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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Last week the Commission filed seven new enforcement actions. Six were civil injunctive actions while one was an administrative proceeding. The civil injunctive actions involved failure to register as a broker or dealer, cybersecurity, insider trading and misappropriation. The administrative proceeding centered on a fee splitting transaction prohibited by the Investment Company Act.

Be careful, be safe this week.

SEC Enforcement – Filed and Settled Actions

Statistics: This week the Commission filed 6 new civil injunctive actions and 1 new administrative proceeding, excluding tag-along actions and those that present a conflict for the author.

Unregistered broker: SEC v. Levin, Civil Action No. 22-cv-01025 (N.D. Tex.) is a previously filed action that alleged defendant Daniel E. Levin violated Exchange Act Section 15(a). The complaint claimed that Defendant solicited investors to purchase about $2.6 million in units of a fund he controlled which, in turn, owned units in funds run by GPB Capital. Between 2017 and 2018 Defendant solicited 27 investors. Defendant was not registered with the Commission. Defendant agreed to resolve the charges, consenting to the entry of a permanent injunction based on Exchange Act Section 15(a) in a bifurcated proceeding. Subsequently, the Court, on motion by the Commission, directed Defendant to pay $320,000 in disgorgement and prejudgment interest and a penalty in the amount of $115,231. See Lit. Rel. No. 25991 (May 1, 2024).

Cybersecurity: SEC v. Blount, Civil Action No. 4:2-cv-375 (E.D.Tx. Filed April 30, 3034). Named as defendant is Jack Blount, the president of Intrusion , Inc., whose shares are listed o Nasdaq. Beginning in early 2020, and continuing for about one year, Mr. Blount served as the president and CEO of Intrusion. He used the firm to promote a new cybersecurity product called “Intrusion Shield.” The product was part of a package of services being marketed regarding cyberattacks. Specifically, Intrusion marketed and sold services that supposedly detected, analyzed and reported cyberattacks or the misuse of information. The marketing pitch was successful. During the period Mr. Blount and his firm built a client base which included government defense and security agencies and two commercial customers. Intrusion Shield appeared to be a success. The difficulty was that the sale pitch was based on misrepresentations regarding Mr. Blount’s background, the success of the company, its claimed testing program and certain of its contacts. The Commission filed a complaint which alleged violations of Securities Act Sections 17(a)(1) and (3) and Exchange Act Section 10(b). Mr. Blount resolved the matter, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. He also agreed to the imposition of an officer/director bar. The judgment does not impose any financial penalty based on Mr. Blount’s financial condition. See Lit. Rel. No. 25990 (April 30, 2024).

Unregistered dealer: SEC v. Tri-Bridge Ventures, LLC, Civil Action No. 3:24-cv-05711 (D.N.J. Filed April 29, 2024). Named as defendants in the action are: The company and John F. Forsythe, III. The company was founded in about 2016. It is controlled by Defendant Forsythe. The firm is now based out of his home in New Jersey. Mr. Forsythe has been associated with 10 brokers over the years. Over a five-year period, beginning in early 2017 and continuing through at least November 2022, Defendants engaged in the business of buying and selling securities. Defendants conducted this business by: a) entering into convertible notes with microcap issuers or purchasing such notes; b) converting the notes into stock; and c) selling the shares of the microcap issuers into the over-the-counter or OTC markets. During the five year period period securities were sold of at least 31 issuers. From May 2019 to November 2022 Defendants sold shares of at least 25 issuers yielding over $18 million in gross sales. Neither Defendant is registered with the Commission. The complaint alleges violations of Exchange Act Section 15(a)(1). The case is in litigation. See Lit. Rel. No. 25987 (April 29, 2024).

Insider trading: SEC v. Bhandari, Civil Action No. 1:24-cv-00710 (E.D. Va. Filed April 30, 2024) is an action which names as defendant Sanjay Bhandari, a consultant at a private company: Vinod Singhi, a close friend of Bhandari; and Rakesh Jain, a friend of each other Defendant. On January 19, 2022 Belgium-based pharmaceutical company UCB S.A. announced that it would acquire Zogenix. Shortly prior to the announcement Zogenix Insider, who had a close personal relationship with Defendant Bhandari, told his friend about the upcoming announcement. During the phone call Defendant began buying shares of the target. Overall he acquired $75,000 worth of shares. Defendant Bhandari also told his close friend Singhi about the deal. He traded and told a close friend, Jain, who purchased options. Following the deal announcement shares of Zogenix increased in price by about 66%. Defendant Bhandari had profits of about $49,015 while Singhi had profits of $10,555 and Jain had profits of about $9,570. To resolve the action each trader consented to the entry of a permanent injunction based on Exchange Act Section 10(b). The Court ordered Defendant Bhandari to pay disgorgement of $48,015, prejudgment interest of $7,020 and a penalty of $73,523. Mr. Singhi was ordered to pay disgorgement of $10,555, prejudgment interest of $1,512 and a penalty equal to his trading profits. Jain was ordered to pay disgorgement of $9.570 prejudgment interest of $1,371 and a penalty equal to the trading profits. See Lit. Rel. No. 25989 (April 30, 2022).

Self-dealing: SEC v. Sumichrest, Civil Action No. 25988 (W.D.N.C.) is a previously filed action which named as defendant Martin S. Sumichrest who became manager of private fund Stone Street Partners LLC following the death of its prior manager in late 2018. Subsequently, he used the fund to enter into a series of self-dealing transactions which included doubling his salary, purchasing restricted shares of Sumichrest, and buying privately held shares of a vaping company held by Sumichrest and others. To resolve the matter Defendant consented to the entry of a permanent injunction based on Advisers Act Sections 206(2) &(3) and an order directing him to pay disgorgement in the amount of $225,000, prejudgment interest of $50,000 and a penalty in the amount of $75,000. See Lit. Rel. No. 25988 (April 30, 2024).

Misappropriation: SEC v. Rivero, Civil Action No. 22-cv-01360 (D.N.J.) is a previously filed action which named as defendant Mario Rivero, a former registered representative. He was alleged to have misappropriate hundreds of thousands of dollars from investment accounts he handled. The court previously entered a partial final judgment against him, enjoining Mr. Rivero from future violations of Securities Act Sections 17(a)(1) & (2), Exchange Act Section 10(b) and Advisers Act Sections 206(1) & (2). Subsequently, the court directed that Defendant pay disgorgement in the amount of $488,978 which is deemed paid by the restitution order entered in the parallel criminal case. U.S. v. Rivero, No. 23-cr88 (D. N.J.). See Lit Rel. No. 25986 (April 29, 2024).

Conflicts: In the Matter of Capital Advisors LLC, Adm. 3-121932 (April 29, 2024) is a proceeding which names as respondent the registered investment adviser. The case centers on the relationship and dealings of the adviser with Mutual Fund Series Trust, a registered, open-ended management investment company that consists of 86 series. From 2016 through 2017 Mutual Fund Series was a client of the adviser. Each retained the same counsel. During the term of the inquiry the fees were split in a manner that favored the adviser. This arrangement violated Section 17d and the related Rule of the Investment Company Act. To resolve the proceedings, Respondent consented to the entry of a cease-and-desist order based on that Section. The firm also agreed to pay disgorgement in the amount of $280,902 and $183,737 based on the time value of money.


Remarks: ASIC Chair Joe Longo delivered remarks at the RIAA Conference (Responsible Investment Association Australasia) in Australia on May 2, 2024 centered on greenwashing. The chair sought in his remarks to reinforce the need to combat the practice to support sustainable finance-related products and services (here).


Analysis: The regulator published the latest volume of its macroeconomic review, Vo. 23, Issue 1, April 1, 2024 (here).


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