by T. GormanPosted on Posted in SECActions

When Congress created the PCAOB many commentators thought that actions against accounting firms and their professionals would be handled by the Board rather than the SEC. While the Board does conduct investigations and bring enforcement actions, the Commission has continued to bring cases involving audit firms and their personnel as illustrated by three recent SEC enforcement actions.

In the Matter of PMB Helio Donovan, LLP, Adm. Proc. File No. 3-17691 (Nov. 21, 2016) is a proceeding which names as Respondents: PMB Helio, a PCAOB registered audit firm; Christopher Bauer, CPA, the lead engagement partner for work on Uni-Pixel, Inc. engagements from the 2008 audit through the second quarter review of 2013 and the CFO of the audit firm from 2011 through 2013; and Jeffrey Jamieson, the engagement quality review partner for Uni-Pixel’s 2012 audit and 2012 first and second quarter reviews as well as the managing partner of PMB Helio’s Dallas office.

The proceeding centers on independence violations. Specifically, the Order alleges that the firm failed to comply with the partner rotation requirements with respect to seven issuer clients in connection with work done for the 2010 through 2013 reporting periods. This resulted in the issuance of audit reports which incorrectly stated that that the audit firm had conducted the engagements in accord with PCAOB standards. In addition, the firm failed to conduct quarterly reviews and an annual audit relating to Uni-Pixel for the year ended December 31, 2013 in accord with applicable professional standards. The Order alleges violations of Exchange Act Sections 10A(j) and 13(a) as well as the related Rules.

To resolve the proceedings the firm agreed to implement a series of undertakings. Those include the retention of a consultant who will conduct a review and make recommendations related to the violations alleged. The recommendations will be implemented by the firm. In addition, each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. The firm also consented to a censure and will pay a penalty of $160,000. Each individual Respondent is denied the privilege of appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after one year. Each will pay a penalty of $15,000.

In the Matter of Grassi & Co., CPAs, P.C., Adm. Proc. File No. 3017694 (November 21, 2016) is a proceeding which names as a Respondent the PCAOB registered audit firm. ClearPath Wealth Management, LLC is a Commission registered investment adviser. The adviser is the manager of several LLCs that were the general partners of five private funds. It is also the adviser to those funds under management agreements. Patrick Churchville is the principal of ClearPath. The Commission previously filed an enforcement action against the adviser and its principal. ClearPath is now run by a court-appointed receiver.

Grassi was the independent auditor for several of the funds advised by ClearPath. The audit firm issued nine audit reports on the financial statements of four different funds for the years ended 2009 through 2011. Each audit report was issued in 2012. Each was unqualified.

Beginning in 2010 ClearPath and Mr. Churchville defrauded the funds, according to the Order. Specifically, the adviser and its principal misappropriated investor funds and then misrepresented to value of fund assets. The audit firm failed, however, to heed indications of the fraudulent conduct, violating professional standards. This permitted the adviser and its principal to continue their wrongful conduct. The Order alleges unprofessional conduct in violation of Rule 102(e) and Advisers Act Sections 206(2) and 206(4).

To resolve the proceeding the audit firm agreed to implement certain undertakings. Those undertakings include the retention of an independent consultant who will review certain policies and procedures of the firm and compile a report. The recommendations will be adopted by the firm. The audit firm also consented to the entry of a cease and desist order based on the Advisers Act Sections cited in the Order and to a censure. In addition, Grassi will pay disgorgement of $130,000, prejudgment interest and a civil penalty of $260,000. See also In the Matter of Gary R. Purwin, CPA, Adm. Proc. File No. 3-117695 (November 21, 2016)(proceeding naming the engagement partner on the ClearPath audits; resolved with a cease and desist order based on the same Advisers Act Sections cited in the Order against the firm, an order denying the auditor the privilege of appearing and practicing before the Commission with a right to apply for reinstatement after one year, and the payment of a $20,000 penalty).

Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).

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by T. GormanPosted on Posted in SECActions

The Commission brought a financial fraud action centered on misconduct seemingly drawn from its traditional cases in the area: sham agreements and round-trip transactions, all designed to artificially inflate the share price for a sale of securities. SEC v. Campion, Civil Action No. 16-cv-8940 (S.D.N.Y. Filed November 18, 2016).

Defendant Gavin Campion was the president of KIT Digital, Inc., a purveyor of software and services to facilitate the use of video content on the internet. At the time of the transactions here Kafeil Isaza Tuzman was the CEO of the firm and Robin Smyth was the CFO. Messrs. Tuzman and Smyth were previously named as defendants in a Commission enforcement action.

Beginning in December 2010, and continuing for the next year, Messrs. Campion, Tuzman and Smyth executed a scheme in which KIT entered into at least a dozen sham licensing agreements with twelve different entities. KIT’s typical licensing agreements required periodic fees or payments by customers in exchange for providing specific software and services. The company recognized the fees or payments as revenue when software was delivered and services rendered.

In contrast, the sham licensing agreements were structured as perpetual licenses. A single license fee was payable in installments under the terms of the agreements. This structure permitted KIT to recognize the entire fee at the date of the licensing agreement as long as the specified product was delivered on the contract date, the fee was fixed or determinable, and collection was probable.

KIT did not deliver any software or other products under the sham agreements. To the contrary, the claimed licensees were assured that they were not expected to pay any fees. The licensees cooperated in some instances because the entities were under the control of a former officer and continuing associate of KIT. In other instances the licensees extended an accommodation to the defendants.

To make it appear that KIT was generating revenue from these transactions, Messrs. Tuzman and Smyth arranged for a series of round trip cash transactions. Under those arrangements KIT moved its cash through off-shore accounts and cooperating intermediaries who forwarded the money back to the firm. The returning cash was then booked as revenue. In other instances acquisition agreements were structured to make it appeared that KIT was paying in part for the acquisition. In fact the cash was diverted back to KIT and booked as revenue.

As the scheme unfolded KIT made an offering of its securities. Specifically, on September 20, 2011 the firm completed the sale of 3.2 million shares of its common stock pursuant to a Form S-3 shelf registration statement. The supplement had become effective in October 2010 after being executed by Messrs. Tuzman and Smyth.

The sham transactions fraudulently inflated KIT’s reported revenue. In the fourth quarter of 2010, for example, revenue was falsely inflated by at least $7.5 million or over 24% and by 7.5% for the year ended December 31, 2010. In 2011 revenue was falsely inflated in each quarter in similar amounts and for the year by over 9.3%. The quarterly and annual financial statements with fraudulently inflated revenue were filed with the Commission. During the period Defendant Campion was awarded salaries and cash bonuses and performance-contingent stock.

Following the close of trading on November 21, 2012 KIT filed a Form 8-K announcing that because of irregularities in its historical financial statements there would be a restatement of those financial statements for the years ended December 31, 2010 and 2011 as well as for certain quarters. At the end of 2012 NASDQ halted trading in KIT’s shares and later delisted the stock. The firm filed for bankruptcy protection under Chapter 11 in April 2013.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is pending. The Manhattan U.S. Attorney’s Office filed a parallel criminal action. See Lit. Rel. No. 23690 (November 18, 2016).

Program: On December 1, 2016 Dorsey will present it Third Annual Federal Enforcement Forum featuring panels discussing enforcement issues relating to the SEC, CFTC, FERC, EPA and CFPB. The program is live in Washington, DC. and video cast. No charge for registration (here).

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