by T. GormanPosted on Posted in SECActions

Offering frauds are typically one of the largest types of cases filed by the Commission. These frauds come in all sizes, shapes and colors – there is virtually an infinite variety of these types of cases. While the Commission almost continuously files new audit fraud cases, often with a parallel criminal case filed by the appropriate U.S. Attorney’s office, they continue to persist. In some instances, this is because the sales pitch is good and offers something which is difficult to achieve, a quick way to become rich. In others, the scheme is as simple as an offer to sell shares of a company by a good salesman. This was the method used in the latest offering fraud case filed by the Commission, SEC v. Pison Stream Solutions, Inc., Civil Action No. 1:24-cv-00816 (N.D. Oh. Filed May 7, 2024).

Named as defendants are the company and Joseph James, Jr. Defendant James is a resident of Bratenahl, Ohio, a wealthy enclave in Cleveland, Ohio. He formed Defendant Pison Stream and has served as its CEO since inception. Prior to Pison, Mr. James worked as a chemist for various companies. The company, based in Broadview Heights, Ohio, a suburb of Cleveland, engages in researching and developing products in the chemical coatings industry.

Over a five-year period, beginning in 2017 Defendants James and Pison raised about $32.5 million by selling the securities of the company. Investors were told that their funds would be used for the development of Pison and its business and expanding its chemical coatings operations.

In dealing with investors Mr. James presented himself as an independently wealth investor – he did not need their money. He did not take a salary from the company for all of his work, apparently part of the sales pitch. This approach, coupled with the opulent life style of Mr. James apparently convinced investors that he was the real thing – a promotor of the company and its business who did not need the money for himself.

The image Defendant James created was bolstered by relocating the headquarters of Pison from suburban Cleveland to Manhattan and One World Trade Center in 2019. Mr. James finished off his image by maintaining an expensive Manhattan apartment for his personal use.

Unfortunately, the company never moved past being a start-up. Its only recognized income for the period was $6,800 — a testament to its lack of success. The company also did not appear to benefit from the millions of dollars raised by selling its securities. Mr. James, however, did. Over $10 million of those funds were used to create the successful lifestyle Defendant James used to create the image that helped sell Pison’s securities. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation . See Lit. Rel. No. 25999 (May 8, 2024).

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by T. GormanPosted on Posted in SECActions

A key part of investor safeguards in the market place regarding public companies is the requirement that financial information be reviewed and audited by public accountants registered with the Public Company Accounting Board or PCAOB. The Board was created in 2002 as part of the Sarbanes Oxley Act.

The Board regulates auditors of public companies and oversees the audits of those firms as well broker and dealers registered with the SEC. It also writes rules designed to safeguard the public and brings enforcement actions against firms that fail to comply with those provisions. The Commission also files action based on PCAOB rules. Its most recent is In the Matter of BF Borgers CPA PC. Adm. Proc. File No. 3-21926 (May 3, 2024).

Named as Respondents in the proceeding is the firm and Benjamin F. Borgers, CPA. The firm is based in Colorado and registered with the Commission. Mr. Borgers is the managing partner and a certified public accountant licensed in Colorado.

The proceeding centers on a two-year period beginning in early 2021. During the period the firm had about 350 clients who were required by Commission rules to have their financial statements audited in accord with PCAOB standards to incorporate their financial statements into filed with the Commission.

Respondents in the proceeding were required to comply with the requirements of the Board in conducting audits and reviews. For engagements Mr. Borgers typically served as the engagement partner.

During the period the Order claims that Respondents deliberately and systematically failed to audit and review public companies and SEC registered broker-dealer clients in accord with the applicable PCAOB standards. Specifically, Respondents are alleged to have not complied with three standards. The first is PCAOB Auditing standard 1220; the second and third are PCAOB Standards 1201 and 1215.

PCAOB Standard 1220 governs the Engagement Quality Review. It requires that audits and reviews of interim financial information be approved by an engagement quality reviewer. Here Respondents failed to comply with this requirement in at least 1,625 public filings and disclosures during the period.

PCAOB Standards 1201 and 1215 provide for Supervision of the Audit. These provisions provide for supervision and control with regard to the work of the engagement teams. They also ensure that workpapers are properly prepared. Respondents failed to comply with these requirements in their engagements during the period. Nevertheless, Respondents stated in their engagement letters that the audits and quarterly reviews would be in accord with PCAOB standards. They also issued reports which falsely certified that the audits were completed in accord with the pertinent standards.

Respondents resolved the proceedings. An order was entered prohibiting each Respondent from committing or causing violations in the future of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 15(d), 17(a) and 17(e). A censure was also entered. In addition, each Respondent is denied the privilege of appearing and practicing before the Commission as an accountant. The firm will pay a penalty of $12 million. Mr. Borgers will pay a penalty of $2 million.

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