by T. GormanPosted on Posted in SECActions

The Commission announced the resolution of two fraud cases this week. Once centered on fraud claims tied to a real estate crowd funding portal. SEC v. Skelley, Civil Action No. 18-cv-8803 (S.D.N.Y. Settled March 26, 2021). The second focused on the assistance rendered to fraudsters by an attorney. SEC v. Shkreli, Civil Action No. 15-cv-7175 (E.D.N.Y. Settled April 5, 2021).

Skelley is an action which names as defendants William Skelley and Sohin Shah. Defendants co-founded Innovational Funding LLC in 2012. The next year the firm launched an on-line real estate portal. Investors were solicited using PPMs which claimed that they could become equity or debt holders in real estate projects across the U.S. The solicitations took place from October 2013 through June 2016. Investors were told their funds would be used to build the business. About $3.39 million was raised from 47 investors in 17 states. Investors were required to be accredited. Beginning in December 2015 Defendants also issued to five investors promissory notes convertible to capital or common stock. The notes were issued in the principal amount of $187,5000 with a 2% rate. In fact, Defendants misappropriated over $1.1 million of the investor funds. The complaint alleged violations of each subsection of Securities Act section 17(a) and Exchange Act sections 10(b) and 20(a).

The action was resolved as to Mr. Skelley when he failed to respond and the Court entered judgment. Subsequently, on March 26, 2021 the Court entered a permanent injunction against Mr. Skelley based on Securities Act Section 17(a) and Exchange Act Section 10(b). The Court also directed that Mr. Skelley pay disgorgement of $1,073,746.65, prejudgment interest of $184655.27 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 25066 (April 7, 2021).

The settlement in Shkreli involved attorney Evan Greebel, former counsel to Retrophin, Inc., a publicly traded pharmaceutical company founded by Martin Shkreli who was sentenced to serve seven years in prison after being convicted on fraud charges tied largely to his conduct concerning two hedge funds. See U.S. v. Shkreli, No. 15-cv-07175 (S.D.N.Y.). The Commission’s action here centered on the period 2013 and early 2014 when Mr. Shkreil orchestrated a fraud involving the pharmaceutical firm and his hedge funds. Specifically, Mr. Shkreli induced investors from his hedge funds to enter into agreements with the company of which he was CEO stating that certain payments they received from the company were for consulting services. In fact the payments were for the release of potential claims against Mr. Shkreli. Mr. Greebel is alleged to have aided the scheme.

To resolve the matter with the Commission Mr. Greebel consented to, and the Court entered, permanent injunctions based on Exchange Act Section 10(b). Mr. Greebel was also barred from serving as an officer or director of a public company. No monetary relief was ordered in view of the penalties imposed in the related criminal action. See Lit. Rel. No. 25065 (April 6, 2021).

by T. GormanPosted on Posted in SECActions

Commission administrative proceedings naming auditors as respondents typically focus on a failure to properly conduct the audit in accord with PCAOB standards. Many are essentially audit failures where so little work was done that it is questionable if the firm even drove by the issuer’s business. Virtually all of the cases are settled prior to filing.

The latest proceeding brought by the agency is different. In this case the auditor failed to even complete the application process to register with the PCAOB. Nevertheless, the auditor attempted to perform the audit but failed to comply with Board standards. The matter will be set for hearing. In the Matter of Christopher E. Knauth, CPA, Adm. Proc. File No. 3-20256 (April 5, 2021).

Respondent Knauth is the founder and principal of Audit Firm A, a Texas firm formed in 2017. Mr. Knauth is a certified public accountant but had never audited a public company. The firm was not registered with the PCAOB. The proceedings centers on work to be done at Issuer A, a firm whose shares were listed on the OTCQB tier of the OTC Markets until they were delisted by the Commission in 2019.

Respondent Knauth executed an engagement agreement with Issuer A to audit the firm’s 2018 year-end financial statements and perform the interim quarterly reviews for the same year. The letter represented that the firm was registered with the PCAOB and that Mr. Knauth would serve as the engagement partner.

Subsequently, Mr. Knauth filed Form 1 with the PCAOB to register in September 2018. Although Audit Firm A had a second partner, he was not consulted or informed. The Board sent a letter requesting clarification of certain points and additional information. Although follow-up requests were sent no response was made. Finally, Respondent sent a letter stating that he would file a new application. He did not.

Nevertheless, Respondent proceeded with the audit of the year-end 2018 financial statements as well as the interim reviews. The year-end audit opinion represented the firm was registered with the Board and that the work had been performed in accord with its standards. It was not.

In doing the work Respondent failed to plan the year-end audit in accord with the applicable PCAOB requirements. Those standards require that the auditor prepare a plan describing the nature, timing and extent of the risk assessment procedures for the work. Similarly, the standards applicable to conducting a review of interim financial statements require that the auditor conduct procedures to understand the business and its internal controls. No meaningful process was undertaken.

In performing the audit and undertaking the reviews Respondent disregarded key PCAOB standards. For example, the audit work papers lacked sufficient documentation to determine what work was done. During the engagement Respondent failed to exercise due professional care and exercise professional skepticism or to properly evaluate the risks. In fact, Respondent failed to obtain sufficient appropriate audit evidence. And, no engagement quality reviews of Respondent’s work were done.

The Order alleges violations of SOX Section 102(a) since the firm was not registered; Rule 2-02(b)(1) regarding the improper report and the applicable standards; Exchange Act Section 13(a) and the applicable rules requiring the issuer to file certain reports; and Rule 102(e)(1)(ii) regarding professional standards.

The proceedings will be set for hearing.

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