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Accounting Fraud

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Page 12 of 16

December 10, 2015

Through orders instituting settled administrative proceedings, the SEC suspended five accountants and two associated auditing firms from practicing or appearing before the SEC.  The SEC’s orders found that the accountants and firms at various times performed deficient audits of public companies, jeopardized the independence of other audits, falsified and backdated audit documents, and violated other key rules designed to preserve the integrity of the financial reporting system. SEC

December 2, 2015

National audit firm Grant Thorton will pay $4.5 million to settle charges it ignored red flags and fraud risks while conducting deficient audits for publicly-traded Assisted Living Concepts (a senior housing provider) and Broadwind Energy (an alternative energy company) — both of which themselves faced SEC enforcement actions for improper accounting and other violations.  Grant Thorton’s deficient audits spanned from 2009 to 2011.  The SEC’s investigation found that Grant Thorton repeatedly violated professional standards and their inaction allowed the companies to make numerous false and misleading public filings.  SEC

October 27, 2015

The St. Joe Company, a Florida-based real estate developer and landowner, its former top executives, and two former accounting department directors, agreed to pay, collectively, $3.725 million in penalties and disgorgement to settle SEC claims of improperly accounting for the declining value of residential real estate developments during the financial crisis.  According to the SEC’s order instituting settled administrative proceedings, the respondents repeatedly failed to properly apply generally accepted accounting practices in testing St. Joe’s real estate developments for impairment, resulting in the failure to take required write-downs on properties hit hard by the financial crisis.  SEC

October 26, 2015

Credit rating agency DRBS Inc. agreed to pay almost $6 million to settle SEC charges of misrepresenting its surveillance methodology for ratings of certain complex financial instruments during a three-year period.  An SEC investigation found that the firm misrepresented that it would monitor on a monthly basis each of its outstanding ratings of U.S. residential mortgage-backed securities (RMBS) and re-securitized real estate mortgage investment conduits (Re-REMICs) by conducting a three-step quantitative analysis and subjecting each rating to review by a surveillance committee.  In fact, the review was not conducted on a monthly basis and when the committee convened it reviewed only a limited subset of ratings.  DRBS did not have adequate staffing and technological resources to conduct the surveillance promised by its surveillance methodology.  SEC

October 6, 2015

The SEC charged two former top executives at OCZ Technology Group Inc., a now-bankrupt seller of computer memory storage and power supply devices, with accounting failures.  The SEC’s complaint alleges that OCZ’s former CEO engaged in a scheme to materially inflate OCZ’s revenues and gross margins from 2010 to 2012, by, for instance, mischaracterizing sales discounts as marketing expenses, channel-stuffing OCZ’s largest customer, and concealing large product returns.  OCZ’s former CFO agreed to pay $130,000 in disgorgement and to be barred from acting as an officer or director of a public company  to settle the SEC’s charges against him of accounting, disclosure, and internal accounting control failures.  SEC

October 5, 2015

Cayman Islands-based Home Loan Services Solutions Ltd.(HLSS) will pay a $1.5 million penalty to settle SEC charges of making material misstatements about its handling of related party transactions and the value of its primary asset.  According to the SEC’s order instituting a settled administrative proceeding, HLSS misstated its handling of transactions with related parties.  For example, from 2012 to 2014, HLSS stated that to avoid potential conflicts of interest, it required its Chairman (also the Chairman of Ocwen Financial Corp.) to recuse himself from transactions with Ocwen.  However, HLSS had no written policies on recusals for related-party transactions and, in fact, HLSS’ Chairman approved many transactions with Ocwen.  In addition, according to the SEC’s order, HLSS misstated its net income in 2012, 2013, and the first quarter of 2014, because the methodology used to value its primary asset – billions of dollars of mortgage servicing rights purchased from Ocwen – did not conform to generally accepted accounting principles.  SEC

October 1, 2015

Grant Thornton India LLP and Grant Thornton Audit Pty Ltd will pay $365,085 to settle charges of violating auditor independence rules.  According to the SEC’s order, two Grant Thornton Mauritius partners served on the boards of subsidiaries of Grant Thornton audit clients and performed non-audit services prohibited under the SEC’s auditor independence rules.  SEC

September 28, 2015

Trinity Capital Corporation and its wholly-owned subsidiary Los Alamos National Bank will pay $1.5 million to settle accounting fraud charges.  An SEC investigation found that Trinity materially misstated its provision for loan losses and its allowance for loan and lease losses in its SEC filings between 2010 and 2012.  In 2011, Trinity understated its net loss available to common shareholders by $30.5 million, reporting income of $4.9 million instead of a $25.6 million loss.  SEC

September 25, 2015

The SEC charged four former SMF Energy Corp. officers with financial fraud by vastly inflating SMF Energy’s revenues through a fraudulent billing scheme.  The SEC alleges that SMF Energy overbilled certain mobile fueling customers, including the U.S. Postal Service, by charging for fuel that was not delivered and adding surcharges that the customers’ contracts did not permit.  As a result, the SEC alleges that SMF Energy materially overstated its revenues, profit margins, shareholders’ equity and net income.  According to the SEC’s complaint, the overbilling began in 2004 as a minor contributor to SMF Energy’s financial performance but later made the difference between the company being profitable and posting net losses. SEC

September 22, 2015

Retailer Stein Mart Inc. will pay an $800,000 penalty to settle charges of materially misstating its pre-tax income due to improper valuation of inventory subject to price discounts.  An SEC investigation found that when Stein Mart offered its merchandise to customers at reduced prices, the value of the inventory subject to the markdowns was reduced at the time the item was sold rather than immediately at the time the markdown was applied.  As a result, Stein Mart materially misstated its pre-tax income in certain quarterly filings with the SEC, including an overstatement of almost 30 percent in the first quarter of 2012.  SEC
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