SEC ANNOUNCES CHARGES AGAINST ATTORNEYS AND AUDITORS IN SHAM STOCK OFFERINGS CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced charges against attorneys, auditors, and others allegedly involved in a microcap scheme the agency stifled last year when it suspended the registration statements of 20 purported mining companies being used for sham offerings of stock to investors.

The SEC Enforcement Division alleges that a Canada-based attorney and stock promoter named John Briner orchestrated the scheme, which entailed creating shell companies supposedly exploring mining activities.  Briner had been suspended from practicing on behalf of entities regulated by the SEC, so he recruited clients and associates to become figurehead executive officers while he secretly controlled the companies from behind the scenes.  The registration statements falsely stated that each CEO was solely running the company when in fact Briner was making all material decisions.

The SEC Enforcement Division further alleges that none of the companies had any intention of pursuing mining, and mineral claims purportedly owned by each company were never actually transferred to them.  The registration statements falsely claimed that each company was capitalized by the CEO’s $30,000 purchase of issuer stock when in fact it was Briner who was funding the companies. 

The SEC’s stop order proceedings last year enabled the subsequent suspension of the registration statements for the 20 microcap companies before any investors purchased the stocks, which were ripe for pump-and-dump schemes.

“Briner allegedly orchestrated a massive scheme to create public shell companies through false registration statements,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Our action in this case proactively prevented Briner and his cohorts from carrying out the fraud to an extent that directly harmed investors.”

The SEC Enforcement Division alleges that several gatekeepers helped Briner perpetrate his scheme.  They along with Briner are named in the order instituting a litigated administrative proceeding:

• Colorado-based attorney Diane Dalmy allegedly provided opinion letters for 18 of the mining companies in which she falsely stated that she conducted an investigation of the companies’ stock issuance.
• 
  
• Nevada-based audit firm De Joya Griffith LLC and partners Arthur De Joya, Jason Griffith, Philip Zhang, and Chris Whetman were engaged by Briner for the purpose of auditing the financial statements of some of the mining companies.  The audits they conducted were allegedly so deficient that they amounted to no audits at all, and they ignored red flags that Briner was engaging in fraud.
• 
  
• Texas-based audit firm M&K CPAS PLLC and partners Matt Manis, Jon Ridenour, and Ben Ortego were similarly engaged by Briner for the purpose of auditing the financial statements of some of the mining companies.  The audits they conducted also were allegedly so deficient that they amounted to no audits at all, and they ignored red flags that Briner was engaging in fraud.

“Attorneys and auditors have a serious obligation as gatekeepers to protect the integrity of our markets, and the individuals we’ve charged in this case failed the investing public in their roles,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office. 

The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.  The Enforcement Division alleges that Briner, Dalmy, and the auditors violated the antifraud provisions of the Securities Act of 1933 and that the auditors violated Rule 2-02(b)(1) of Regulation S-X and engaged in improper professional conduct under Rule 102(e) of the Commission’s Rules of Practice.

In separate orders instituting settled administrative proceedings, three of the figurehead CEOs installed by Briner agreed to settlements for their involvement in the scheme.  Without admitting or denying the SEC’s findings, they each agreed to be barred from serving as an officer or director of a public company or from participating in penny stock offerings.  They also agreed to give up money paid to them by Briner as “consulting” fees and pay additional penalties:

• Stuart Carnie of Ocala, Fla., was installed as the purported sole CEO of three of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Carnie must pay disgorgement of $6,000 plus prejudgment interest of $337.85 and a penalty of $12,000 for a total of $18,337.85.
• Charles Irizarry of Peoria, Ariz., was installed as the purported sole CEO of three of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Irizarry must pay disgorgement of $6,000 plus prejudgment interest of $337.85 and a penalty of $12,000 for a total of $18,337.85.
• Wayne Middleton of Salt Lake City, Utah, was installed as the purported sole CEO of two of the companies.  He participated in the offerings of their securities and signed false and misleading registration statements.  Middleton must pay disgorgement of $4,000 plus prejudgment interest of $225.24 and a penalty of $8,000 for a total of $12,225.24.

The SEC’s investigation was conducted by Jason W. Sunshine, James Addison, and Lara Shalov Mehraban in the New York Regional Office, and the case was supervised by Sanjay Wadhwa.  The litigation will be led by David Stoelting, Mr. Sunshine, and Jorge Tenreiro.

SEC CHARGES TWO AUDITORS FOR FAILURE AUDIT OF A NEBRASKA BANK

FROM: U.S. SECURITIES AND EXCHANGE COMMISSION

SEC Charges Two KPMG Auditors for Failed Audit of Nebraska Bank Hiding Loan Losses During Financial Crisis

Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged two auditors at KPMG for their roles in a failed audit of a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

The SEC previously charged three former TierOne Bank executives responsible for the scheme. Two executives agreed to settle the SEC’s charges, and the case continues against the other.

The new charges in the SEC’s case are against KPMG partner John J. Aesoph and senior manager Darren M. Bennett. The SEC’s investigation found that they failed to appropriately scrutinize management’s estimates of TierOne’s allowance for loan and lease losses (known as ALLL). Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit, yet Aesoph and Bennett failed to obtain sufficient evidence supporting management’s estimates of fair value of the collateral underlying the bank’s troubled loans. Instead, they relied on stale information and management’s representations, and they failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the bank’s internal controls over its financial reporting.

"Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans," said Robert Khuzami, Director of the SEC’s Division of Enforcement. "Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations."

According to the SEC’s order instituting administrative proceedings against Aesoph, who lives in Omaha, and Bennett, who lives in Elkhorn, Neb., the auditors failed to comply with professional auditing standards in their substantive audit procedures over the bank’s valuation of loan losses resulting from impaired loans. They relied principally on stale appraisals and management’s uncorroborated representations of current value despite evidence that management’s estimates were biased and inconsistent with independent market data. Aesoph and Bennett failed to exercise the appropriate professional skepticism and obtain sufficient evidence that management’s collateral value and loan loss estimates were reasonable.

According to the SEC’s order, the internal controls identified and tested by the auditing engagement team did not effectively test management’s use of stale and inadequate appraisals to value the collateral underlying the bank’s troubled loan portfolio. For example, the auditors identified TierOne’s Asset Classification Committee as a key ALLL control. But there was no reference in the audit work papers to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment, and the committee did not generate or review written documentation to support management’s assumptions. Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.

The SEC’s order alleges that Aesoph and Bennett engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and what, if any, remedial sanctions are appropriate pursuant to Rule 102(e). The administrative law judge will issue an initial decision no later than 300 days from the date of service of the order.

The SEC’s investigation of the auditors was led by Mary Brady and Michael D’Angelo of the Denver Regional Office. Barbara Wells and Nicholas Heinke will lead the Enforcement Division’s litigation in the administrative proceeding.