by T. GormanPosted on Posted in SECActions

From the beginning the purpose of the federal securities laws has been to bring a new ethics to the marketplace. For years the statutes have been interpreted in a flexible manner to help achieve the new ethics goal. Indeed, the Commission has over the years employed a number of approaches to aid the effectuation of the statutory goal. One is the gatekeeper theory. Born in the earliest days of the Enforcement Division, the theory posits that professionals – lawyers, accountants and market professionals – have ethical obligations which if properly implemented would aid in fulfilling the new ethics goal of the statute while deterring wrongful conduct. This approach is what underlies the Commission’s latest enforcement action holding professionals accountable for ethical failures. In the Matter of Ernst & Young, LLP, Adm. Proc. File No. 3-20911 (June 28, 2022).

Ernst & Young is one of the largest accounting, auditing and consulting firms in the world. As auditors of public companies, accountants and consultants, part of their obligation is to safeguard and help further the ethical underpinnings of their profession in the marketplace. It is for this reason that to become a licensed CPA, applicants must in most states pass ethics examinations. It is with this goal in mind that many state accountancy boards require CPAs to complete continuing professional education courses – to reinforce their knowledge of “ethical obligations and current accounting standards.”

Despite these repeated tutorials, on multiple occasions between 2017 and 2021, and for many years before, the professionals at the firm cheated on ethics exams by using and circulating answer keys. For example, over 200 EY audit professionals across the country exploited a software flaw in the firm’s CPE testing platform to pass exams while “answering only a low percentage of questions correctly.” And, many audit professionals who knew of the lies, the unethical conduct, but failed to stand up and say anything to try and halt it.

As the Order in this matter states: The “gatekeeping role depends on the integrity not only of the independent audit firm’s audit personnel, but of its management and its attorneys.” This point is reflected in the federal securities laws, the PCAOB rules and the Code of Professional Conduct of the AICPA. Yet despite widespread information at the firm about cheating, and confirmation of the unethical conduct by an internal investigation, the firm failed to correct a submission to the Commission stating that it “did not have any current issues with cheating.” The Order concludes that the firm willfully violated PCAOB Rule 3500T regarding ethical standards in the AICPA Code and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.

In resolving the matter, the firm agreed to implement certain undertakings. Those include the retention of an Independent Consultant and a requirement to conduct a review of the firm’s policies and procedures.

The firm consented to the entry of a cease-and-desist order based on PCAOB Rule 3500T and a censure. The firm will also pay a penalty of $100 million.

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by T. GormanPosted on Posted in SECActions

Frequently corporate employees receive confidential information, that is, information that is material and has not been made available to the public. Those employed in the finance department of a company frequently learn about the firm financial results, for example, before they are published and available to the public. The same is frequently true in the pharmaceutical industry. There clinical results are typically learned from on-going tests before the information is released to the public. Once the information is obtained, those in possession are not permitted to trade in the stock until the information is released. Unfortunately for one doctor engaged at a medical consulting firm, failed to comply with the standard rule. In the Matter of Sidney A. Spector, MD, PhD, File No,. 3-20910 (June 27, 2022).

Sidney Spector is a neurologist licensed to practice in Arizona and Florida. He operates a medical consulting firm through a wholly owned entity. In 2019 he was employed as a medical consult at Solid Biosciences Inc. The consultancy focused on a clinical trial for a gene therapy to treat Duchenne muscular dystrophy, then under development by the company.

During his consultancy, Dr. Spector learned that the trial was not successful through his position at Solid Biosciences. Rather than maintain the confidentiality of the information he acted on it. Specifically, Dr. Spector sold his Solid Biosciences shares from his brokerage account. The sale permitted him to avoid a loss of $28,142.33. He also persuaded a close relative to sell his shares, avoiding a loss of $2,351.89, The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

To resolve the matter Respondent consented to the entry of a cease-and-desist order based on the Sections cited in the Order. In addition, he will pay disgorgement of $2,142.33, prejudgment interest of $2,381.44 and a penalty of $33,045.02.

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