by middle-office accounting +staff, and then distributed by middle-office accounting staff to the potential IPC participants in +advance of these semi-annual meetings. The lack of an established practice for monthly reviews +created confusion within GLG as to whether relevant information and changes in pricing +recommendations should be transmitted to the IPC on an ongoing, monthly basis or whether +transmittal could be delayed until the next semi-annual review. + +Purchase and Initial Marking of Coal Co. Stake + + 12. In December 2007, GLG agreed to buy a 25% stake in Coal Co. for $210 million. +It was the EM Fund’s objective to sell the stake in a potential near-term IPO. The EM Fund +closed the Coal Co. purchase on March 20, 2008. On March 31, 2008, the IPC approved an initial +valuation or “mark” of $425 million for the position. GLG based its recommendation for the $425- +million mark on an internal valuation report prepared by an EM Fund analyst. This internal report +employed a discounted-cash-flow (“DCF”) analysis as well as a review of comparable public +equities. The report took note of a large increase in coking coal prices that had occurred in late +2007 and early 2008 as the primary justification for the mark-up over the EM Fund’s purchase +price. Furthermore, the report projected that Coal Co. would be able to quadruple its coal +production over the next four or five years, pursuant to its management’s aggressive expansion +plans. Three months later, the Coal Co. position was transferred to the EMSA1 Fund. + + 13. The manager of the EM and EMSA1 Funds resigned from GLG on October 31, +2008, along with the analyst who had prepared GLG’s internal valuation report on Coal Co. and +who was responsible for ongoing updates of GLG’s DCF model for the position. Until June 2011, +the Coal Co. stake remained in the EMSA1 Fund, which did not accept additional investment +during that period. + +GLG’s Policies and Procedures Failed to Ensure Timely Transmittal of +Relevant Information to IPC, Resulting in Overvaluation of Coal Co. Position + + 14. On a number of occasions between November 2008 and December 2010, GLG +employees received information calling into question the $425-million valuation for the Coal Co. +position, but there were inadequate policies and procedures to ensure that relevant information +such as this was timely provided to the IPC or that recommendations to lower the mark were + 5 +forwarded to the IPC expediently. Additionally, there was confusion among GLG’s fund +managers, middle-office accounting personnel, and senior management as to whose role it was to +determine that valuation issues should be elevated to the IPC. + +15. GLG also failed to implement policies and procedures to ensure that the IPC +participants were provided with sufficient time to thoroughly review pricing recommendations and +supporting documentation forwarded to the IPC. This failure occurred despite prior guidance from +the GLG funds’ independent auditor, in early 2008, that the IPC should be given adequate time +before making determinations in order to make sure that sufficient rigor was exercised with respect +to valuations. As a result of these failures, the Coal Co. position remained overvalued during the +entire period from November 1, 2008 through November 30, 2010. + +2008 – 2009 + + 16. By the time that the Coal Co. mark for the month of November 2008 was ratified +by the IPC, several of the key bases for the initial mark of $425 million no longer held true. Coal +Co. and GLG were no longer pursuing an IPO in the near to mid-term, there had been a significant +decline in emerging equity markets and in the stock prices of comparable coal miners, and coking +coal prices had begun a steep decline. GLG failed to provide current information on these factors +to the IPC at that time. Additionally, GLG failed to inform the IPC that Coal Co. had experienced +significant shortfalls in its projected output, GLG’s prior DCF model for Coal Co. was no longer +being updated, and internal doubts had arisen among GLG’s analysts regarding the continued +validity of the Coal Co. mark. During this same time period, GLG and GPI employees with +responsibility for the EMSA1 Fund discussed in e-mails their intention to obtain a third-party +valuation of Coal Co. and to reexamine the position’s mark on the basis of the third-party +valuation. However, there was no established procedure for obtaining third-party valuations and +the third-party valuation was not obtained until January 2010. + + 17. During the first half of 2009, GLG’s policies and procedures failed to ensure +transmittal of additional relevant, valuation-related information to the IPC. For example, the IPC +was not informed of a continued drop in Coal Co.’s output and in the price of coking coal. +Moreover, the IPC was not informed that GLG’s analysts were reaching lower valuations for the +Coal Co. position. During the second half of 2009, the IPC received no updates on the Coal Co. +position prior to the year-end semi-annual private-equity review. + + First Half of 2010 + + 18. GLG obtained a third-party valuation of Coal Co. in January 2010. The EM Fund +co-manager’s primary objective in obtaining the third-party valuation report was to assist in GLG’s +private-market attempts to sell the EMSA1 Fund’s stake in Coal Co. rather than as a pricing +document to be submitted to the IPC. He obtained a brief, free valuation report from one of EM +Fund’s brokers, as a client accommodation. When he later forwarded the report to the middle- +office accounting staff, the middle-office accounting staff, who lacked expertise in valuing assets, +assumed that the report was sufficient for the IPC to base pricing decisions upon. In actuality, the +report was based on limited sources of information, and the third-party firm had made no attempt + 6 +to contact Coal Co. directly in order to obtain or verify information contained in the report. +Nevertheless, the third-party report reflected a valuation for the EMSA1 Fund’s Coal Co. stake of +$350 million, which was $75 million less than the EMSA1 Fund’s $425-million mark. + + 19. After receiving the report from the fund manager, GLG’s middle-office accounting +staff failed to forward it to the list of potential IPC participants until after business hours on the +night before the January 2010 semi-annual private-equity review meeting. The report was +provided to the participants as part of an extensive production of data and recommendations for all +37 private-equity positions held by GLG firm-wide. GLG thus did not provide sufficient time for +the IPC participants to review the report in depth prior to the IPC meeting, which was held at 12:30 +PM. The IPC approved maintaining the existing mark of $425 million based on a $200 million +range of values that only appeared on the report’s cover page rather than the actual valuation of +$350 million set forth in the body of the report. Despite guidance from its funds’ auditor in early +2008 that the IPC would benefit from technical assistance when considering valuations, GLG did +not obtain such assistance for the IPC in evaluating the third-party report on Coal Co. or at any +point during the relevant period. + + Second Half of 2010 – January 2011 + + 20. In mid-June 2010, GLG concluded that its efforts to find a private-market buyer for +the Coal Co. position had failed and that a near-term IPO was still unlikely. In order to present the +EMSA1 Fund investors with an alternative exit opportunity, GLG decided to hire a global financial +services firm to conduct an auction of the EMSA1 Fund shares, the value of which, by that time, +was almost entirely in the Coal Co. stake. The high bidder in the auction would be permitted to +make a tender offer to many of the EMSA1 Fund shareholders2 and, in June 2011, this bidder and +all non-tendering shareholders would automatically be subscribed into a successor special-assets +fund. The auction plan included preparation and issuance of a detailed Coal Co. valuation report +by the financial services firm. + + 21. Although the EM Fund co-manager received the financial services firm’s draft +report and final valuation figures in September 2010, GLG lacked policies and procedures to +ensure that the conclusions of the financial services firm were timely forwarded to and considered +by the IPC. The draft report provided a preliminary valuation range of $221-259 million and a +stated midpoint of $240 million. The final report provided a final valuation range of $246-284 +million and a stated midpoint of $265 million, which was $160 million less than GLG’s $425 +million mark. However, a recommendation to lower the Coal Co. mark to the financial services +firm’s final valuation of $265 million was not presented to the IPC in connection with the IPC’s +monthly meetings for September, October or November 2010. Instead, the recommendation was +put forward in January 2011 in connection with the IPC’s semi-annual private equity review, to be +effective December 1, 2010. At that time, however, the financial services firm’s report was not +shared with the IPC, based on confidentiality concerns associated with the auction process. In + +2 “U.S. persons,” as well as Canadian, Australian, Japanese, and South African shareholders, among +others, were to be excluded from the offer. + 7 +addition, the IPC was not provided with any valuation recommendation for the Coal Co. position +or other related materials in advance of the January 2011 meeting. + +Failure to Document IPC’s Basis for Monthly Decisions + to Keep Level 3 Asset Valuations Unchanged + + 22. The Pricing Policy directed that Level 3 prices be “ratifi[ed] and approv[ed]” +monthly and that “comprehensive documentation” be maintained “to ensure the rationale +supporting any judgments made is recorded and available for future reference.” However, for 21 +of 25 months from November 2008 through November 2010, GLG failed to document the basis for +the IPC’s monthly ratification and approval of the EMSA1 Fund’s $425-million Coal Co. mark. + +Inflated Fee Revenue to GLG and GPI + +23. The EMSA1 Fund’s summary of terms provided that the EMSA1 Fund would +charge a 2% annual management fee and a 0.5% annual administration fee – identical to fee +percentages charged by the EM Fund. Both the management fee and the administration fee were +calculated on the basis of the EMSA1 Fund’s monthly net asset value (“NAV”). Contractually, the +EMSA1 Fund remitted the 2% management fee to GLG and remitted 2/3 of the 0.5% +administration fee, i.e., 0.33%, to a GPI subsidiary. Accordingly, a total of 2.33% in annual fees +was remitted to GPI, calculated on the full amount of the Coal Co. position’s valuation, which was +by far the largest component of the EMSA1 Fund’s NAV. + + 24. As a result of GLG’s deficient valuation policies and procedures, the monthly +valuation for the EMSA1 Fund’s Coal Co. position was overstated by approximately $160 million +during the period from November 1, 2008 through November 30, 2010. This led to inflated or +excess management and administration fees remitted to GLG and/or GPI totaling approximately +$7,766,667. + +Misstatements in GPI’s Filings + + 25. GPI’s SEC filings contained a number of misstatements related to AUM which +resulted from the $160-million overvaluation of the Coal Co. position from November 2008 +through November 2010. AUM was a key metric for GPI because the issuer’s revenues were +largely a function of various types of fee revenues calculated as percentages of AUM. +Information regarding AUM was thus necessary to an understanding of the results of GPI’s +operations. Beginning in the second quarter of 2009, GPI’s filings frequently highlighted GLG’s +“long-short fund” and “alternative strategy” AUM, which included the EMSA1 Fund’s AUM, as +preferential to its “long-only fund” AUM because the former categories typically had a higher +fee structure. Some of GPI’s misstatements were made in quarterly or annual reports, while +others appeared in press releases and/or investor presentations filed as exhibits to Forms 8-K. + + 26. In all, at least 14 of GPI’s filings, filed with the Commission from March 2009 +through August 2010, contained the following types of misstatements: (1) overstatements of +AUM of the EMSA1 Fund; (2) overstatements of combined AUM of GLG special assets funds; + 8 +and (3) overstatements of AUM of GLG “mixed asset” long-short funds as a percentage of +alternative-strategy AUM. These overstatements ranged in magnitude from 8.9% to 36.4%. For +example, GLG’s $160 million overvaluation of the EMSA1 Fund’s Coal Co. position resulted in +GPI’s overstatement of the EMSA1 Fund’s AUM by about 33.3% in its 2008 annual report and +by 36.4% in its 2009 annual report. In addition, the combined AUM of GLG special assets funds +was overstated by between 14% and 18% from the fourth quarter of 2008 through the second +quarter of 2010. + +Violations of the Exchange Act + + 27. Section 13(b)(2)(B) of the Exchange Act requires public companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with generally accepted accounting principles and to maintain accountability for assets. Section +13(b)(2)(A) of the Exchange Act requires public companies to make and keep books, records and +accounts which, in reasonable detail, accurately and fairly reflect the company’s transactions and +dispositions of its assets. No showing of scienter is required to establish a violation of Sections +13(b)(2)(A) and (B). SEC v. World-Wide Coin Investments, Ltd., 567 F.Supp. 724, 751 (N.D. Ga. +1983). + + 28. As set forth above, GPI and its wholly-owned subsidiary, GLG, failed to design and +maintain adequate internal controls related to the valuation of fund assets, on the basis of which fee +revenues were calculated and recorded. GLG had inadequate policies and procedures to ensure +that information relevant to valuations was provided to the IPC when it became available, and, in +various instances, GLG failed to provide necessary information to the IPC due to confusion within +GLG regarding whose role it was to elevate such information to the IPC. GLG had no policies or +procedures to ensure that the IPC had sufficient time to review valuation recommendations, and, in +various instances, GLG failed to provide the IPC with sufficient time to review such +recommendations. In addition, GLG generally kept no record of the IPC’s basis for monthly +decisions to keep individual Level 3 fund asset valuations unchanged. As a result of these failures, +the books and records of GPI and GLG were inaccurate because the EMSA1 Fund’s Coal Co. +position was overvalued from November 2008 through November 2010. GPI thus violated +Sections 13(b)(2)(B) and 13(b)(2)(A) of the Exchange Act, and GLG was a cause of these +violations. + + 29. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11 and 13a-13 thereunder +require issuers of registered securities to file factually accurate annual, quarterly, and current +reports with the SEC. No showing of scienter is required to establish a violation of Section 13(a). +SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978), cert denied, 440 U.S. 913 (1979). +Exchange Act Rule 12b-20 requires the addition to such reports of further material information as +necessary to make the required report statements not misleading. + + 30. As set forth above, GPI filed numerous reports with the SEC covering the period +2008 through June 30, 2010 that contained inaccuracies related to overstated AUM, which were + 9 +material. GPI thus violated the aforementioned reporting provisions, and GLG, through its +valuation-related controls failures, was a cause of these violations. + +Undertakings + + GPI and GLG have undertaken to: + + 31. Retain, within 30 days from the date of entry of the Order, the services of an +Independent Consultant, who is not unacceptable to the Commission’s staff. Respondents shall +require the Independent Consultant to perform all of the services and tasks described below. +Respondents shall exclusively bear all costs, including compensation and expenses, associated +with the retention and performance of the Independent Consultant. + + 32. Respondents shall require the Independent Consultant to conduct a +comprehensive review and prepare a written report (“Initial Report”) regarding GLG’s policies, +procedures and practices for the valuation of Level 3 assets. Respondents shall require the +Independent Consultant to issue and deliver to GLG and the Commission’s staff the Initial +Report within 180 days from the date of entry of the Order. The Initial Report must include a +description of the review performed, the conclusions reached, and the Independent Consultant’s +recommendations as to how GLG should improve, modify or supplement its policies, procedures +and practices for the valuation of Level 3 assets. + 33. GLG shall adopt all recommendations in the Initial Report, provided, however, +that within 30 days after the Independent Consultant delivers the Initial Report, GLG shall in +writing advise the Independent Consultant and the Commission’s staff of any recommendations +that it considers unduly burdensome, impractical or costly. GLG need not adopt such +recommendations at that time but shall propose in writing an alternative policy or procedure +designed to achieve the same objective or purpose. As to any recommendations on which GLG +and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an +agreement within 30 days after GLG delivers the written advice. In the event that GLG and the +Independent Consultant are unable to agree on an alternative proposal, GLG shall abide by the +determination of the Independent Consultant. + 34. GLG shall, within three months after the issuance of the Independent Consultant’s +Initial Report, 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 Lisa W. Deitch, Assistant Director, with a copy to the Office of Chief Counsel of +the Enforcement Division. + 35. Respondents shall, one year after GLG’s implementation of the recommendations, +require the Independent Consultant to review and test GLG’s policies, procedures and practices +for the valuation of Level 3 assets and deliver to GLG and the Commission’s staff a final written +report (“Final Report”) analyzing GLG’s adoption, implementation, maintenance and + 10 +enforcement of the policies, procedures and practices contained in the Initial Report and the +effectiveness of those policies, procedures, and practices during the prior year. Respondents +shall require the Independent Consultant to issue and deliver to GLG and the Commission’s staff +the Final Report within 90 days from the date of the first-year implementation anniversary. The +Final Report must include a description of the review and testing performed, the conclusions +reached, and any additional recommendations by the Independent Consultant as to how GLG +should further improve, modify or supplement its policies, procedures and practices for the +valuation of Level 3 assets. + + 36. GLG shall adopt all additional recommendations in the Final Report, provided, +however, that within 30 days after the Independent Consultant delivers the Final Report, GLG +shall in writing advise the Independent Consultant and the Commission’s staff of any +recommendations that it considers unduly burdensome, impractical or costly. GLG need not +adopt such additional recommendations at that time but shall propose in writing an alternative +policy or procedure designed to achieve the same objective or purpose. As to any +recommendations on which GLG and the Independent Consultant do not agree, such parties shall +attempt in good faith to reach an agreement within 30 days after GLG delivers the written +advice. In the event that GLG and the Independent Consultant are unable to agree on an +alternative proposal, GLG shall abide by the determination of the Independent Consultant. + + 37. GLG shall, within three months after the issuance of the Independent Consultant’s +Final Report, certify, in writing, adoption of the Independent Consultant’s additional +recommendations. The certification shall identify the recommendations, 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 Lisa W. Deitch, Assistant Director, with a copy to the +Office of Chief Counsel of the Enforcement Division. + + 38. Respondents: (i) shall not have the authority to terminate the Independent +Consultant, without the prior written approval of the Commission’s staff; (ii) shall compensate +the Independent Consultant, and persons engaged to assist the Independent Consultant, for +services rendered pursuant to the Order at their reasonable and customary rates; and (iii) shall not +be in and shall not have an attorney-client relationship with the Independent Consultant and shall +not seek to invoke the attorney-client or any other doctrine or privilege to prevent the +Independent Consultant from transmitting any information, reports or documents to the +Commission or the Commission’s staff. + + 39. Respondents 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 Respondents, or any of their +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 + 11 +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Commission’s staff, enter into any employment, consultant, attorney- +client, auditing or other professional relationship with Respondents, or any of their present or +former affiliates, directors, officers, employees, or agents acting in their capacity as such for the +period of the engagement and for a period of two years after the engagement. + +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 that: + + A. Pursuant to Section 21C of the Exchange Act, Respondents GPI and GLG cease and +desist from committing or causing any violations and any future violations of Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder. + + B. Respondents GPI and GLG shall comply with the undertakings enumerated in +Section III above. + + C. Respondents GPI and GLG shall, within 14 days of the entry of this Order, pay +disgorgement of $7,766,667, representing their management and administrative fee overcharges for +the period November 1, 2008 through November 30, 2010, and prejudgment interest of $437,679, +to the Securities and Exchange Commission. If timely payment is not made, additional interest +shall accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the following +ways: + +(1) Respondents may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying GPI +and GLG as Respondents in these proceedings, and the file number of these proceedings; a copy of + 12 +the cover letter and check or money order must be sent to Antonia Chion, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + D. Within 14 days of the entry of this Order, Respondent GPI shall pay a civil money +penalty in the amount of $375,000 to the Securities and Exchange Commission, and Respondent +GLG shall pay a civil money penalty in the amount of $375,000 to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +3717. Payment must be made in one of the following ways: + +(1) 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 GPI +and GLG as Respondents in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Antonia Chion, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + 13 + E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the disgorgement, interest and/or penalties referenced in paragraphs C-D above. +Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil +money penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondents’ payment of a civil penalty in this action ("Penalty Offset"). If +the court in any Related Investor Action grants such a Penalty Offset, Respondents agree that they +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission's counsel in this action and pay the amount of the Penalty Offset to the United States +Treasury or to a Fair Fund, as the Commission directs. 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. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3517.txt b/raw/aaer/2013/AAER-3517.txt new file mode 100644 index 0000000000000000000000000000000000000000..90f2b813812320de6a90be4ad5978353be38a831 --- /dev/null +++ b/raw/aaer/2013/AAER-3517.txt @@ -0,0 +1,1372 @@ + + + + + + + + + + + + + + + + SEC.gov | Michael H. Taber, CPA + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/514976","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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Taber, CPA + + + + + + + + + + + + Michael H. Taber, CPA + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22887 / December 12, 2013 + Accounting and Auditing Enforcement Release No. 3517 / December 12, 2013 + Securities and Exchange Commission v. Michael H. Taber, CPA , Civil Action No. 13-mc-0282 (S.D.N.Y. filed Aug. 8, 2013) + + SEC Awarded $400,000 in Disgorgement from Certified Public Accountant for His Violations of Commission Suspension Order + + + The Securities and Exchange Commission today announced a court ruling that requires certified public accountant Michael H. Taber to pay the government $400,000 in compensation he received while suspended from appearing or practicing before the Commission as an accountant. + + According to the SEC's application filed in U.S. District Court for the Southern District of New York, Taber violated a 2004 Commission Order suspending him . The 2004 Order was based on a fraud injunction obtained against Taber, in SEC v. Del Global Techs. Corp., 04 CV 4092 (S.D.N.Y. filed June 1, 2004), for his participation in a fraudulent scheme as the chief financial officer of a New York-based company. While suspended, Taber repeatedly drafted, compiled, and edited information and data that was incorporated into requisite periodic reports that public companies filed with the SEC. + + On October 3, 2013, the district court entered an order enforcing compliance by Taber with the 2004 Commission Order and directing the parties to submit their positions regarding disgorgement. On December 5, 2013, U.S. District Judge Katherine B. Forrest entered an order awarding the Commission $400,000 in disgorgement from Taber, who is licensed as a certified public accountant in New York and is currently a Florida resident. + + See Litigation Release No. 22773 / August 8, 2013. + + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Super 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/2013/AAER-3518.txt b/raw/aaer/2013/AAER-3518.txt new file mode 100644 index 0000000000000000000000000000000000000000..80baea8a128a6b23eaa60e11eb1d2436c6132490 --- /dev/null +++ b/raw/aaer/2013/AAER-3518.txt @@ -0,0 +1,618 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71070 / December 12, 2013 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 3738 / December 12, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3518 / December 12, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15645 + + +In the Matter of + +Rodney A. Smith, +Michael Santicchia, CPA, and + Stephen D. Cheaney, CPA, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, SECTION 4C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Rodney A. +Smith, Michael Santicchia, CPA, and Stephen D. Cheaney, CPA (collectively “Respondents”) +pursuant to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), Section 4C1 +of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) +of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege of +appearing or practicing before the Commission in any way, if that person is found . . (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and regulations +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it . . . to +any person who is found . . . to have engaged in unethical or improper professional conduct. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 203(k) of the Investment +Advisers Act of 1940, Section 4C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that + +Summary + +1. This matter involves misconduct by Respondents in completing surprise exams +pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody +Rule”).4 Freedom One Investment Advisors, Inc. (“Freedom One”), a formerly registered +investment adviser, had custody of client assets held in two omnibus accounts and was required +by the Custody Rule to have an independent public accountant conduct annual surprise exams to +verify those assets. For 2006 and 2008, Freedom One engaged UHY LLP (“Accounting Firm”) +to perform the surprise exams. By failing to complete the surprise exams (i.e. conduct fieldwork, +prepare and issue a surprise exam report, and file Forms ADV-E), Respondents, three accountants +at Accounting Firm caused Freedom One to violate the Custody Rule. In addition, Smith willfully +aided and abetted Freedom One’s 2006 violations of the Custody Rule, and Santicchia and +Cheaney engaged in improper professional conduct within the meaning of Section 4C of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + + +Rule 102(e)(1)(iii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it . . . to +any person who is found…to have willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +4 On December 31, 2009, the Commission revised Rule 206(4)-2. Freedom One’s conduct for 2006 through 2008 +was governed by the Custody Rule in effect before the December 31, 2009 amendments (the “Prior Custody Rule”). +See Custody of Funds or Securities of Clients by Investment Advisers, Release No. IA-2176 (Sept. 25, 2003). + + +3 +Respondents + +2. Rodney A. Smith, age 63, of Ann Arbor, Michigan, was an Accounting Firm +principal from 2005 through 2008. He was a member of the engagement teams for both of +Accounting Firm’s surprise exams. Accounting Firm terminated his employment on November +21, 2008. Smith received his Bachelor of Science in Accounting and Corporate Finance from +Penn State University. He is not and has never been a CPA. + +3. Michael Santicchia, age 53, of Dearborn, Michigan, has been a partner with +Accounting Firm or its predecessor since approximately 1994. While holding the position of +Accounting Firm’s Michigan Regional Attest Leader, he was a member of the engagement team, +and the only partner thereon, for both of Accounting Firm’s surprise exams. Santicchia has been +a licensed Certified Public Accountant (“CPA”) in Michigan since 1984, Pennsylvania since +1999, Oklahoma and New York since 2000, Indiana since 2002, and Massachusetts since 2010. + +4. Stephen D. Cheaney, age 58, of Northville, Michigan, has been employed by +Accounting Firm, or its predecessor, since 1983, and has been an Accounting Firm principal for +approximately the last 15 years. After Smith left Accounting Firm, Santicchia assigned Cheaney +to replace Smith on the 2008 surprise exam. Cheaney has been a licensed CPA in Michigan +since 1985. + +Other Relevant Entities + +5. Freedom One Investment Advisors, Inc., was a privately-held Michigan +corporation headquartered in Clarkston, Michigan and registered with the Commission as an +investment adviser from December 1995 until April 2, 2013, when it filed a Form ADV-W to +withdraw its registration with the Commission. + +6. Freedom One Retirement Services, LLC (“FORS”), is a Michigan and North +Carolina limited liability company headquartered in Clarkston, Michigan. FORS provided +retirement plan services, including record keeping services, to Freedom One. FORS was an +affiliate of Freedom One. + +7. Freedom One Financial Group, LLC (“FOFG”) was the 66% owner of +Freedom One and FORS until December 31, 2012, when it was acquired by a dually-registered +broker-dealer and investment adviser. + +Background + +8. From 2006 through 2008, Freedom One offered four different types of +discretionary and non-discretionary investment management services, including to individuals +with IRA accounts (“IRA Accounts”); and to individuals with personal taxable accounts +(“Managed Accounts”). During the relevant period, Freedom One managed approximately $625 +million in assets, approximately $69 million of which were held in the IRA Accounts and +Managed Accounts. + +4 + +9. The Custody Rule requires registered investment advisers with custody of client +funds or securities to implement certain controls designed to protect those client assets from loss, +misappropriation, misuse, or the adviser’s insolvency. Before the December 31, 2009 amendment +of the Custody Rule, Rule 206(4)-2(a)(3) required these advisers to have a reasonable basis for +believing that a “qualified custodian,” such as a bank or broker-dealer, was sending quarterly +account statements to each of the clients for which they maintained funds or securities, or to send +the quarterly account statements themselves and obtain an annual surprise examination by an +independent public accountant to verify all of the client funds and securities. + +10. From 2006 through 2008, Freedom One held funds and securities for the IRA +Accounts and Managed Accounts in an omnibus account at a broker-dealer registered with the +Commission (“Custodian 1”). A third-party custodian and trustee (“Custodian 2”) instructed +Custodian 1 as to which trades to execute, based on instructions it received from Freedom One. +Custodian 2 maintained two separate omnibus accounts – one for the IRA Accounts and one for +the Managed Accounts. + +11. From 2006 through 2008, FORS maintained the records for Custodian 2’s omnibus +accounts on a participant level (i.e. keeping track of how the assets in the IRA and Managed +Accounts broke down by client) and directed Custodian 2 to make distributions. Since FORS’ +responsibilities gave it the authority to obtain possession of clients’ funds and securities held in +Custodian 2’s omnibus accounts, and FORS was an affiliate of Freedom One, Freedom One was +deemed to have custody of the assets contained in Custodian 2’s omnibus accounts. + +12. From 2006 through 2008, because FORS was not a qualified custodian and it sent +quarterly account statements to Freedom One’s clients with IRA Accounts and Managed +Accounts, the Prior Custody Rule required Freedom One to have a surprise exam for each of +those years. + +FOFG Engaged Accounting Firm to Complete +Freedom One’s 2006 and 2008 Surprise Exams + +13. FOFG engaged Accounting Firm to complete Freedom One’s surprise exams for +2006 and 2008. FOFG executed two engagement letters with Accounting Firm, dated December +18, 2006 and November 5, 2007. According to each engagement letter, Accounting Firm was to +perform an “annual surprise audit” of a “previously tested product that [Freedom One has] +developed [i.e. the IRA Accounts]...” Neither of the engagement letters stated what year the +surprise exams were for. + +14. Although neither of the letters referred to the Custody Rule itself, they each provide +surprise exam guidance directly from it, stating: + +“An independent public accountant verifies all of those funds and securities by actual +examination at least once during each calendar year…and files a certificate on Form ADV- +E (17 CFR 279.8) with the Commission within 30 days after the completion of the + +5 +examination, stating that it has examined the funds and securities and describing the nature +and extent of the examination.” + +15. Both engagement letters also reference a November 2006 email from Freedom +One’s chief compliance officer (“CCO”), to Smith, which states “The following is some of the +regulatory language spelling our [sic] the requirement…§ 275.206(4)-2 Custody of funds or +securities of clients by investment advisers.” The email also includes the entire text of the +Prior Custody Rule. Smith drafted both engagement letters and Santicchia reviewed them. + +Respondents Conducted Some Field Work for +the 2006 and 2008 Surprise Exams + +16. During 2006 and 2007, the Accounting Firm engagement team conducted some +field work for the first surprise exam, with a surprise exam date of December 31, 2006 (the “2006 +exam”). Similarly, during 2008, the engagement team conducted some field work for the second +surprise exam, with a surprise exam date of August 31, 2008 (the “2008 exam”). + +17. Smith was a member of both surprise exam engagement teams until he left +Accounting Firm at the end of November 2008. He was responsible for staffing the +engagements, planning the exam procedures, reviewing the workpapers, preparing the report to +be issued (the “surprise exam report”), and preparing the Form ADV-E. When Smith left +Accounting Firm, a manager at Accounting Firm who performed some of the 2006 exam +fieldwork and all of the 2008 exam fieldwork (“Accounting Firm Manager”) had already started +performing the 2008 exam procedures, but his 2008 surprise exam work had not yet been +reviewed. + +18. Santicchia was a member of, and sole partner on, both surprise exam engagement +teams. Santicchia was responsible for assigning Smith and Cheaney to the engagements, +participating in some planning procedures, reviewing the workpapers, issuing the surprise exam +report, and ensuring that the Form ADV-E was filed. Santicchia never performed this work on +either exam and no report was ever issued. + +19. On or about December 5, 2008, after Smith left Accounting Firm, Santicchia +assigned Cheaney, who like Smith was a principal but not a partner, to replace Smith on the 2008 +exam, and asked him to review Accounting Firm Manager’s work on that exam. + +20. On December 8, 2008, Cheaney reviewed the workpapers, and prepared +comments and questions for Accounting Firm Manager, which he memorialized in Accounting +Firm’s electronic workpaper filing system (the “Notes”). Cheaney commented in the Notes that +“some [exam] steps [had] not [been] completed.” In the Notes, he also questioned “where is +[client] independence [affirmation] and engagement continuance forms?” + +21. In the Notes, he also questioned whether “the work that is done accomplish[es] +the audit objective that all of the assets reported are there on an unannounced day.” Finally, +Cheaney commented that he “briefly looked at the 2006 [workpaper] file,” and found that “[i]t + +6 +appears that the job was not completed, no evidence that there is any report even drafted and +never filed….the [workpapers] were not even reviewed. my [sic] guess is that nothing was ever +filed with SEC.” + +22. Cheaney then told Santicchia that he had completed his review and that the 2008 +exam was incomplete. Santicchia also reviewed the Notes, and therefore knew Cheaney’s +conclusions regarding the 2006 exam. + +23. Santicchia never followed up with Cheaney and neither Santicchia nor Cheaney +followed up with Accounting Firm Manager to determine whether he addressed the issues +identified in the Notes, or took any other action to address the incomplete exams. + +24. At the time, Accounting Firm did not tell Freedom One that it had not completed +the exams. At the end of March 2009, Accounting Firm Manager left Accounting Firm. By the +end of July 2010, Freedom One learned that no report had ever been issued for the 2008 exam. +By mid-April 2011, Freedom One learned that Accounting Firm did not complete either exam, +did not issue a report for either exam, and did not file the Forms ADV-E. On May 5, 2011, +Accounting Firm refunded the fees Freedom One paid for both exams, totaling $19,000. + +Respondents Failed to Complete the 2006 and 2008 +Surprise Exams in Accordance with Applicable Standards + +25. Respondents failed to complete the 2006 and 2008 surprise exams. That is, they +failed to conduct fieldwork, prepare and issue surprise exam reports, and file Forms ADV-E with +the Commission. Alternatively, they failed to withdraw from the engagements and notify the client +on a timely basis. + +Respondents Failed to Conduct Fieldwork + +26. Smith (for the 2006 exam), Santicchia (for both exams) and Cheaney (for the 2008 +exam) failed to ensure that the Accounting Firm engagement team conducted fieldwork. + +27. An accountant should conduct the surprise exam, or withdraw from the +engagement, in accordance with U.S. Generally Accepted Auditing or Attestation Standards as +established by the AICPA (“AICPA Attest Standards”), which are described in AT Section 101, +“Attest Engagements.” See Custody of Funds or Securities of Clients by Investment Advisers, +Release No. IA-2176 (Sept. 25, 2003). + +28. On May 26, 1966, the Commission issued Accounting Series Release No. 1035, +which described the nature of the exam required by Rule 206(4)-2(a) of the Advisers Act.6 + +5 ASR No. 103 has been incorporated into Financial Reporting Codification Section 404.01.b. + +6 The Nature of the Examination and Certificate Required by Paragraph (a)(5) of Rule 206(4)-2 Under the +Investment Advisers Act of 1940, Accounting Series Release No. 103, Investment Advisers Act Release No. 201 +(May 26, 1966) (“ASR No. 103”). + +7 +According to ASR No. 103, to conduct an appropriate exam, an accountant should, among other +things, conduct the following procedures: + + Make a physical examination of securities and obtain confirmation as appropriate; + Obtain confirmation of funds on deposit in banks; and + Reconcile the physical count and confirmations to the books and records. + +ASR No. 103 further states that these books and records should be verified by examination of the +security records and transactions since the last examination and by obtaining written confirmations +from clients of the funds and securities in the clients’ accounts as of the date of the physical +examination. Also, if clients’ accounts have been closed or securities or funds of such clients have +been returned since the last examination, the accountant should confirm these on a test basis. + +29. All of these procedures were applicable to Freedom One’s 2006 and 2008 surprise +exams, however, the Accounting Firm engagement team did not obtain confirmation of securities +or funds held by Custodians 1 and 2 and did not send any confirmation requests to Freedom +One’s clients. Therefore, they also did not reconcile the confirmations to the books and records. + +30. For the 2006 exam, the engagement team tested reconciliations, but the +workpapers were not included in the Accounting Firm’s official file. Also, the testing was not +performed as of the surprise exam date – it was as of March 31, 2007, rather than December 31, +2006. Finally, the reconciliations compared Freedom One’s books to the Custodian 2 IRA +Account, but not to the Custodian 2 Managed Account and to the Custodian 1 Account. + +31. For the 2008 exam, the Accounting Firm engagement team selected August 31, +2008 as the examination date. The engagement team tested reconciliations, but they were not +performed as of the surprise exam date – they were as of August 18, 2008. Also, they only +compared Freedom One’s books to the Custodian 2 IRA Account, but not to the Custodian 2 +Managed Account and to the Custodian 1 Account. + +Respondents Failed to Issue Surprise Exam Reports or Withdraw from the Engagements + +32. The Respondents failed to ensure that reports were issued for the surprise exams. +Alternatively, they failed to withdraw from the engagements and notify the client on a timely basis. + +33. The AICPA Attest Standards require that a “practitioner who accepts an attest +engagement should issue a report on the subject matter or the assertion or withdraw from the attest +engagement.” AT §§101.64 + +Respondents Failed to File Forms ADV-E + +34. The Respondents failed to ensure that Forms ADV-E were filed for the surprise +exams. + + +8 +35. Under the Prior Custody Rule, an accountant must transmit to the Commission, +within 30 days of completing the surprise exam, a Form ADV-E along with a certificate stating +that it has examined the funds and securities and describing the nature and extent of the exam (the +“Exam Certificate”). + +36. For the 2006 exam, Smith exchanged draft Forms ADV-E with Freedom One’s +CCO at the time. On March 30, 2007, Smith emailed Freedom One’s CCO a blank Form ADV- +E and stated “Please see the attached form which you must fill out for us to send.” Then, on +April 10, Freedom One’s CCO emailed Smith a completed Form ADV-E that had an +examination completed date of February 28, 2007. Finally, on July 12, Freedom One’s CCO +emailed Smith attaching an updated Form ADV-E with an examination completed date of June +30, 2007. No drafts of Form ADV-E were contained in the workpapers. + +37. No Form ADV-E or Exam Certificate was filed with the Commission for either +exam. + +Respondents Santicchia and Cheaney Failed to Meet the AICPA Standards +Requiring “Due Professional Care” + +38. AT Section 101 requires a practitioner to “exercise due professional care in the +planning and performance of the engagement and the preparation of the report.” AT §§101.39, +101.40 and 101.41. + +39. An accountant should also perform certain procedures during the course of the +surprise exam in order to comply with the AICPA Attest Standards, as described in AT Section +601, “Compliance Attestation” (“AICPA Compliance Attest Procedures”). The AICPA +Compliance Attest Procedures state that a practitioner should exercise (a) due care in planning, +performing, and evaluating the results of his or her examination procedures…” AT §601.38. + +40. Santicchia and Cheaney failed to exercise due professional care in accordance with +AICPA Attest Standards AT §§101.39, 101.40 and 101.41, and AICPA Compliance Attest +Procedure AT §§601 in performing the surprise exams. First, they did not have adequate +knowledge or understanding of the Custody Rule and its requirements. They had never before +conducted a surprise exam, and they did not consult with anyone from Accounting Firm that had +conducted a surprise exam. Santicchia and Cheaney did not have any prior experience or +training regarding the Custody Rule or surprise exams, and they did not determine or consider +the requirements for the exams. In addition, Santicchia did not understand that the surprise exam +was being conducted pursuant to the Custody Rule. The only reference to the Custody Rule +requirements in the official workpapers is in the engagement letters, which include an excerpt +from the rule. + +41. Second, Santicchia and Cheaney did not follow Accounting Firm’s quality control +practices and procedures. As to client acceptance and continuance, Santicchia did not evaluate +whether the Accounting Firm engagement team had sufficient technical skills, knowledge of the +industry, and personnel to perform the engagements, and document the client acceptance + +9 +evaluation procedures. Santicchia also failed to obtain the required sign-offs to accept Freedom +One as a client – he failed to consult with the Michigan SEC “Leader” in his office and, because +Freedom One was an SEC registered investment adviser, he should have consulted with +Accounting Firm’s Office of the Managing Partner and the Director of Quality Control. + +42. Santicchia did not follow Accounting Firm’s planning procedures, including +reviewing background information on Freedom One, holding planning meetings, documenting +the plans and approving the plans. There are no completed planning forms or any workpapers in +the official file that detail the scope and objective of the exam. + +43. Santicchia and Cheaney did not follow Accounting Firm’s supervisory +procedures, including documenting the supervisory personnel responsible for reviewing the work +performed, and ensuring that the surprise exams were supervised and reviewed by partners who +had appropriate knowledge and expertise for the engagement. They also did not consult with any +Accounting Firm partners who had experience with, or specialized in, SEC matters or the SEC +rules that apply to investment advisers. + +44. Third, Santicchia (for both exams) and Cheaney (for the 2008 exam) failed to +ensure that the surprise exam engagements were completed. That is, they failed to ensure that +fieldwork was conducted. Also, Cheaney failed to prepare a surprise exam report, and Santicchia +failed to issue surprise exam reports. In addition, Cheaney failed to prepare a Form ADV-E, and +Santicchia failed to file Forms ADV-E. Alternatively, they failed to withdraw from the +engagements and notify the client on a timely basis. + +Respondents Misconduct Under Section 4C of the Exchange Act and Rule 102(e) + +45. Rule 102(e) of the Commission’s Rules of Practice, which has been codified into +Section 4C of the Exchange Act, allows the Commission to censure a person, or deny the person, +either permanently or temporarily, from appearing or practicing before the Commission if the +Commission finds the person to be lacking in character or integrity or to have engaged in unethical +or improper professional conduct or to have willfully aided and abetted the violation of any +provision of the federal securities laws or the rules and regulations thereunder. Section 4C(a)(2) +and (3) of the Exchange Act and Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. + +46. Rule 102(e)(1)(iv) and Section 4C(b) defines “improper professional conduct” as +including: (A) intentional or knowing conduct, including reckless conduct, that results in a +violation of applicable professional standards; or (B) negligent conduct, including 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.7 + + + +7 Rule 102(e)(1)(iv) describes improper professional conduct with respect to persons licensed as accountants; +Section 4C describes improper professional conduct with respect to any registered public accounting firm or +associated person. + +10 +Respondent Smith Willfully Aided and Abetted Freedom One’s 2006 Custody Rule Violation + +47. Smith willfully aided and abetted Freedom One’s 2006 violation of Section 206(4) +of the Advisers Act and Rule 206(4)-2 thereunder. + +48. Smith was part of the 2006 surprise exam engagement team. He drafted the +engagement letter for that exam and therefore knew that Accounting Firm was engaged to conduct +an annual surprise exam, to verify funds and securities by actual examination, and to file a +certificate on Form ADV-E with the Commission within 30 days after the completion of the +examination. + +49. Smith did not have adequate knowledge or understanding of the Custody Rule and +its requirements in order to complete the engagement. He had never before conducted a surprise +exam, and did not consult with anyone from Accounting Firm that had conducted a surprise +exam. Smith did not have any prior experience or training regarding the Custody Rule or +surprise exams, and he did not determine or consider the requirements for the exams. The only +reference to the Custody Rule requirements in the official workpapers is in the engagement +letters, which include an excerpt from the rule. + +50. For the 2006 surprise exam, he exchanged draft Forms ADV-E before fieldwork +was conducted. Before leaving Accounting Firm in November 2008, he took no action to ensure +that the 2006 surprise exam fieldwork was conducted and that the surprise exam report was +prepared, which meant that a Form ADV-E could not be issued. Alternatively, he failed to +withdraw from the engagement and notify the client on a timely basis. + +Respondents Santicchia and Cheaney Engaged in Improper Professional Conduct + +51. Santicchia (for both exams) and Cheaney (for the 2008 exam) engaged in improper +professional conduct. First, they failed to complete the surprise exams. That is, they failed to +ensure that fieldwork was conducted. Also, Cheaney failed to prepare a surprise exam report, and +Santicchia failed to issue reports. In addition, Cheaney failed to prepare a Form ADV-E, and +Santicchia failed to file Forms ADV-E. Alternatively, they failed to withdraw from the +engagements and notify the client on a timely basis. + +52. Santicchia and Cheaney also failed to exercise due professional care in accordance +with AICPA Attest Standards AT §§101.39, 101.40, and 101.41, and AICPA Compliance Attest +Procedure AT §§601. They: (1) did not have adequate knowledge or understanding of the Prior +Custody Rule and its requirements; (2) did not follow Accounting Firm’s quality control +practices and procedures; and (3) failed to ensure that the surprise exams were completed or +withdraw from the engagements and notify the client on a timely basis. + +Violations + +53. As a result of the conduct described above, Smith (for the 2006 and 2008 surprise +exams), Santicchia (for the 2006 and 2008 surprise exams), and Cheaney (for the 2008 surprise + +11 +exam) caused Freedom One’s violations of Section 206(4) of the Advisers Act and Rule 206(4)-2 +promulgated thereunder. + +54. As a result of the conduct described above, Smith willfully aided and abetted +Freedom One’s 2006 violation of Section 206(4) of the Advisers Act and Rule 206(4)-2 +promulgated thereunder. + +55. As a result of the conduct described above, Santicchia and Cheaney engaged in +improper professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 203(k) of the Advisers Act, Section 4C of the Exchange +Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby ORDERED that: + + A. Respondents Smith, Santicchia and Cheaney cease and desist from committing or +causing any violations and any future violations of Section 206(4) of the Advisers Act and Rule +206(4)-2 promulgated thereunder. + + Smith + +B. Respondent Smith is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After three years from the date of this order, Respondent Smith 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. + + Santicchia + +D. Respondent Santicchia is denied the privilege of appearing or practicing before the +Commission as an accountant. + +E. After three years from the date of this order, Respondent Santicchia may +request that the Commission consider his reinstatement by submitting an application +(attention: Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent Santicchia’s work in his practice + +12 +before the Commission will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent Santicchia, 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 Santicchia, or the registered public accounting firm +with which he is associated, has been inspected by the Board and that inspection did not identify +any criticisms of or potential defects in his or the firm’s quality control system that would +indicate that he will not receive appropriate supervision; + +(c) Respondent Santicchia 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 Santicchia 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 Respondent Santicchia 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 Santicchia’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + +Cheaney + +G. Respondent Cheaney is denied the privilege of appearing or practicing before the +Commission as an accountant. + +H. After two years from the date of this order, Respondent Cheaney 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: + + +13 + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. Such +an application must satisfy the Commission that Respondent Cheaney’s work in his practice +before the Commission will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + + 2. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent Cheaney, 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) Respondent Cheaney, or the registered public accounting firm with +which he is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in his or the firm’s quality control system that would indicate +that he will not receive appropriate supervision; + (c) Respondent Cheaney 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 Cheaney 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 Respondent Cheaney 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 Cheaney’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3519.txt b/raw/aaer/2013/AAER-3519.txt new file mode 100644 index 0000000000000000000000000000000000000000..82fd4b56d35c8f3b243629bb4ef7312d134cb7a6 --- /dev/null +++ b/raw/aaer/2013/AAER-3519.txt @@ -0,0 +1,787 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71117 / December 18, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3519 / December 18, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-15651 + +In the Matter of +James Vincent Poti, 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 ( the “Commission”) deems it appropriate that +public administrative proceedings be, and hereby are, instituted against James Vincent Poti, CPA +(the “Respondent” or “ Poti”) pursuant to Section 4C 1 [15 U.S.C. § 78d -3] of the Securities +Exchange Act of 1934 (the “Exchange Act”) and Rule 102(e)(1)(ii)2 of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)(1)(ii)]. +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 behal f of the +Commission, 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 + +1 Section 4C provides, in relevant part, that “[t]he Commission may censure any person, or +deny, temporarily or permanently, to any person the privilege of appearing or practicing +before the Commission in any way, if that person is found to . . . have engaged in . . . +improper professional conduct . . . .” +2 Rule 102(e)(1)(ii) provides, in pertinent part, that “[t]he Commission may . . . deny, +temporarily or permanently, the privilege of appearing or practicing before it . . . to any +person who is found . . . to have engaged in . . . improper professional conduct.” +2 +Rule 102(e) of the Commission’s Rules of Practice, Making Findings , and Imposing Remedial +Sanctions (the “Order”), as set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +A. Summary +1. Poti engaged in improper professional conduct during Witt Mares, PLC’s (“Witt +Mares”) 2008 year-end audit of Commonwealth Bankshares, Inc., the holding company for Bank of +the Commonwealth (collectively, “Commonwealth” or the “Bank”). He did so by failing to subject +Commonwealth’s loan loss estimates – one of the audit areas that Witt Mares identified as higher +risk – to appropriate scrutiny. As engagement partner on the audit since 2006, Poti had ultimate +responsibility for the audit decisions, the audit programs, the review of audit work papers, and the +failures to follow the Public Company Accounting Oversight Board (the “PCAOB”) audit standards +that are the subject of this proceeding.4 +2. Beginning in 2006, Commonwealth – then a small Norfolk, Virginia -based +community bank – embarked on a strategic plan to accumulate assets over $1 billion. It did so by +lending more and more money to construction and development projects in Norfolk, Hampton, +Newport News, Chesapeake, Portsmouth and Virginia Beach, Virginia . At the same time that +Commonwealth underwrote more and more construction and development loans on its quest to +become a billion-dollar bank, those cities began to show signs of distress. During 2008, as a result +of the financial crisis and related real estate market crash, the construction and development projects +funded by Commonwealth began to flounder and Commonwealth experienced a dramatic increase +in the number of its troubled real estate loans. Commonwealth’s classified loans – loans that could +expose Commonwealth to partial or complete loss – had increased over the course of a year from +approximately $8 million to $80 million – a tenfold increase. The dramatic run -up of these so - +called classified loans – a major component of Commonwealth’s loan losses – coincided with a +significant lack of critical information necessary to assess potential losses in its loan portfolio. +Specifically, Commonwealth lacked current appraisals on the collateral securing the loans and +financial information on the guarantors behind the loans. +3. Poti was well aware of Commonwealth’s loan documentation problems and the +effect of these issues on the estimation of loan losses. In fact, since at least 2006, the Witt Mares +audit team, under Poti’s supervision, as well as Commonwealth’s prim ary regulators, had +repeatedly criticized the Bank’s Board of Directors and management that the failure to obtain +and update critical information in Commonwealth’s loan files posed a concern. During the 2008 +audit, Poti and the other members of the audit team identified the loan loss reserves as presenting + +3 The findings herein are made pursuant to Respondent’s Offer and are not binding on any +other person or entity in this or any other proceeding. +4 All citations to PCAOB auditing standards refer to the standards in effect at the time of the +conduct discussed herein. +3 +significant risk of material misstatement and fraud risk. Notwithstanding the audit team’s +identification of the loan loss reserve as a potentially significant problem area, the actual audit work +in this area was inadequate and the resulting audit opinion was not supported by reliable or +persuasive evidence. In fact, based on the audit tests of the troubled loans , the audit team +concluded that, for a significant percentage of the loans reviewed , there was “[i]nadequate +financial information in [the] file to determine if additional reserve is necessary .” Despite this +and other audit-identified issues that are detailed below , Poti authorized the issuance of an +unqualified audit op inion on Commonwealth’s financial statements and internal control over +financial reporting for the year ended December 31, 2008. +4. In sum, Poti failed to obtain sufficient, competent evidential matter to support the +issuance of unqualified audit opinions. He further failed to act with due professional care and to +exercise professional skepticism. These failures, detailed below, resulted in repeated instances +of unreasonable conduct, each resulting in a violation of ap plicable professional standards , that +indicate a lack of competence to practice before the Commission. +B. Respondent +5. James Vincent Poti, CPA, age 63, is a resident of Midlothian, Virginia. Poti has +been an auditor and partner at PBMares , LLP since the firm was formed on January 1, 2013 +through the merger of PBGH LLP and Witt Mares, PLC (“Witt Mares”), and an auditor and +partner at Witt Mares from November 2002 until the merger. Poti was a member of the +Commonwealth audit team from 2006 t hrough September 23, 2011, when federal and state +banking regulators closed Commonwealth’s banking subsidiary, and was the engagement partner +for the 2008 audit. As engagement partner, Poti was responsible for the audit and its performance, +for proper sup ervision of the work of the audit team members, and for compliance with PCAOB +standards. Poti is currently licensed as a CPA in Virginia and has no disciplinary history. +C. Other Relevant Entities +6. Commonwealth Bankshares, Inc. (“Commonwealth” or the “Bank”), formerly a +Virginia corporation, was, during the relevant time period, a holding company for Bank of the +Commonwealth, a Virginia state-chartered commercial bank headquartered in Norfolk, Virginia. +Commonwealth’s common stock was initially registered with the Commission pursuant to Section +12(g) of the Exchange Act and was quoted on the NASDAQ National Market under the stock +symbol “CWBS.” On July 31, 2006, after the NASDAQ became a national exchange, pursuant to +Commission global order, all NASDAQ National Market issuers became Section 12(b) registrants +listed on the new NASDAQ Global Market (“NASDAQ”). On September 23, 2011, the Virginia +State Corporation Commission’s Bureau of Financial Institutions (the “SCC”) and the Federal +Deposit Insurance Corporation (the “FDIC”), which insured the deposits held by the Bank, closed +the Bank and entered into a purchase and assumption agreement with a subsidiary of a privately +held bank holding company to assume the deposits of the Bank . O n November 1 0, 2011, +NASDAQ filed a Form 25 with the Commission, in which it stated that it had delisted +Commonwealth’s common stock from the NASDAQ exchange for failing to satisfy the exchange’s +requirements effective on November 21, 2011 and deregistered it from Section 12(b), effective 90 +days after the filing of the Form 25. After the effective date of NASDAQ’s deregistration of +4 +Commonwealth from Section 12(b), Commonwealth reverted to its prior Section 12(g) +registration. Commonwealth remained an inactive corporate entity until May 31, 2013, when the +SCC terminated Commonwealth’s corporate registration. On July 31, 2013, the Commission +revoked Commonwealth Section 12(g) registration by consent. +7. Witt Mares, PLC (“Witt Mares”) was, during the relevant time period, a public +limited company headquartered in Richmond, Virginia engaged in the business of providing +accounting and auditing services. Witt Mares audited Commonwealth’s financial statements and +internal control over financial reporting for the year ended Dec ember 31, 2008 and issued +unqualified opinions. On January 1, 2013, Witt Mares merged with PBGH LLP to form PBMares, +LLP. +D. Commonwealth’s Troubled Loan Portfolio and the Failure of the Bank +8. Commonwealth was a Norfolk, Virginia -based bank that had historically focused +on commercial banking and residential loans. By 2006, Commonwealth’s assets had grown to +approximately $715 million, of which the Bank’s loan portfolio accounted for $670 million. +9. In July 2006, Commonwealth adopted a strategic plan to reach one billion in assets +by December 31, 2009. As part of this goal, Commonwealth began to make substantially more +construction and development loans than it previously had made . By December 31 , 2006, +Commonwealth’s exposure to such loans climbed to approximately $179 million, or 27%, of gross +loans. Commonwealth’s exposure to commercial and construction and development loans +continued to climb in 2007 and 2008, when its exposure to such loans amounted to approximately +$223 million, or 28%, and $29 5 million, or 29%, of gross loans, respectively. Virtually all of +Commonwealth’s construction and development loans related to properties located in Norfolk and +Virginia Beach, Virginia. +10. Beginning in or about 2006, the Norfolk commercial real estate market began to +show signs of distress. As time progressed, the market trends grew worse. Condominiums and +office space were particularly hit. At the end of 2008, office space and condominium prices were +both down approximately 10% from 2007 nationally. At the end of 2009, the trend had +deteriorated for these two categories of real estate, with office space prices down approximately +23% and condominium prices down approximately 22% nationally. +11. The decline in Norfolk’s commercial real estate market had a direct impact on +Commonwealth’s allowance for loan and lease losses (the “ALLL”) during the relevant period . +The ALLL is an estimate of probable losses that reduces the book value of loans and leases to the +amount that is expected to be collected. The ALLL is a material financial metric for banks, like +Commonwealth, whose principal assets are loans. Inasmuch as the ALLL represents the B ank’s +assessment of probable losses on its loans, increases to the ALLL reflect an assessed deterioration +of its loan portfolio. In addition, any increase in the ALLL (a balance sheet item) is accompanied +by the recording of a provision for loan losses (an income statement item), thereby impacting a +company’s reported income or losses. +5 +12. Commonwealth’s ALLL principally had two components – smaller, homogeneous +loans that were pooled and accorded generalized treatment under the Financial Accounting +Standards Board’s (“FASB”) Statement of Financial Accounting Standards5 No. 5 (“FAS 5”) and +larger and non -homogeneous loans – typically development and construction loans – that were +individually analyzed under Statement of Financial Accounting Standards No. 114 (“FAS 114”). +Throughout 2008, Commonwealth experienced a dra matic rise in high -risk problem loans that +were deemed “impaired” pursuant to FAS 114, meaning it was probable the Bank would not +recover all amounts contractually due. In fact, the portion of Commonwealth’s ALLL that was +attributed to FAS 114 impaired lo ans grew from approximately $ 3 million as of December 31, +2006 to more than $21 million as of December 31, 2008. +13. A key consideration in assessing the amount of ALLL required for impaired loans +is the “fair value” of the collateral. Although GAAP does not specify the precise manner in which +fair value is to be determined, fair value is measured from the perspective of factors considered by +market participants. In commercial real estate, a current appraisal provides persuasive evidence of +current market conditions on the appraised value of collateral.6 Commonwealth’s Credit Policy +Manual provided that a written appraisal was the only way to determine the fair value of collateral +securing collateral-dependent loans. Notwithstanding these considerations and Commonwealth’s +own policies, Witt Mares and Commonwealth’s banking regulators found that the Bank lacked +current appraisals for a significant percentage of collateral-dependent impaired loans. +14. Current financial in formation for borrowers and guarantors also is critical for +evaluating the condition of a loan. Guarantor financial information is particularly important for +impaired loans where the fair value of the collateral securing the loan was less than the unpaid +principal balance on the loan because, in the event the borrower defaults and the fair value of the +collateral is not enough to satisfy the loan’s unpaid principal balance, the bank can seek to satisfy +the remaining balance from the guarantor. The absence of current and complete guarantor +financial information makes it difficult for the bank to assess whether the guarantor is in a position +to make the bank whole if the collateral is not enough to satisfy the loan. Recognizing this, +Commonwealth’s Credit P olicy Manual highlighted the importance of guarantor financial +information to evaluating collectability, describing one characteristic of “problem loans” as a loan +where “[t]he borrower or guarantor displays deterioration of financial condition as evidence d by +financial statements or other available information.” +15. Commonwealth’s primary regulators – the SCC and the Federal Reserve Bank of +Richmond (the “FRB”) – had raised concerns that Commonwealth’s lending and underwriting + +5 In 2009, FASB codified existing standards into the Accounting Standards Codification (the +“ASC”). The ASC is the current single source of United States Generally Accepted +Accounting Principles (“GAAP”). During most of the time period relevant to this Order, the +ASC had not yet been published; thus, the Order cites to pre -codification GAAP in effect at +the time of the conduct discussed herein. +6 See, e.g., Commission Staff Accounting Bulletin No. 102, 66 Fed. Reg. 36,457, 36,462 n.44 +(July 6, 2001). +6 +practices were not keeping pace with the scope of loan growth. Specifically, the SCC’s October +16, 2006 report of examination concluded that credit administration weaknesses existed, in part, +due to numerous “[d]ocumentation exceptions” which “included missing or stale financial +statements and/or income information along with the lack of final title policies, recorded deeds of +trust, and cash flow analyses.” The FRB’s January 11, 2008 report of examination similarly +concluded that “[a]n inordinate number of loans reviewed at this examination reflected lacking or +stale financial information.” +16. In September 2008, the SCC conducted an examination of Commonwealth that +focused on capital adequacy, asset quality, management, earnings performance, liquidity and funds +management, and sensitivity to market risk (“CAMELS”). As a result of that examination, the +SCC downgraded the Bank’s composite CAMELS rating to a 3 (indicating a financial institution +with “a combination of weaknesses in risk -management practices and financial condition that +range from fair to moderately severe”). The SCC provided the Bank with a report of examination +(the “2008 SCC Report”) that deemed the institution to be in troubled condition and board and +management performance to be poor. The 2008 SCC Report concluded that Commonwealth had +experienced a significant deterioration in asset quality because “[t]he focus on loan growth +overshadowed the need to properly observe effective credit -administration and underwriting +practices.” In particular, the 2008 SCC Report determined that “adversely classified assets” – +loans that would have to be measured for impairment under FAS 114 – had, over the course of a +year’s time, increased from approximately $8 million to $80 million, a tenfold increase. According +to the 2008 SCC Report , “[a] key contributing factor in the problems with the risk-identification +system and the reserve methodology is the pervasi ve lack of current financial information on +borrowers.” +17. Despite the dire warnings in the 2008 SCC R eport, Commonwealth failed +adequately to address the concerns regarding the loan portfolio. As a result, in 2009, the FRB +further downgraded the Bank’s CAMELS score to a 5 (indicating a financial institution with +“extremely unsafe and unsound practices or conditions . . . and are o f the greatest supervisory +concern”). +18. Due in large part to Commonwealth’s persistent failure to obtain and update +appraisals and guarantor financial information, the FRB identified an understatement in +Commonwealth’s ALLL for the period ended September 30, 2009. On January 29, 2010, +Commonwealth issued a press release disclosing $23 million in additional ALLL for that period. +The $23 million ALLL increase caused Commonwealth to file amended and restated financials +for the quarter ended September 30, 2009 with the Commission. Of the $23 million increase, +approximately $10 million was attributable to downgrades of individual loans and loan +relationships evaluated under the ASC’s codification of FAS 114.7 +19. After the restatement, Commonwealth ’s financial condi tion continued to +deteriorate. On June 30, 2011, the F RB found that Commonwealth was “critically +undercapitalized.” On September 23, 2011, SCC and the FDIC, which insured the deposits held by + +7 See generally ASC 310. +7 +Commonwealth, closed the Bank and entered into a purchase and assumption agreement with a +subsidiary of a privately held bank holding company to assume the deposits of the Bank. +E. The Auditors Recognized the Risks in Commonwealth’s Troubled Loan Portfolio +20. Prior to and during Witt Mares’ 2008 audit of Commonwealth, P oti was aware of +the risk and significance of the Bank’s ALLL, and of the component related to the Bank’s FAS 114 +loans specifically. +1. Poti Identified Risks During Witt Mares’ 2006 and 2007 Audits +21. Poti served as the lead partner on the Commonwealth audit for the year-end 2006 +through 2009 audits and had raised concerns regarding Commonwealth’s loan portfolio to +Commonwealth during earlier audits. On March 13, 2007 and March 10, 2008, Poti signed , on +Witt Mares’ behalf, reports to Commonwealth’s audit com mittee. These reports commented on +the lack of current financial statements and other loan documentation in Commonwealth’s loan +files and noted that “credit decisions made on outdated or inaccurate financial information can +potentially lead to an increase in classified assets and losses for the Bank.” +22. By the time that Witt Mares began its audit work for the year ended December 31, +2008, despite the repeated comments in reports to Commonwealth’s audit committee described +above in Paragraph 21, Commonwealth’s management had not corrected the previously-identified +deficiencies. +2. Poti Identified ALLL Risks During Witt Mares’ 2008 Audit +23. The year-end 2008 audit planning document – which Poti reviewed and approved – +identified the ALLL as a “High Risk Audit Area.” A risk assessment summary work paper noted +that the Bank’s ALLL presented a significant risk of material misstatement, with respect to +inherent risk and the risk of fraud. +3. The Initial Calculation of Commonwealth’s ALLL Was Performed by A +Senior Loan Officer +24. During Witt Mares’ walk-through of Commonwealth’s internal controls, a manager +on the audit learned that the senior loan officer performed the initial ALLL calculation, which was +then reviewed by, among others, the Bank’s vice president for credit administration, Chief +Financial Officer (the “CFO”) and the Board of Directors. Poti, who reviewed the memorandum +summarizing the manager’s walkthrough of Commonwealth’s ALLL controls, had significant +concerns about having the senior loan officer perform the initial ALLL calculation since the loan +officer was evaluating many loans that he originated and closed. +4. The SCC Identified a Significant Understatement of the ALLL +25. In connection with its September 2008 examination, the SCC identified a +deficiency in Commonwealth’s ALLL as of Septemb er 30, 2008 in the amount of $19 million, +representing an approximate 200% increase over the ALLL reported the previous year of +8 +approximately $9 million. Poti was aware of this deficiency: A manager had directly identified +“the need for significant additions” to the ALLL in a work paper summarizing the 2008 SCC +Report that Poti reviewed. Further, the 2008 SCC Report, discussed above in Paragraph 16, was +provided to Witt Mares and included in the work papers. +5. Witt Mares’ Testing Identified A Significant Deficiency in Internal Control +Over Financial Reporting in Commonwealth’s ALLL Process and Controls +26. The summary of the 2008 SCC Report, discussed above in Paragraph 25, also +highlighted for Poti the following issues, among others: (a) The lack of current guarantor financial +statements; (b) excessive financial statement exceptions; (c) inadequate cash flo w analyses and +loan review; (d) a significant deterioration in asset quality; and (e) a significant understatement of +Commonwealth’s ALLL. The results of the SCC were a surprise to Poti, who remarked in an e - +mail to a colleague that he felt that Commonwealth’s management had “mislead [sic] us about the +severity of the State exam.” +27. Poti was sufficiently concerned by the SCC’s findings that h e caused additional +audit testing of Commonwealth’s internal controls to be conducted. The audit tests designed were: +a. Testing of controls designed to ensure that all nonaccrual loans were placed +on the nonaccrual list; +b. Testing of controls designed to ensure that loan officers had obtained +updated financial information for loans placed on the Bank’s watch list; +c. Testing of controls designed to confirm that the Bank’s loan officers were +obtaining or performing current cash flow projections, appraisals or other analyses for loans placed +on the Bank’s watch list; +d. Testing of controls designed to confirm that extensions of credit and +renewed loans were being close d in a manner consistent with terms approved by the Board of +Directors; +e. Testing of controls design ed to determine the proper treatment of +capitalized interest; and +f. Testing of controls designed to determine if critical items were being +cleared in a timely fashion from the Bank’s exception reports and confirm that management was +monitoring the reports. +28. Of the six specific tests described above in Paragraph 27, Witt Mares noted +deviations from Commonwealth’s controls in all but one of the tests (described in Paragraph 27.a). +Witt Mares noted deviations from Commonwealth’s controls for four of the tests (described in +Paragraphs 27.b, 27.c, 27.d, and 27.e). Witt Mares’ work papers did not document the results of +the sixth test (described in Paragraph 27.f). The results of the specific tests and led the Witt Mares +audit team to conclude that a significant deficiency in internal control over financial reporting +existed as of the year ended December 31, 2008. +9 +6. The Audit’s Substantive Testing of ALLL Identified Significant Problems +29. Through the audit team’s work, Poti was aware that , despite market declines, +Commonwealth management often did not get updated appraisals on the collateral underlying the +Bank’s FAS 114 loans or guarantor financial information for the guarantors of the loans. In fact, +around the same time as the audit of Commonwealth was taking place , Poti understood that +“appraisals as current as 6 months ago could be considered stale and not reflective of true market +values.” During the audit team’s review of Commonwealth’s loan portfolio as of year -end 2008, +members of the audit team noted appraisals more than a year old and a significant lack of current +guarantor financial information in loan files . In fact, during Witt Mares’ review of +Commonwealth’s loan portfolio, the audit team noted that there was: +a. “Inadequate financial information in [the] file to determine if additional +reserve is necessary” for loan files representing approximately 30% of the value of the total loan +sample balance and approximately 5% of the value of the FAS 114 loans in the ALLL; +b. Approximately 75% of the value of the total loan sample balance and +approximately 52% of the value of the FAS 114 loans in the ALLL represented loan files that were +missing, or contained stale, guarantor financial information; and +c. Approximately 33% of the value of the total loan sample balance and +approximately 37% of the value of the FAS 114 loans in the ALLL consisted of loan files that +contained appraisals that were dated between 2005 and 2007 – dates more than a year before the +loan review took place. +F. Commonwealth’s FAS 114 Loans Were Material +30. The portion of the ALLL related to Commonwealth’s FAS 114 loans was +approximately $21 million and was material.8 It far exceeded the approximately $5 million +planning materiality threshold established for the 2008 audit. It was reasonably possible that even +a small change in the value of the Bank’s FAS 114 loans would cause a material error in the +financial statements. +31. The portion of the ALLL related to Commonwealth’s FAS 114 loans was material +for additional reasons: +a. The trend in Commonwealth’s reported ALLL was in precipitous decline. +As of December 31, 2006, Commonwealth’s reported ALLL was slightly more than $8 million. +At year-end 2007, the ALLL slightly increased to approximately $9 million. By year -end 2008, +the ALLL had more than tripled to approximately $31 million. + +8 AU § 312 ¶ 3 (“The concept of materiality recognizes that some matters, either individually +or in the aggregate, are important for fair presentation of financial statements in conformity +with generally accepted accounting principles, while other matters are not important.”) +(footnote omitted). +10 +b. On November 6, 2008, Commonwealth issued a press release announcing +its third quarter results, which included disclosure of the $19 million AL LL deficiency described +above in Paragraph 25. The next trading day following this disclosure, the value of +Commonwealth’s common stock plummeted approximately 14%. +c. Commonwealth itself acknowledged the importance of its ALLL, including +the FAS 114 loans, devoting several pages in its Form 10-K for the year ended December 31, 2008 +(the “2008 10 -K”) to a discussion of problem loans and the ALLL. Indeed, Commonwealth’s +2008 10-K expressly warned that “[if] our allowance for loan losses becomes inadequate, o ur +results of operations may be adversely affected.” +32. Given the risk and materiality of the ALLL related to the Bank’s FAS 114 loans, +and the many identified red flags described above in Paragraphs 21 through 29, Poti had +heightened responsibility in auditing this area, and was required to obtain sufficient competent +evidential matter to support his opinion. He failed in this responsibility. +G. Poti Caused Witt Mares to Issue an Unqualified Opinion +33. On March 16, 2009, Commonwealth filed audited consolidated financial statements +as an exhibit to the 2008 10-K. Filed with the financial statements was Witt Mares’ audit report +dated March 11, 2009, which stated, among other things, that “[i]n our opinion, the consolidated +financial statements referred to above present fairly, in all material respects, the financial position +of Commonwealth Bankshares, Inc. and subsidiaries as of December 31, 2008 and 2007 , and the +results of their operations and their cash flows for each of the years in the three-year period ended +December 31, 2008, in conformity with accounting principles generally accepted in the United +States of America[,]” and that “ in our opinion, Commonwealth Bankshares, Inc. and subsidiaries +maintained, in all material respects, effective internal control over financial reporting as of +December 31, 2008 . . . .” +H. Poti’s Improper Professional Conduct +34. 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.”9 For auditors of issuers such as Commonwealth, +the applicable professional standards include auditing standards issued by the PCAOB. +1. General Standards +35. The PCAOB’s three general standards of auditing require that an auditor , among +other things, exercise due professional care in the performance of the audit. 10 The three basic +standards of field work require the auditor to (1) adequately plan and properly supervise the audit, + +9 Rule 102(e) [17 C.F.R. § 201.102(e)]. +10 AU § 150 ¶ 2. +11 +(2) obtain a sufficient understanding of internal control to plan the audit, and (3) obtain sufficient +competent evidential matter to afford a reasonable basis for an opinion. 11 +36. Auditors are required to obtain “sufficient competent evidential matter” to afford a +reasonable basis for the auditor’s opinions. 12 “Gathering and objectively evaluating audit evidence +requires the auditor to consider the competency and sufficiency of the evidence.”13 PCAOB standards +note that evidential matter obtained from independent sources outside an entity provides greater +assurance of reliability than that secured solely within the entity, and that the auditor’s direct personal +knowledge, obtained through physical examination, observation, computation, and inspection, is more +persuasive than information obtained indirectly.14 +37. Further, audit procedures, and the amount and persuasiveness of evidence auditors are +required to obtain, are driven by risk. “Audit risk and materiality, among other matters, need to be +considered together in determining the nature, timing, and extent of auditing procedures and in +evaluating the results of those procedures.” 15 When auditors identify a significant risk of material +misstatement, as they did here, that fact is relevant to, among other things, the nature and extent of the +audit procedures to be applied.16 “Higher risk may cause the auditor to expand the extent of procedures +applied, apply procedures closer to or as of year-end, particularly in critical audit areas, or modify the +nature of procedures to obtain more persuasive evidence.”17 +38. Poti, as the engagement partner, was responsible for the audit and its performance, for +proper supervision of the work of the audit team members, and for compliance with PCAOB standards. +39. At the completion of the audit, Poti signed off that he had “reviewed the c ompleted +audit programs” and was “satisfied that our audit(s) of the financial statement and internal control” + +11 Id. +12 AU § 326 ¶ 1; see also AU § 230 ¶ 11 (“The independent auditor’s obje ctive is to obtain +sufficient competent evidential matter to provide him or her with a reasonable basis for +forming an opinion.”). +13 AU § 230 ¶ 8. +14 AU § 326 ¶ 21. +15 AU § 312 ¶ 1; see also id. ¶ 12 (“The auditor should consider audit risk and materialit y both +in (a) planning the audit and designing auditing procedures and (b) evaluating whether the +financial statements taken as a whole are presented fairly, in all material respects, in +conformity with generally accepted accounting principles. The audito r should consider audit +risk and materiality in the first circumstance to obtain sufficient competent evidential matter +on which to properly evaluate the financial statements in the second circumstance.”). +16 Id. ¶ 17. +17 Id. +12 +were “sufficient and appropriate to support the auditor’s report(s) and were conducted in accordance +with PCAOB standards and other applicable legal and regulatory requirements.” +40. As detailed below, Poti’s conduct in planning, supervising, and performing Witt Mares’ +audit of Commonwealth’s 2008 internal control over financial reporting and financial statements – +specifically the portions of the audit relating to the Bank’s FAS 114 loans – violated numerous PCAOB +standards. Most prominently, the auditors violated the requirements of AS No. 5 (An Audit of Internal +Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements), and AU +Sections 328 ( Auditing Fair Value Measurements and Disclosures ) and 342 ( Auditing Accounting +Estimates) related to the substantive audit procedures. Poti also violated the third standard of field +work (Audit Documentation). +2. The Audit of Commonwealth’s Internal Control over Financial Reporting +Violated Professional Standards +41. For year-end 2008, Witt Mares performed an integrated audit of Commonwealth, +meaning that the audit of Commonwealth’s internal controls over financial rep orting was +integrated with the audit of Commonwealth’s financial statements. When an auditor assesses +control risk below the maximum level, as the auditors did here, he or she should obtain sufficient +evidential matter to support that assessed level. 18 Moreover, if one or more material weaknesses +exist, the company’s internal control over financial reporting cannot be considered effective.19 “A +material weakness is a deficiency, or a combination of deficiencies, in internal control over +financial reporting, such that there is a reasonable possibility that a material misstatement of the +company’s annual or interim financial statements will not be prevented or detected on a timely +basis.”20 +42. AS No. 5 provides specific requirements for auditing internal control over financial +reporting in an integrated audit, including that the auditors should determine the likely sources of +potential misstatements that would cause the financial statements to b e materially misstated and +focus more of his or her attention on the areas of highest risk. 21 As described below, the audit + +18 AU § 319 ¶¶ 80, 90. +19 AS No. 5 ¶ 2. +20 Id. App. A ¶ A7. +21 Id. ¶¶ 11 (“A direct relationship exists between the degree of risk that a material weakness +could exist in a particular area of the company’s internal control over financial reporting and +the amount of audit attention tha t should be devoted to that area. In addition, the risk that a +company’s internal control over financial reporting will fail to prevent or detect misstatement +caused by fraud usually is higher than the risk of failure to prevent or detect error. The +auditor should focus more of his or her attention on the areas of highest risk. On the other +hand, it is not necessary to test controls that, even if deficient, would not present a reasonable +possibility of material misstatement to the financial statements.”) , 30 (“As part of identifying +significant accounts and disclosures and their relevant assertions, the auditor also should +determine the likely sources of potential misstatements that would cause the financial +13 +team, under Poti’s supervision, identified a source of potential misstatement in Commonwealth’s +ALLL processes – the senior loan officer’s initial calculation of the ALLL . The audit team also +identified a control that they believed addressed the potential for a material misstatement posed by +the senior loan officer’s role in calculating the ALLL: the review by the Bank’s vice president for +credit administration, CFO and the Board of Directors. However, the audit team failed to test this +control despite being put on notice before the audit opinion was issued that it was not effective.22 +Poti therefore violated AS No. 5, and further la cked a reasonable basis for causing Witt Mares to +conclude that there were no material weaknesses in Commonwealth’s internal control over +financial reporting. +a. Relevant PCAOB Standards +43. In an integrated audit, an auditor should design tests of controls to obtain sufficient +evidence both to support his or her opinion on internal control over financial reporting and to +support his or her control risk assessments for the purpose of the audit of the financial statements.23 +44. Auditors also should determine the lik ely sources of potential misstatements that +would cause the financial statements to be materially misstated. One of the ways to do so is “by +asking himself or herself ‘what could go wrong?’ within a given significant account or +disclosure.”24 +45. To further understand the likely sources of potential misstatements, and as part of +selecting the controls to test, the auditor should , among other things, understand the flow of +transactions related to the relevant assertions, identify the points within the company’s processes at +which a misstatement could arise that would be material, and identify the controls that +management has implemented to address these potential misstatements.25 +46. Performing a “walkthrough” is often the most effective way to understand likely +sources of potential misstatements and identify the appropriate controls to test. 26 Walkthroughs +require the auditor to “follow[] a transaction from origination through the company’s processes . . . + +statements to be materially misstated. The aud itor might determine the likely sources of +potential misstatements by asking himself or herself ‘what could go wrong?’ within a given +significant account or disclosure.”). +22 See id. ¶ 39 (“ The auditor should test those controls that are important to the a uditor’s +conclusion about whether the company’s controls sufficiently address the assessed risk of +misstatement to each relevant assertion.”). +23 Id. ¶ 7. +24 Id. ¶ 30. +25 Id. ¶ 34. +26 Id. ¶ 37. +14 +until it is reflected in the company’s financial records, using the same documents and information +technology that company personnel use.”27 +47. The selection of the controls to test, and the evidence needed to evaluate a given +control, are driven by the auditor’s risk assessment.28 “The auditor should focus more of his or her +attention on the areas of highest risk,” taking into consideration risks of material misstatement due +to fraud with respect to significant management estimates.29 Further, the level of evidence needed +increases as the risk associated with the control increases.30 +48. Some types of tests, by their nature, produce greater evidence of the effectiveness +of controls than other tests. 31 PCAOB standards include a hierarchy of tests. Inquiry, which +ordinarily produces the lowest level of evidence, is never alone sufficient to support a conclusion +about the effectiveness of a control.32 +49. If there are deficiencies in a company’s internal control over financial reporting +that, individually or in combination, result in one or more material weaknesses, the auditor “must +express an adverse opinion on the company’s internal control over financial reporting, unless there +is a restriction on the scope of the engagement.”33 +50. The internal control test work that Poti supervised did not comply with the +foregoing PCAOB standards. +b. Failure to Identify Effective Controls Over The Review of the ALLL +Calculation +51. In order to understand the likely sources of a potential misstatement of the ALLL, a +manager, under Poti’s supervision, performed a walkthrough of Commonwealth’s internal controls +over the ALLL. As described above in Paragraph 24, the manager documented his walkthrough in +audit work papers that Poti reviewed and identified the senior loan officer’s initial calculation of +the ALLL as a point in the ALLL processes at which a material misstatement could arise. The +manager also identified a control that he be lieved addressed the potential for a material +misstatement posed by the senior loan officer’s role in calculating the ALLL: the review by the + +27 Id. +28 Id. ¶ 10. +29 Id. ¶¶ 11, 14. +30 Id. ¶¶ 46-47. +31 Id. ¶ 50. +32 Id. ¶¶ 45, 50. +33 Id. ¶ 90. +15 +Bank’s vice president for credit administration, CFO and the Board of Directors. The manager +observed that the p rocesses for calculating Commonwealth’s ALLL did not constitute “a +significant deficiency due to the review performed by the CFO, and that [the] VP of Credit +Administration is heavily involved in the discussions of impaired loans though he does not actually +do the manual calculation. Board and Management both review and approve [the] calculation.” In +fact, the audit team assessed the ALLL’s control risk to be “moderate” based on “relatively strong +controls and procedures over the allowance” and identified the review by the Bank’s vice president +for credit administration, CFO and Board of Directors as one of four key controls over the ALLL. +52. The audit work papers do not reflect that any testing of the design or operating +effectiveness of the CFO’s, the vice president of credit administration’s, or the Board of Directors’ +review of the ALLL was performed. Moreover, other than an assertion that such a review was +done, the audit work papers do not describe what the CFO, vice president of credit administration, +or the Board of Directors were required to do or what they actually did to review the ALLL. Poti +did not know what steps the CFO, the vice president of credit administration, or the Board of +Directors took to review the senior loan officer ’s calculation of the ALLL . In fact, the only +evidence of review in the audit work papers was a review of the minutes of Commonwealth’s +Board of Directors to confirm that the minutes reflected the Board’s approval of the ALLL. Thus, +though the audit team correctly identified the senior loan officer’s initial calculation of the ALLL +as creating a potential risk for material misstatement , the audit work does not provide a basis to +conclude that it did not represent a material weakness. +53. In fact, before Poti authorized the issuance of an unqualified audit opinion on +Commonwealth’s financial statements and internal control over financial reporting for the year +ended December 31, 2008 , Commonwealth’s internal auditor wrote to Poti that, based on the +internal aud itor’s testing of the control designed to ensure that the vice president of credit +administration had adequate information to review the ALLL, the internal auditor had determined +that the review control was not working properly as of year-end 2008 because, among other things, +the vice president of credit administration had not received information from loan officers to +independently assess if loans had become impaired. +c. The Absence of These Controls Was an Indicator of a Material +Weakness in Commonwealth’s Internal Control Over Financial +Reporting +54. PCAOB audit standards define a material weakness as “a deficiency, or a +combination of deficiencies, in internal control over financial reporting, such that there is a +reasonable possibility that a material misstatement of the company’s annual or interim financial +statements will not be prevented or detected on a timely basis. ”34 Whether a deficiency or +combination of deficiencies rises to the level of a material weakness depends on the severity of the +deficiencies.35 The absence of effective controls over the review of the ALLL calculation should + +34 Id. App. A ¶ A7. +35 Id. ¶¶ 62-63. +16 +have been treated as an indicator of a material weakness in Commonwealth’s internal control over +financial reporting as of December 31, 2008.36 Had Poti tested the control over the review of the +ALLL calculation, he would have learned that it was not effective since one of the key components +of the control – the review by the vice president for credit administration – was not working +properly because the v ice president for credit administration did not have current guarantor +financial information to independently assess if loans had become impaired. Without having tested +this important control over the ALLL, and having information, including from internal audit, +indicating that it was deficient, Poti did not have a sufficient basis to conclude that no material +weaknesses existed and to issue an unqualified opinion on the Bank’s internal control over +financial reporting.37 Moreover, the inappropriate conclusion that controls were effective led to an +unsupported – and incorrect conclusion that, for purposes of the financial statement audit, the risk +of material misstatement with respect to the ALLL was only “moderate.” +3. Substantive Testing of Commonwealth’s FAS 114 Loans Violated Professional +Standards +55. Adding to the failures in connection with auditing Commonwealth’s inter nal +control over financial reporting were Poti’s deficient substantive audit procedures. Specifically , +the audit team failed to follow PCAOB standards in reviewing the reasonableness of +management’s estimates of impairment of the Bank’s FAS 114 loans – one of the riskiest and most +critical elements of the Bank’s FAS 114 loss estimate calculation. The audit team found that, in +estimating the ALLL, Commonwealth relied on the appraisals in the loan files , many of which +were dated between 2005 and 2007 – over a year before the loan review took place . Poti was +aware of the significance of the dates of the appraisals because of his understanding that +“appraisals as current as 6 months ago could be considered stale and not reflective of true market +values.” In addition, the audit team found that, for approximately 30% of the total loan sample +balance the tea m felt that there was “[i]nadequate financial information in [the loan] file to +determine if additional reserve is necessary.” Poti reviewed the audit team’s FAS 114 test work +prior to signing the audit opinion. By failing to subject the ALLL to appropri ate scrutiny, Poti +violated PCAOB standards, including AU Sections 328 and 342, which address auditing fair value +and accounting estimates, respectively. Poti failed to obtain sufficient competent evidential matter +to support management’s estimate of the ALLL. +a. Relevant PCAOB Standards +56. Commonwealth’s calculation of the portion of the ALLL attributable to the Bank’s +FAS 114 loans, which was based largely on an assessment of the value of the underlying collateral, was +an estimate. As such, the auditor ’s responsibility was to obtain sufficient competent evidence to +provide reasonable assurance that the estimates were reasonable and presented in conformity with the +relevant accounting principles.38 + +36 Id. ¶¶ 69-70. +37 Id. ¶ 71. +38 AU §§ 328 ¶ 3; 342 ¶ 7. +17 +57. In evaluating reasonableness, the auditor should obtain an understanding of how +management developed the estimate. Based on that understanding, the auditor should use one or a +combination of the following approaches: (a) review and test the process used by management to +develop the estimate; (2) develop an indep endent expectation of the estimate to corroborate the +reasonableness of management’s estimate; or (3) review subsequent events or transactions occurring +prior to the date of the auditor’s report.39 +58. Where management’s estimate is based on a valuation, such a s an appraisal, that was +made prior to the financial reporting date, the following is an example of a consideration in the +development of audit procedures: “obtain[ing] evidence that management has taken into account the +effect of events, transactions, and changes in circumstances occurring between the date of the fair value +measurement and the reporting date.”40 +59. Further, as Poti had correctly identified Commonwealth’s ALLL as presenting a risk of +fraud and a higher risk of error, Poti had a heightened responsibility over this area.41 +60. The risk of material misstatement generally increases where, as here, the relevant +account includes an estimate.42 While estimates may differ, an unreasonable estimate should be +considered a likely misstatement.43 +61. The auditor sho uld be thorough in his or her search for evidential matter and +unbiased in its evaluation. 44 The auditor cannot express the conclusion in the auditor’s standard +report that the financial statements present fairly, in all material respects, an entity’s fina ncial +position, results of operations, and cash flows in conformity with generally accepted accounting +principles without obtaining sufficient competent evidential matter to support that conclusion.45 + +39 AU § 342 ¶ 10; see also AU § 328 ¶ 23. +40 AU § 328 ¶ 25. +41 AU § 312 ¶ 17 (“Higher risk may cause the auditor to expand the extent of procedures +applied, apply pro cedures closer to or as of year -end, particularly in critical audit areas, or +modify the nature of procedures to obtain more persuasive evidence.”). +42 Id. ¶ 36. +43 Id. +44 AU § 326 ¶ 25; see also id. (“In developing his or her opinion, the auditor should consider +relevant evidential matter regardless of whether it appears to corroborate or to contradict the +assertions in the financial statements.”). +45 See AU § 508 ¶ 7 ( “The auditor’s standard report states that th e financial statements present +fairly, in all material respects, an entity’s financial position, results of operations, and cash +flows in conformity with generally accepted accounting principles. This conclusion may be +18 +62. Finally, auditors are required to clearly document the work they perform.46 “Audit +documentation should be prepared in sufficient detail to provide a clear understanding of its +purpose, source, and the conclusions reached.” 47 “The auditor must document the procedures +performed, evidence obtained, and conclusions reached with respect to relevant financial statement +assertions.”48 “Audit documentation must clearly demonstrate that the work was in fact +performed.”49 “Because audit documentation is the written record that provides the support for the +representations in the auditor’s report, it should,” among other things, “[d]emonstrate that the +engagement complied with the standards of the PCAOB.”50 +63. The substantive audit procedures Poti designed and implemented fell short of these +standards. + b. Failure to Obtain Sufficient Audit Evidence +64. Commonwealth estimated the value of the collateral underlying the B ank’s FAS +114 loans on a loan-by-loan basis because the B ank’s FAS 114 portfolio was made up of large, +non-homogenous loans. Therefore, the audit team performed a loan-by-loan review of a sample of +the Bank’s FAS 114 loan portfolio to test whether management’s estimates of value were +reasonable. However, the substantive audit procedures and the evidence obtained from those +procedures were insufficient to meet PCAOB standards. +65. As part of Witt Mares’ testing of Commonwealth’s FAS 114 loans, the audit team +selected a sample of Commonwealth’s loan portfolio for in -depth review that represented +approximately 14% of the total loan balance, and approximately 55% of the ALLL, at year-end +2008. After selecting the sample of loans to review, the audit team examined the loan file +documentation, estimated the specific allowance or allocation needed for each loan , and assessed +the reasonableness of management’s estimate of the ALLL comparing the estimated ALLL to the +recorded ALLL. However, as documented in the audit work paper, for a significant portion of the +loans reviewed, there was inadequate information to perform this assessment. +66. Witt Mares’ 2008 loan review found that approximately 30% of the total loan +sample balance and approximately 5% of the ALLL, respectively, had “[i]nadequate financial +information in [the loan] file to determine if additional reserve is necessary ;” approximately 75% + +expressed only when the auditor has formed such an opinion on the basis of an audit +performed in accordance with generally accepted auditing standards.”). +46 See AS No. 3. +47 Id. ¶ 4. +48 Id. ¶ 6. +49 Id. +50 Id. ¶ 5. +19 +of the total loan sample balance and 52% of the ALLL consisted of loans whose files were +missing, or contained stale, guarantor financial information; and approximately 33% of the total +loan sample balance and approximately 37% of the ALLL consisted of loans whose files contained +appraisals that were dated between 2005 and 2007 – dates more than a year before the loan review +took place. In short, the files lacked critical information necessary to assess the FAS 114 loans and +their reserves. +67. Despite the critical lack of information needed to assess the reasonableness of +management’s loss estimates on the FAS 114 loans, Witt Mares auditors agreed with +management’s loss estimates for all of the loans in the loan sample except one and concluded that +“the Bank appears to have enough reserved to sustain any immediate short term losses.” That +conclusion was not supported by the available audit evidence. To the contrary, the audit evidence +would lead a reasonable auditor to the opposite conclusion – that the ALLL was not a reasonable +estimate because there was not sufficient information in the loan files to evaluate its +reasonableness. +c. Failure to Adequately Document Audit Work +68. In addition to the audit failures noted above, Poti failed to adequate ly document +audit work.51 Witt Mares’ loan work papers do not contain any explanation as to how the audit +team evaluated whether management took into account the effect of deteriorating market +conditions that had occurred between the appraisal dates for th e approximately 33% of the total +loan sample balance and approximately 37% of the ALLL that consisted of loans whose files +contained appraisals that were dated between 2005 and 2007 – dates more than a year before the +loan review took place. In addition, the work papers do not explain how Witt Mares was able to +develop an independent estimate of the ALLL given that approximately 30% of the total loan +sample balance and approximately 5% of the ALLL, respectively, had “[i]nadequate financial +information in [the loan] file to determine if additional reserve is necessary.” +D. FINDINGS +69. Based on the foregoing, the Commission finds that Poti engaged in improper +professional conduct within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice [17 C.F.R. § 201.102(e)(1)(ii)].52 Specifically, the Commission finds that Poti engaged in +repeated instances of unreasonable conduct, each resulting in a violation of applicable professional +standards that indicate a lack of competence to practice before the Commission. + + + +51 Id. +52 See also Rule 102(e)(1)(iv)(B)(2) (defining improper professional conduct) [17 C.F.R. +§ 201.102(e)(1)(iv)(B)(2)]. +20 +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Poti’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Poti is denied the privilege of appearing or practicing before the Commission as an +accountant. +B. After two (2) years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: +1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission. Such an +application must satisfy the Commission that Respondent’s work in his practice before the +Commission will be reviewed either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he/she practices before the +Commission in this capacity; and/or +2. an independent accountant. Such an application must satisfy the +Commission that: +(a) Respondent, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, and +such registration continues to be effective; +(b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the PCAOB and that inspection did not identify any criticisms +of or potential defects in the Respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; +(c) Respondent has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions imposed by the PCAOB (other +than reinstatement by the Commission); and +(d) Respondent acknowledges his responsibility, as long as Respondent +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the PCAOB, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + + + +21 +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, if +state licensure is dependent on reinstatement by the Commission, the Commission will consider an +application on its other merits. The Commission’s review may include consideration of, in +addition to the matters referenced above, any other matters relat ing to Respondent’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. +By the Commission. + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3520.txt b/raw/aaer/2013/AAER-3520.txt new file mode 100644 index 0000000000000000000000000000000000000000..88f07a3594b473092816c6d2484711754769c11d --- /dev/null +++ b/raw/aaer/2013/AAER-3520.txt @@ -0,0 +1,469 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71154 / December 20, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3520 / December 20, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15536 + + + +In the Matter of + +JOHN KINROSS-KENNEDY, CPA, + +Respondent. + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE +102(e) OF THE COMMISSION’S +RULES OF PRACTICE AND A +CEASE-AND-DESIST ORDER + + +I. + On September 30, 2013, the Securities and Exchange Commission (“Commission”) +instituted public administrative and cease-and-desist proceedings against John Kinross-Kennedy, +CPA (“Respondent” or “Kinross”) pursuant to Sections 4C1 and 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess the +requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have engaged in +unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. +Rule 102(e)(1)(iii) provides, in pertinent part, that: + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found…to have willfully violated, or willfully aided and abetted the violation of any +provision of the Federal securities laws or the rules and regulations thereunder. + + 2 +II. + Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +this Order Making Findings and Imposing Remedial Sanctions Pursuant to Sections 4C and 21C of +the Exchange Act and Rule 102(e) and a Cease-and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds +3 that: +A. SUMMARY +These proceedings arise out of John Kinross-Kennedy’s improper professional conduct in +connection with audit and review engagements for issuers for fiscal periods beginning on or after +December 15, 2009. During this period, Kinross issued audit reports in which he falsely represents +that he conducted his audits in accordance with Public Company Accounting Oversight Board +(“PCAOB”) standards. This matter also involves Kinross’s willful violations of Sections 10A(j) +and 10A(k) of the Exchange Act and Rules 2-02(b)(1) and 2-07 of Regulation S-X. +B. RESPONDENT +John Kinross-Kennedy, age 85, of Irvine, California, is a certified public accountant +licensed in California. Kinross has operated as an unincorporated sole proprietor since 1993 and +has been registered with the PCAOB since 2005. As of July 15, 2013, Kinross is the independent +public accountant for six public companies. Since 2009, at any one time, he has been the +independent accountant for as many as 23 public companies. +C. RELEVANT ISSUERS +At all relevant times Issuer A’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and was traded on the OTC Bulletin Board, and its +fiscal year ended on the last day of March. +At all relevant times, Issuer B filed reports with the Commission pursuant to Section 15(d) +of the Exchange Act, its common stock was traded on the OTC Market, and its fiscal year ended +on the last day of August. +At all relevant times, Issuer C’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and was traded on the OTC Market, and its fiscal +year ended on the last day of September. + +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 +At all relevant times, Issuer D’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act and was traded on the OTC Bulletin Board, and its +fiscal year ended on the last day of December. +At all relevant times, Issuer E filed reports with the Commission pursuant to Section 15(d) +of the Exchange Act, its common stock was traded on the OTC Bulletin Board, and its fiscal year +ended on the last day of December. +D. FACTS +1. During 2011 and 2012, Kinross issued six audit reports containing unqualified +opinions listed in the table below in connection with his audits of the financial statements of five +issuers (the “Issuer Audits”), as well as audit reports for approximately 20 other issuers. In each of +these six audit reports, Kinross represents that he conducted his audits in accordance with PCAOB +standards. Kinross failed, however, to conduct each of the six audits of the five issuer’s financial +statements in accordance with PCAOB standards, as described below. +Issuer Report Date Fiscal Periods +Issuer A June 21, 2011 Periods from inception, March 31, 2009, to March 31, 2010 and 2011 +Issuer A June 25, 2012 Periods from inception, March 31, 2009, to March 31, 2011 and 2012 +Issuer B Oct. 31, 2011 Years ended and periods from inception, August 22, 2008, to August 31, 2011 +and 2010 +Issuer C Dec. 22, 2011 Years ended and periods from inception, August 2, 2005, to September 30, +2011 and 2010 +Issuer D March 26, 2012 Years ended and periods from inception, December 22, 2006, to December 31, +2011 and 2010 +Issuer E Feb. 29, 2012 Years ended December 31, 2011 and 2010 + +AU §230, Due Professional Care in the Performance of Work +2. Kinross failed to exercise due professional care in each of the six Issuer Audits. See +AU §230.02-.06. Kinross does not possess the degree of skill commonly possessed by other +auditors and failed to exercise reasonable care and diligence. AU §230.02-.05. Kinross’s lack of +knowledge and skill is demonstrated by his admitted unfamiliarity with PCAOB requirements to +perform certain auditing procedures, e.g. annual written confirmation of his independence (See +PCAOB Rule 3526), and his failure to communicate with the predecessor auditor (See AU §315) +and communicate with the audit committee (See AU §380). He also was unaware of certain +changes in GAAP, such as the 2001 shift from amortization of goodwill to non-amortization of +goodwill (changed by Statement of Financial Accounting Standards No. 142, Goodwill and Other +Intangible Assets (June 2001)). +3. Kinross also failed to exercise due professional care on fundamental aspects of the +audits by using outdated audit templates to document his audit planning and performance of certain +audit procedures on each of the audits without any apparent effort to adapt those templates for +subsequent changes in auditing standards. Kinross relied upon checklists published in 1993, the + + 4 +year he formed his audit practice and ten years before the creation of the PCAOB, for client +acceptance, internal control evaluation, and transactional audit plans for small organizations. +Kinross’s audit work papers for Issuer D’s December 31, 2011 financial statements included a +copy of the cover page and an index of a 1993-checklist, but did not include the checklist itself. +Not only was the checklist outdated, the cover page indicated that it pertained to GAAP disclosure +requirements for financial statements of a nonpublic commercial business. +4. Kinross’s inappropriate use of client personnel to perform audit steps also illustrates +his lack of due professional care. For example, for Issuer E’s December 31, 2011 audit, Kinross +instructed client personnel to select one invoice per month for the sample to be subjected to audit +testing. Even though he was present at the time the client made the selection, Kinross should have +made sure that all items were available for selection, selected the items, and made sure that the +sample was expected to be representative of the population. +4 +AU §326, Evidential Matter and Auditing Standard No. 15, Audit Evidence +5. Under AU §326, Evidential Matter, which was in effect for the pertinent periods +beginning before December 15, 2010, an auditor was required to obtain sufficient competent +evidential matter to afford a reasonable basis for his opinion. See AU §326.01 and 22-24; and +AU §150.02, Generally Accepted Auditing Standards. Auditing Standard No. 15, Audit Evidence +(“AS 15”), which is effective for fiscal periods beginning on or after December 15, 2010, requires +that an auditor plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his opinion. See AS 15, ¶4. For each of the six Issuer Audits, +Kinross failed to obtain the requisite level of evidential matter or audit evidence to support his +opinion. +6. For the three audits of fiscal years beginning before December 15, 2010, Kinross +failed to obtain sufficient competent evidential matter to afford a reasonable basis for his opinion. +For issuer A, Kinross issued an audit report containing an unqualified opinion on Issuer A’s +financial statements as of March 31, 2010 and 2011 and the periods from inception (March 31, +2009), despite the fact that he had performed no audit procedures as of March 31, 2010 or for the +period from inception (March 31, 2009) to March 31, 2010. Kinross issued an audit report +containing an unqualified opinion on Issuer B’s August 31, 2011 financial statements. Issuer B’s +sole operating subsidiary accounted for 100 percent of Issuer B’s revenues and cost of revenues +and 15 percent of its expenses. Yet, Kinross performed no audit procedures on the subsidiary’s +revenues or its expenses. Instead, Kinross conducted a “balance sheet audit,” relying on the +change in net equity to validate the subsidiary’s net income and limiting the testing of Issuer B’s +expenses. With respect to Issuer C, which recorded a $42 million gain upon deconsolidation of +Issuer B and a corresponding $42 million investment in Issuer B (See FASB ASC 810-10-40-5, +Consolidation: Derecognition), Kinross failed to consider potential impairment of Issuer C’s $42 + +4 AU §350.03 Audit Sampling, “[R]equire[s] that the auditor use professional judgment in planning, +performing, and evaluating a sample and in relating the evidential matter produc ed by the sample to other evidential +matter when forming a conclusion about the related account balance or class of transactions.” Additionally, AU +§350.39 provides that the sample should be selected in such a way that the sample can be expected to be +representative of the population and that all items in the population should have an opportunity to be selected. + + 5 +million investment in Issuer B despite Issuer B’s stock price having declined by 94 percent by +Issuer C’s fiscal year end. +7. For the three audits of fiscal years beginning on or after December 15, 2010, +Kinross failed to plan and perform audit procedures to obtain sufficient appropriate audit evidence +to provide a reasonable basis for his opinion. For issuer A, Kinross issued an audit report +containing an unqualified opinion on Issuer A’s financial statements as of March 31, 2011 and +2012 and the periods from inception (March 31, 2009), despite the fact that he had performed no +audit procedures as of March 31, 2010 or for the period from inception (March 31, 2009) to March +31, 2010. With respect to his audit of Issuer D’s December 31, 2011 financial statements, Kinross +inadequately tested revenues and cost of goods sold. Despite Issuer D having only one customer +and relatively few transactions, Kinross did not review sales contracts or purchase orders with +customers or suppliers to identify terms that might affect the timing of revenue recognition or cost +of goods sold. Additionally, Kinross inappropriately relied upon documents that he could not read, +either because the documents were written in Chinese or because the copies were illegible. With +respect to Issuer E, Kinross inadequately tested revenues and failed to investigate material, +differences between schedules detailing sales transactions and the amount of recorded sales +revenue. +Auditing Standard No. 8, Audit Risk +8. Kinross failed to obtain sufficient audit evidence by failing to conduct three audits +in compliance with Auditing Standard No. 8, Audit Risk (“AS 8”), which was effective for audits +of fiscal years beginning on or after December 15, 2010. AS 8 requires an auditor to plan and +perform the audit to obtain reasonable assurance about whether the financial statements are free of +material misstatement due to error or fraud. An auditor obtains reasonable assurance by reducing +audit risk to an appropriately low level through applying due professional care, including obtaining +sufficient appropriate audit evidence. See AS 8, ¶3. Kinross did not exercise due professional care +and did not obtain sufficient appropriate audit evidence for Issuer D’s and Issuer E’s December 31, +2011 audits or Issuer A’s March 31, 2012 audit. Consequently, Kinross did not conduct these +audits in a manner designed to reduce audit risk to an appropriately low level. +AU §333, Management Representations +9. Under AU §333, Management Representations, an independent auditor must obtain +written representations from management for all financial statements and all periods covered by +the audit report. Kinross failed to satisfy this auditing standard for each of the Issuer Audits +because he issued audit reports on both the current and prior year’s financial statements even +though he obtained written representations from management only for the current year’s financial +statements. See AU §333.05. +Auditing Standard No. 3, Audit Documentation +10. For each of the Issuer Audits, Kinross’s audit documentation was deficient. +Auditing Standard No. 3, Audit Documentation (“AS 3”) establishes the requirements for +documentation that the auditor should prepare and retain in connection with engagements to +support the auditor’s conclusions and representations contained in the auditor’s report. See AS 3, + + 6 +¶2. Audit documentation must contain sufficient information to enable an experienced auditor, +having no previous connection with the engagement to i) understand the nature, timing, extent, and +results of the procedures performed, evidence obtained, and conclusions reached; and ii) determine +who performed the work and the date such work was completed as well as the person who +reviewed the work and the date of such review. See AS 3 ¶6. Kinross failed to prepare +documentation that sufficiently described the procedures he performed, the evidence he obtained, +and the conclusions he reached. Kinross’s documentation also did not identify the person who +performed the work and the date such work was completed, or the person who reviewed the work +and the date of the review. Kinross performed substantially all of the audit procedures, but he +frequently did not sign or initial and date his audit work papers. Additionally, Kinross did not +include written audit programs or document the conclusions he reached for most audit areas other +than cash. See AS 3, ¶¶4-6. Finally, he did not prepare an engagement completion document +identifying significant findings or issues. See AS 3, ¶13. +11. Kinross added information to his audit work papers after the documentation +completion date without identifying who prepared the additional documentation and explaining +why it was added. In some instances, he failed to specify the date he added the information. See +AS 3, ¶16. +12. Kinross did not retain audit documentation for the required seven years. Kinross +was unable to locate documentation to support his audit reports on Issuer B’s fiscal year 2008 and +Issuer C’s fiscal year 2008 financial statements, the earliest years covered by his initial audit +reports for these issuers. See AS 3, ¶14. +Auditing Standard No. 7, Engagement Quality Review +13. Kinross failed to obtain required Engagement Quality Reviews (“EQR”) for the +vast majority of his audit engagements, and he engaged an unqualified person to perform the few +EQRs that he did obtain. Under Auditing Standard No. 7, Engagement Quality Review (“AS 7”), +an auditor must obtain an EQR and concurring approval of issuance for each audit and interim +review engagement.5 Kinross engaged Wilfred W. Hanson to conduct EQRs on the engagements +for five of the 40 audit reports he issued on financial statements for fiscal years beginning on or +after December 15, 2009. +6 For the same period, however, Kinross did not obtain the required +EQRs for any of the other 35 audits he conducted or for any reviews of interim financial +information. See AS 7, ¶1. +14. Kinross engaged Hanson to conduct an EQR on the audits of Issuer A’s March 31, +2012 financial statements, Issuer B’s August 31, 2011 financial statements, Issuer C’s September +30, 2011 financial statements, Issuer D’s December 30, 2011 financial statements, and Issuer E’s +December 31, 2011 financial statements. In connection with these audits, Kinross did not ascertain +whether Hanson was qualified to perform the review. An engagement quality reviewer must be, +among other things, competent, i.e., possessing the level of knowledge and competence related to + +5 AS 7 is effective for audits and interim reviews for fiscal years beginning on or after December 15, 2009. + +6 On September 30, 2013, the Commission brought a settled action against Hanson for his role as EQR on +certain Kinross engagements. In the Matter of Wilfred W. Hanson, CPA, (Accounting and Auditing Enforcement +Release No. 3503). + + 7 +accounting, auditing and financial reporting required to serve as the engagement partner on the +engagement under review. See AS 7, ¶¶4-5. Additionally, Kinross did not establish quality control +policies and procedures to provide him with reasonable assurance that the engagement quality +reviewer has sufficient competence, among other things, to perform the EQR. See AS 7, ¶4.7 +Finally, Kinross did not ensure that his audit documentation included adequate documentation of +Hanson’s EQRs. See AS 7, ¶¶19-21. +15. With respect to Issuer D, Kinross requested that Hanson act as the engagement +quality reviewer but did not request him to provide concurring approval of issuance of Kinross’s +audit report. Instead, Kinross improperly signed as the engagement quality reviewer and provided +concurring approval to issue the audit report, even though Kinross was the engagement partner +responsible for supervising the audit. +AU §508, Reports on Audited Financial Statements +16. Under AU §508, Reports on Audited Financial Statements, an auditor may express +an unqualified opinion on historical financial statements only when the auditor has formed such an +opinion on the basis of an audit performed in accordance with PCAOB standards. See +AU §508.07. Kinross failed to conduct each of the Issuer Audits in accordance with PCAOB +standards. Kinross should not have issued audit reports expressing an unqualified opinion and +asserting he had conducted his audits in accordance with PCAOB standards. +Communications with Audit Committees +17. For each of the Issuer Audits, Kinross failed to make required communications to +the audit committee or to others responsible for the oversight of the issuer’s financial reporting +process. See AU §380, Communication With Audit Committees, Section 10A(k) of the Exchange +Act, Rule 2-07 of Regulation S-X, and PCAOB Rule 3526, Communication with Audit Committees +Concerning Independence. Kinross did not make or document that he had made the required +communications to the audit committee (or board of directors for the entities without an audit +committee), including, where applicable: i) the auditor’s responsibility under PCAOB standards, +ii) significant accounting policies, iii) management’s judgments and accounting estimates, iv) audit +adjustments, v) the auditor’s judgment about the quality of the company’s accounting principles, +vi) other information in documents containing audited financial statements, vii) disagreements with +management, viii) consultation with other accountants, ix) major issues discussed with +management prior to retention, and x) difficulties encountered in performing the audit. See +AU §380.03-.16. +18. For each of the Issuer Audits, Kinross neglected to report information regarding: +i) all critical accounting policies and practices to be used, ii) all alternative treatments of financial +information within GAAP for policies and practices related to material items that have been +discussed with management, including ramifications of the use of such alternative disclosures and + +7 PCAOB standard QC §40, The Personnel Management Element of a Firm's System of Quality Control- +Competencies Required by a Practitioner-in-Charge of an Attest Engagement states, in part, that policies and +procedures should be established to provide the firm with reasonable assurance that “those hired possess the +appropriate characteristics to enable them to perform competently” and “[w]ork is assigned to personnel having the +degree of technical training and proficiency required in the circumstances.” QC §40, ¶.02. + + 8 +treatments, and the treatment preferred by the registered public accounting firm, and iii) other +material written communications between the registered public accounting firm and management +(management letter, schedule of unadjusted differences). See Section 10A(k) of the Exchange Act +and Rule 2-07 of Regulation S-X. +19. With respect to Issuer A, Kinross failed to affirm to the audit committee,8 in +writing, prior to accepting his initial engagement pursuant to standards of the PCAOB that he was +in compliance with PCAOB Rule 3520, Auditor Independence. Similarly, with respect to +continuation of engagements for Issuers A, B, C, D, and E, Kinross failed to affirm to the audit +committee, in writing, at least annually that he was in compliance with PCAOB Rule 3520. (See +PCAOB Rule 3526, Communication With Audit Committees Concerning Independence.) +AU §315, Communications Between Predecessor and Successor Auditors +20. Kinross failed to make required communications with the predecessor auditor or +obtain sufficient competent evidential matter to afford a reasonable basis for his opinion on Issuer +A’s fiscal year 2010 financial statements, which were included in his audit report on Issuer A’s +financial statements for the fiscal years ending March 31, 2011 and March 31, 2010. As the +successor auditor, Kinross was required to obtain sufficient competent evidential matter to afford a +reasonable basis for expressing an opinion on Issuer A’s financial statements, including making an +inquiry of the predecessor auditor and requesting to review its work papers. See AU §315, +Communications Between Predecessor and Successor Auditors, ¶¶.03 and ¶¶.07-.13. For the fiscal +year ending March 31, 2010, Kinross never contacted Issuer A’s predecessor auditor. Instead, he +relied exclusively on the predecessor’s audit report on Issuer A’s March 31, 2010 financial +statements as the basis for his opinion on Issuer A’s March 31, 2010 financial statements, even +though he had not spoken with the predecessor auditor or reviewed the predecessor auditor’s work +papers. Because Kinross performed no audit procedures as of March 31, 2010 or for the period +then ended, he failed to obtain sufficient competent evidential matter to afford a reasonable basis +for his opinion on Issuer A’s March 31, 2010 and 2011 financial statements. See AU §326 and AU +§315.12. +AU § 330, The Confirmation Process +21. With respect to Issuer A, and consistent with his practice, Kinross did not control +the confirmation process. The purpose of the confirmation process, which includes +communicating the confirmation request to the appropriate third party, is to obtain evidence from a +third party about financial statement assertions made by management. See AU §§ 330.04, 330.06, +and 330.28. Kinross failed to maintain control over the confirmation requests and did not establish +direct communication with the intended recipients. Kinross knew that the auditor should control +the confirmation process, but he instructed his clients to prepare and mail confirmation requests on +his behalf. + +8 Section 3(a)(58) of the Exchange Act states, in part, that the term “audit committee” means the entire board +of directors if the issuer does not have an audit committee. + + 9 +AU §334, Related Parties +22. With respect to Issuer D, Kinross failed to evaluate and assess the adequacy of the +issuer’s disclosure of related party transactions. Kinross knew that Issuer D derived 100 percent of +its revenues and cost of revenues from a company that owned 93 percent of Issuer D’s common +stock, and with which Issuer D shared its officers and its principal place of business. Kinross also +knew or should have known that the transactions with its parent company were material and +required disclosure. See FASB ASC 850-10-50, Related Party Disclosures. Kinross failed to +consider whether he had obtained sufficient appropriate evidential matter to understand the +relationship of the parties and the effects of the transactions on the financial statements. Similarly, +he failed to evaluate all the information available and satisfy himself that Issuer D adequately +disclosed related party transactions in its financial statements. See AU §334.11. In fact, Issuer D +did not make required disclosures regarding related party transactions in its December 31, 2011 +financial statements. +Auditing Standard No. 14, Evaluating Audit Results +23. For Issuers C and D, Kinross failed to aggregate uncorrected differences that were +clearly not inconsequential, and evaluate whether they were material, either individually or in +combination with other misstatements. AS 14, Evaluating Audit Results, (“AS 14”).9 Kinross +determined planning materiality based on an amount equal to five percent of total expenses. +During the audit, Kinross identified, but did not address differences that exceeded five percent of +total expenses, i.e., planning materiality. Kinross failed to evaluate whether the uncorrected +differences were material, individually or in combination with other misstatements. See AS 14, +¶¶11-18. +Section 10A(j) of the Exchange Act, Audit Partner Rotation +24. Kinross was Issuer D’s registered public accounting firm from 2007 until he +resigned in November 2012. During this period, Kinross issued audit reports for Issuer D’s +financial statements for each of the five years in the period ended December 31, 2011. Kinross +continued to provide audit services in connection with reviews of Issuer D’s interim financial +information for the quarters ended March 31, June 30, and September 30, 2012. +10 As a result, +Kinross was not independent with respect to the audit services he provided in connection with his +review of Issuer D’s 2012 interim financial statements.11 See Section 10A(j) of the Exchange Act. +E. VIOLATIONS +1. As a result of the conduct described above, Kinross willfully violated Sections +10A(j) and 10A(k) of the Exchange Act. + +9 AS 14 is effective for audits of fiscal years beginning on or after December 15, 2010. +10 PCAOB Rule 1001(a)(vii) defines audit services, in part, as “professional services rendered for the audit of +an issuer’s annual financial statements, and (if applicable) for the reviews of an issuer’s financial statements +included in the issuer’s quarterly reports.” +11 Kinross does not qualify for the audit partner rotation exemption pursuant to Rule 2 -01(c)(6)(ii) of +Regulation S-X because Kinross was the auditor for five or more issuer clients at all relevant times. + + 10 + + 2. As a result of the conduct described above, Kinross willfully violated Rule +2-02(b)(1) and Rule 2-07 of Regulation S-X. + + 3. As a result of the conduct described above, Kinross engaged in improper +professional conduct as defined in Rule 102(e)(1)(iv)(B)(2) in that his conduct constituted +negligent conduct, consisting of repeated instances of unreasonable conduct, each resulting in a +violation of applicable professional standards, that indicate a lack of competence to practice before +the Commission. + 4. As a result of the conduct described above, Kinross willfully violated certain +provisions of the Federal securities laws and the rules and regulations thereunder pursuant to Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +F. +Findings +1. Based on the foregoing, the Commission finds that Kinross willfully violated +Sections 10A(j) and 10A(k) of the Exchange Act and Rules 2-02(b)(1) and 2-07 of Regulation +S-X. +2. Based on the foregoing, the Commission finds that Kinross engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice and willfully violated certain provisions of the federal securities +laws, pursuant to 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules +of Practice. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Kinross’ Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Kinross shall cease and desist from committing or causing any violations and any +future violations of Sections 10A(j) and 10A(k) of the Exchange Act and Rules 2-02(b)(1) and +2-07 of Regulation S-X. + B. Kinross is denied the privilege of appearing or practicing before the Commission as +an accountant. + C. After five years from the date of this order, Respondent may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission. +Such an application must satisfy the Commission that Respondent’s work in his practice +before the Commission will be reviewed either by the independent audit committee of the + + 11 +public company for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + 2. an independent accountant. Such an application must satisfy the +Commission that: + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of 2002, +and such registration continues to be effective; + (b) Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the PCAOB and that inspection did not identify any +criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions imposed by the PCAOB (other +than reinstatement by the Commission); and + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the PCAOB, including, but not limited to, +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3521.txt b/raw/aaer/2013/AAER-3521.txt new file mode 100644 index 0000000000000000000000000000000000000000..af2cf1f2983ae445ef3cbfc2bbfc1b5b9a7bc603 --- /dev/null +++ b/raw/aaer/2013/AAER-3521.txt @@ -0,0 +1,107 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71161 / December 20, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3521 / December 20, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15659 + + +In the Matter of + +Thomas D. Melvin, CPA + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3)1 of the Commission’s Rules of Practice against Thomas D. Melvin (“Respondent” +or “Melvin”). +II. + +The Commission finds that: + +A. RESPONDENT +1. Thomas D. Melvin, 46 years old, is and has been a certified public +accountant (“CPA”) licensed to practice in the State of Georgia. He has been a partner in the +accounting firm of Melvin, Rooks and Howell in Griffin, Georgia, for a number of years. + + +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 + B. CIVIL INJUNCTION + +2. On August 14, 2013 the U.S. District Court for the Northern District of +Georgia entered a final judgment against Melvin, permanently enjoining him fro m future +violations, direct or indirect, of Section 10(b) of the Securities Exchange Act of 1934 and Rule +10b-5 thereunder. Securities and Exchange Commission v. Melvin, et al. , Civil Action Number +1:12-cv-2984-CAP (N.D. Ga.). + +3. The Commission’s complaint alleged that Melvin and others engaged in a +fraudulent insider trading scheme in which Melvin misappropriated confidential information from +one of his clients regarding an imminent merger involving a company of which the client was a +director. The complaint alleges that Melvin tipped four friends and business associates about the +merger in violation of his fiduciary duties to his clients, and then those tippees purchased shares of +the target company, realizing large profits. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Melvin, a CPA, from violating the Federal securities laws within the +meaning of Rule 102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view of these findings, +the Commission deems it appropriate and in the public interest that Melvin be temporarily +suspended from appearing or practicing before the Commission. + + IT IS HEREBY ORDERED that Melvin be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on the +Respondent. + + IT IS FURTHER ORDERED that Melvin may within thirty days after service of this Order +file a petition with the Commission to lift the temporary suspension. If the Commission within +thirty days after service of the Order receives no petition, the suspension shall become permanent +pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may li ft the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + 3 + +This Order shall be served upon Melvin personally or by certified mail at his last known +address. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3522.txt b/raw/aaer/2013/AAER-3522.txt new file mode 100644 index 0000000000000000000000000000000000000000..d677130ebfa9867a17436832bea78e1ebd674e54 --- /dev/null +++ b/raw/aaer/2013/AAER-3522.txt @@ -0,0 +1,113 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71174 / December 23, 2013 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3522 / December 23, 2013 +ADMINISTRATIVE PROCEEDING +File No. 3-13709 + +In the Matter of +Clinton Ronald Greenman, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On December 10, 2009, Clinton Ronald Greenman, CPA (“Greenman”) 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 Greenman pursuant to Rule +102(e)(3)(i) of the Commission's Rules of Practice.1 This order is issued in response to +Greenman’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 Greenman 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 +Rules 13b2-1 and 13b2-2 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 a complaint filed on +November 12, 2009, the Commission alleged that SafeNet, Inc. (“SafeNet”) engaged in a scheme +to meet or exceed quarterly earnings per share targets through the use of improper accounting +adjustments from the third quarter of 2004 through the second quarter of 2005. Greenman +served as SafeNet’s Corporate Controller from December 2002 through December 2004 and as +the Director for the Americas Regional Operating Center from December 2004 through May 26, +2005. The complaint alleged that Greenman and others made, or caused others to make, certain + +1 See Accounting and Auditing Enforcement Release No. 3076 dated December 10, 2009. Greenman was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. + + 2 +improper accounting adjustments in SafeNet’s books and records. The complaint further alleged +that, as a result of these inappropriate adjustments, SafeNet’s periodic reports, registration +statements, and press releases contained materially misstated financial results and materially +false and misleading information concerning SafeNet’s financial condition. + +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, Greenman +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. Greenman 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, Greenman’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 Greenman, it appears that he has complied with the terms of the December 10, 2009 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Greenman, 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. + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the 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 +Therefore, it is accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Clinton Ronald Greenman, 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. + + +Elizabeth M. Murphy +Secretary \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3523.txt b/raw/aaer/2013/AAER-3523.txt new file mode 100644 index 0000000000000000000000000000000000000000..59866ea5eb573a170511fc4f7798f5ee1ecf8f23 --- /dev/null +++ b/raw/aaer/2013/AAER-3523.txt @@ -0,0 +1,74 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71185 / December 24, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3523 / December 24, 2013 + +ADMINISTRATIVE PROCEEDING +File No. 3-15662 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +KEVIN BRENNAN, 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 Kevin Brennan pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice [17 C.F.R. Section 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Brennan, 60, is a certified public accountant holding inactive licenses in Florida +and Pennsylvania. + +2. On June 27, 2013, a judgment of conviction was entered against Brennan in +United States v. Brennan, et al, Case No. 12-60064-CR, in the United States District Court for +the Southern District of Florida, finding him guilty of two counts of securities fraud and one + +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.” + +count of conspiracy to commit securities fraud. + +3. As a result of this conviction, Brennan was sentenced to 75 months imprisonment +in a federal penitentiary and ordered to forfeit $4,770. + +III. + +In view of the foregoing, the Commission finds that Brennan 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 Kevin Brennan 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. + + + +Elizabeth M. Murphy +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2013/AAER-3524.pdf b/raw/aaer/2013/AAER-3524.pdf new file mode 100644 index 0000000000000000000000000000000000000000..96777224bec5807898f12785312bb7f8669bec0b Binary files /dev/null and b/raw/aaer/2013/AAER-3524.pdf differ diff --git a/raw/aaer/2013/AAER-3524.txt b/raw/aaer/2013/AAER-3524.txt new file mode 100644 index 0000000000000000000000000000000000000000..51063a0aa96c1ff7e36d649f713021d48110d576 --- /dev/null +++ b/raw/aaer/2013/AAER-3524.txt @@ -0,0 +1,74 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71205 / December 30, 2013 + +ACCOUNTING AND AUDITING ENFORCEMENT ACT +Release No. 3524 / December 30, 2013 + +Admin. Proc. File No. 3-15168 + + +In the Matter of + +JOHN J. AESOPH, CPA, and +DARREN M. BENNETT, CPA + + + + +ORDER GRANTING +EXTENSION + +Chief Administrative Law Judge Brenda P. Murray has moved, pursuant to Commission +Rule of Practice 360(a)(3),1 for a six-month extension to issue the initial decision in this +proceeding. For the reasons set forth below, we grant her motion. +On January 9, 2013, we issued an Order Instituting Administrative Proceedings ("OIP") +against John J. Aesoph, CPA and Darren M. Bennett, CPA, auditors at KPMG, LLP.2 The OIP +alleges that Aesoph and Bennett repeatedly engaged in improper professional conduct, as defined +in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission +Rules of Practice,3 during their year-end 2008 audit of TierOne Corporation, a holding company +for TierOne Bank (collectively, "TierOne"), by failing to subject TierOne's loan loss estimates to +appropriate scrutiny. +The OIP directs the presiding law judge to issue an initial decision within 300 days of the +date of service of the OIP. On November 26, 2013, Chief Judge Murray filed a motion stating +that the initial decision is due on January 1, 2014, and requesting an extension pursuant to +Commission Rule of Practice 360(a)(3). +We adopted Rules of Practice 360(a)(2) and 360(a)(3) to enhance the timely and efficient +adjudication and disposition of Commission administrative proceedings by setting deadlines for + +1 17 C.F.R. § 201.360(a)(3). +2 John J. Aesoph, CPA, Exchange Act Release No. 68605, 2013 WL 98717 (Jan. 9, 2013). +3 15 U.S.C. § 78d-3 and 17 C.F.R. § 201.102(e)(1)(ii). +2 + + + +issuance of an initial decision.4 The rules further provide for deadline extensions under certain +circumstances, if supported by a motion from the Chief Administrative Law Judge and we +determine that "additional time is necessary or appropriate in the public interest."5 +In her motion, Chief Judge Murray states that it will not be possible for the presiding law +judge to issue an initial decision by the due date. She notes that the hearing in this proceeding, +which took place between October 7 and 11, 2013, and October 28 and 31, 2013, had been +"postponed for over three months" because (i) the parties and the judge agreed to a delay because +Bennett's long-time counsel was recovering "from a sudden medical condition;" and +(ii) "uncertainty of a government shutdown in early October 2013." She also notes that the +"nine-day hearing produced a record of over 2,300 pages of transcript and over 150 exhibits," +and the post-hearing reply briefs are not due until December 19, 2013. Moreover, the presiding +law judge is responsible for initial decisions in two proceedings with hearings that concluded in +May and September 2013, one of which produced an extensive record. Under the circumstances, +it is appropriate in the public interest to grant the Chief Administrative Law Judge's request and +to extend the deadline for issuance of a decision in this matter. +Accordingly, IT IS ORDERED that the deadline for filing the initial decision in this +proceeding is extended to July 1, 2014. +By the Commission. + + +Elizabeth M. Murphy +Secretary + +4 See Adopting Release, Exchange Act Release No. 48018, 2003 WL 21354791, at *2 (June +11, 2003). +5 17 C.F.R. § 201.360(a)(3). \ No newline at end of file diff --git a/raw/aaer/2013/AAER-4298.txt b/raw/aaer/2013/AAER-4298.txt new file mode 100644 index 0000000000000000000000000000000000000000..82fb8996ce6a973c264fa6d1e4a86d7b50edd990 --- /dev/null +++ b/raw/aaer/2013/AAER-4298.txt @@ -0,0 +1,196 @@ + INITIAL DECISION RELEASE NO. 485 + ADMINISTRATIVE PROCEEDING + FILE NO. 3-15207 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +Washington, DC + + +_________________________________________ + +In the Matter of + : INITIAL DECISION AS TO ARTFEST +ARTFEST INTERNATIONAL, INC., : INTERNATIONAL, INC. +CHINA ADVANCED MEDITECH, INC., : April 30, 2013 +CYNET, INC., : +DURHAM MARKETING CORP., : +EMISSARY CAPITAL GROUP, INC. : + (n/k/a CAVALIER HOLDINGS, INC.), and : +ESP ENTERPRISES, INC. : + (n/k/a ESP ENTERPRISES OF LA, INC.) : +_________________________________________ + +APPEARANCES: Neil J. Welch, Jr., and Stephan J. Schlegelmilch for the Division of +Enforcement, Securities and Exchange Commission + +Jonathan D. Leinwand, Esq., for Artfest International, Inc. + +BEFORE: Brenda P. Murray, Chief Administrative Law Judge + + + The Secur ities and Exchange Commission (Commission ) issued an Order Instituting +Proceedings (OIP) on February 11, 2013, alleging that Respondents have securities registered with +the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act) +and have not filed periodic reports with the Commission as required by Exchange Act Section 13 (a) +and Exchange Act Rules 13a-1 and 13a-13. + +On March 6, 2013, I issue d an Order Making Findings and R evoking Registrations by +Default as to Four Respondents and Granting Leave for Motion for Summary Disposition as to Two +Respondents (Default Order). Artfest International, I nc., Exchange Act Release No. 69049. The +Default Order revoked the registrations of all Respondents except Artfest International, Inc. +(Artfest), and Durham Marketing Corp. (Durham). Artfest had filed a Response to the OIP, which I +considered to be an An swer, and participated in the prehearing conference on March 4, 2013 , and +the Division of Enforcement (Division) indicated at the prehearing conference that Durham would +settle the allegations.1 I granted leave to the Division to file a motion for summary disposition as to + +1 Artfest titled the pleading a Response, but the Commission’s Rules of Practice require an Answer +so I will use the latter term. 17 C.F.R. § 201.220. +2 + +Artfest and Durham. See 17 C.F.R. § 201.250(a). On April 4, 201 3, the Commission issued an +Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the +Securities Exchange Act of 1934 as to Durham Mark eting Corp. Artfest International, Inc. , +Exchange Act Release No. 69292. + + On April 5, 2013, the Division filed a Motion for Summary Disposition and Brief in Support +(Motion) with the De claration of Neil J. Welch, Jr. in Support of the Division of Enforce ment’s +Motion for Summary Disposition ( Declaration) and nine exhibits.. The exhibits are: (1) printout of +Nevada Secretary of State website showing Artfest’s status as revoked; (2) excerpt of Form 10 -SB +filed by Artfest’s predecessor, Soldnet, Inc. , on Mar ch 11, 2002; (3) delinquency letter from the +Commission’s Division of Corporation Finance to Artfest dated November 30, 2012; (4) printout +from the website www.otcmarkets.com showing the trading status of Artfest’s stock as of April 3, +2013; (5) printout showing Artfest’s filings in the EDGAR database as of April 3, 2 013; (6) excerpt +from Artfest’s Form 10 -K/A for the fiscal year ended December 31, 2010 , filed on October 20, +2011; (7) a portion of Artfest’s Form 10 -KSB for the fiscal year ended December 31, 2008; (8) a +portion of Artfest’s Form 10-K/A for the fiscal year ended December 31, 2009; and (9) a portion of +Artfest’s Form-8-K filed on February 22, 2013. I take official notice of these exhibits. See 17 +C.F.R. § 201.323. + + As of the date of this Initial Decision, Artfest has not filed an opposition to the Motion. See +17 C.F.R. § 201.154(b). + +Findings of Fact and Conclusions of Law + + Artfest is a revoked Nevada corporation located in Dallas, T exas, with a c lass of securities +registered with the Commission pursuant to Section 12(g) of the Exch ange Act. See Declaration, +Exs. 1, 2; OIP at 1; Answer. Artfest’s claims that it had no notice that it was delinquent in its filings +are irrelevant and untrue. An entity that registered securities with the Commission is responsible +for knowing its obligation to file periodic reports and for keeping a valid address on file with the +Commission. See 17 C.F.R. § 240. 13a-1, 13a -13. On November 30, 2012, the Commission ’s +Division of Corporation Finance sent a letter of delinquency by certified mail to “Mr. Edward +Vakser, President, Artfest, 13300 Branch View Lane, Dallas, Texas 75234.” Declaration, Ex. 3. +This address was the address that appeared on Artfest’s most recent filing with the Commission , +which was a Form 10-K/A filed on October 20, 2011. Declaration, Exs. 5, 6. As of February 5 and +April 3, 2013, Artfest’s stock was trading on the over -the-counter markets. OIP at 2; Answer; +Declaration, Ex. 4. + + Artfest does not deny that its last required periodic filing with the Commission was a Form +10-K/A filed October 20, 2011. Tr. 4; OIP at 1; Answer; Declaration, Ex. 5. Artfest represents that +it has engaged a new auditor and intends to file all delinquent periodic r eports. Tr. 9; Answer. +However, the sworn Declaration states that: + +On March 22, 2013, I spoke by telephone with David Brooks of D. Brooks & +Associates, which had been announced as the new auditor for Artfest. Mr. Brooks +told me he had received an engagement letter from Artfest on February 12, 2013, but +not his retainer of $2,000, nor any information upon which to begin the audit. Mr. +Brooks said he had not done any of his client accept ance procedures either because +3 + +he had not been paid his retainer. On April 3, 2013, Mr. Brooks left me a voicemail +stating that the status of his audit of Artfest was the same, and that no retainer ha d +yet been paid and no audit work had been done. + +Declaration, 2-3. + + Rule 250 of the Commission’s Rules of Practice provides that: + +(a) After a respondent’s answer has been filed and, in an enforcement or a +disciplinary proceeding, documents have been made available to that respondent +for inspection and copying pursuant to Rule 230, the respondent, or the interested +division may make a motion for summary disposition of any or all allegations of +the order instituting proceedings with respect to that respondent. +. . . . + +(b) The hearing officer may grant the motion for summary disposition if there is no +genuine issue with regard to any material fact and the party making the motion is +entitled to a summary disposition as a matter of law. + +Section 13(a) of the Exchange Act and the Exchange Act Rules 13a -1 and 13a -13 require +issuers of securities registered pursuant to Section 12 of t he Exchange Act to file with the +Commission current and accurate information in periodic reports, even if the registration is +voluntary under Section 12(g). Specifically, Rule 13a -1 requires issuers to file annual reports, and +Rule 13a-13 requires domesti c issuers to file quarterly reports. See 17 C.F.R. §§ 240.13a -1, .13a- +13. + +The Motion is granted because Artfest has failed to comply with Section 13(a) of the +Exchange Act and Exchange Rules 13a -1 and 13a -13 thereunder , there are no material issues of +fact, and the Division is correct on the merits as a matter of law. + +Exchange Act Section 12(j) authorizes the Commission, where it is necessary or appropriate +for the protection of investors, after notice and opportunity for hearing, “to suspend for a p eriod not +exceeding twelve months, or to revoke the registration of a security , if the Commission finds ” that +the issuer has not complied with any provision of the statute or a rule thereunder. The case law is +clear: + +The reporting requirements of the Securities Exchange Act of 1934 is the primary +tool which Congress has fashioned for the protection of investors from negligent, +careless, and deliberate misrepresentations in the sale of stock and securities. +Congress has extended the reporting requireme nts even to companies which are +‘relatively unknown and insubstantial.’ + +SEC v. Beisinger Indus. Corp. , 552 F.2d 15, 18 (1st Cir. 1977) (citations omitted). The +Commission has cited Beisinger in numerous opinions involving Exchange Act Section 13(a) and +Exchange Act Rules 13a-1 and 13a-13, such as Gateway International Holdings, Inc., Exchange Act +Release No. 53907 (May 31, 2006 ), 88 SEC Docket 430. Analysis of the factors set out in +Gateway: (1) seriousness of the issuer’s violations; (2) isolated or re current nature of the violations; +4 + +(3) degree of culpability; (4) extent of the issuer’s efforts to remedy past violations and ensure +future compliance; and (5) credibility of issuer’s efforts to assure future compliance , shows that +Artfest has been in cons istent violation of the periodic filing requirements for over two years and +three months, involving numerous quarterly filings and two annual filings with audited financials; +that from its prior filings it knew what was required; and that it gave false rep resentations that an +accountant would soon submit audited materials because it has not paid $2,000 , an amount +necessary for the work to begin. Declaration, 2-3. The Motion notes that similar to Gateway, +Artfest has not filed required Forms 12b -25 requesting extensions of time to make its delinquent +filings and this could be considered evidence of heightened culpability. Motion at 8. The Motion +also suggests that the violations of Artfest’s officers and director to make the individual filing +requirements required by Exchange Act Sections 13(d) and 16(a) should be considered as well as +Artfest’s failure to comply with Exchange Sections 14(a) and (c) in assessing a sanction. Id. at 8- +12. + +The Commission’s case law, such as Impax Laboratories, Inc. , Exchange Act Release No. +57864, (May 23, 2008 ), 93 SEC Docket 6241, 6252 (“recurrent failure to file periodic reports so +serious that only a strongly compelling showing with respect to other factors would justify a lesser +sanction than revocation.”) , is persuasive that it is necessary and appropriate for the protection of +investors to revoke the registration of Artfest’s registered securities. + +Order + + Based on the findings and conclusions set forth above: + + I ORDER THAT, pursuant to Section 12(j) of the Securi ties Exchange Act of 1934, the +registration of each class of registered securities of Artfest International, Inc., is hereby REVOKED. + + This Initial Decision shall become effective in accordance with and subject to the provisions of +Rule 360 of the Commission’s Rules of Practice. See 17 C.F.R. § 201.360. Pursuant to that Rule, a +party may file a petition for review of this Initial Decision within twenty-one days after service of the +Initial Decision. A party may also file a motion to correct a manifest error of fact within ten days of the +Initial Decision, pursuant to Rule 111 of the Commission’s Rules of Practice. 17 C.F.R. § 201.111. If +a motion to correct a manifest error of fact is filed by a party, then that party shall have twenty -one +days to file a petition for review from the date of the undersigned’s order resolving such motion to +correct manifest error of fact. The Initial Decision will not become final until the Commission enters +an order of finality. The Commission will enter an order of finality unless a party files a petition for +review or motion to correct manifest error of fact or the Commission determines on its own initiative to +review the Initial Decision as to a party. If any of these events occur, the Initial Decision shall not +become final as to that party. + + _______________________________ + Brenda P. Murray + Chief Administrative Law Judge + + + + \ No newline at end of file