UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 41037 / February 10, 1999 Accounting and Auditing Enforcement Release No. 1106 / February 10, 1999 Administrative Proceeding File No. 3-9824 : In the Matter of : : ORDER INSTITUTING PROCEEDINGS : PURSUANT TO SECTION 21C OF THE ANTHONY J. GENTILE, : SECURITIES EXCHANGE ACT OF : 1934, MAKING FINDINGS AND Respondent. : ISSUING CEASE-AND-DESIST ORDER : : : I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute a public administrative proceeding pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Anthony J. Gentile. Accordingly, IT IS HEREBY ORDERED that a public administrative proceeding pursuant to Section 21C of the Exchange Act be, and hereby is, instituted. II. Anthony J. Gentile ("Gentile or Respondent") has submitted an Offer of Settlement ("Offer"), in which Respondent, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.1 et seq., and without admitting or denying any of the findings of this Order Instituting Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Issuing Cease-and-Desist Order ("Order"), but admitting the jurisdiction of the Commission with respect to the matters set forth herein, solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, consents to the issuance of the Order. Based upon the foregoing, the Commission deems it appropriate and in the public interest to accept the Respondent’s Offer and to issue the cease-and-desist order consented to therein. III. The Commission makes the following findings: A. The Issuer Madison Group Associates, Inc. ("Madison Group" or "the Company") is a Delaware corporation whose securities are registered with the Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and were, at all relevant times, traded through the National Association of Securities Dealers Automatic Quotation System. Madison Group is based in Fort Lauderdale, Florida, and during the relevant period was engaged primarily in acquiring rights to the recordings of country and gospel music performers, and sports and fitness video programming. In February 1997, Madison Group ceased operations and entered a reorganization proceeding under the United States Bankruptcy Code that was subsequently converted to a liquidation proceeding. B. Respondent Anthony J. Gentile was originally engaged as chief financial officer to Madison Group Associates, Inc. in August 1992. Subsequent to October 1992, he became a consultant to Madison Group and at various times acted as the Company’s controller, part-time chief financial officer, and member of the board of directors. C. Facts[1] 1. Madison Group’s Financial Statements Did Not Comply with Generally Accepted Accounting Principles ("GAAP"). On August 17, 1992, Madison Group filed a Quarterly Report on Form 10-Q with the Commission, which included unaudited interim financial statements as of June 30, 1992, prepared by Gentile. In that filing, Madison Group reported total assets of $35.3 million, representing a 599% increase over total assets reported in its annual financial statements for the fiscal year ended September 30, 1991. The purported increase of the Company’s assets, resulting principally from acquisitions of media properties and mortgage notes receivable, was false because the value and cost of the media properties was materially overstated and because the Company did not own the mortgage notes receivable. Madison Group again reported the media properties and mortgage notes receivable at the same amounts in its financial statements for the fiscal years ended September 30, 1992 and 1993 which the Company included in its Forms 10-K filed with the Commission on January 21, 1994. a. Madison Group valued the media assets based on unrealistic appraisals. Madison Group’s largest asset was an inventory of media products, consisting of country and gospel music videos, special effects programming, and taped interviews of sports and entertainment personalities. In June 1992, Madison Group acquired two media libraries in exchange for 64,000 shares of its convertible preferred stock, 15,000 shares of its common stock, and a promissory note having a principal amount of $150,000. Gentile recorded these two libraries at $25.5 million. Gentile used an appraisal prepared by an independent appraisal firm to assign a value to the first of two media libraries. For the second library, estimated to be worth $16.5 million, Gentile did not obtain an appraisal. The second library accounted for nearly half of the Company’s reported assets at the quarter ended June 30, 1992. In valuing the media assets, the appraisers relied on estimates and assumptions about future sales of the media programming that were unrealistic and not attainable by the Company. Madison Group had no current or historical sales to support the estimates and assumptions made by the appraisers, and the Company had no realistic way of attaining or reaching the levels of market penetration and revenue production reflected in the appraisal report. In addition to being new to the industry, the Company did not have the working capital necessary to compile, market, and syndicate the programming. Thus, the appraisal reports were not adequate to support the values ascribed to the media libraries. b. Respondent’s role in Madison Group’s improper accounting for the media assets. Gentile knew that Madison Group had no current or historical sales to validate the estimates and assumptions made by the appraisers. Because of his position as a financial officer of the company, he additionally knew that Madison Group did not have the financial resources needed to achieve the levels of market penetration and revenue production contemplated by the appraisers as reflected in their appraisal report. Moreover, Gentile had no basis to support the $16.5 million valuation of one of the media libraries. Gentile, therefore, should have recorded the media assets at a nominal value in the Company’s accounting books and records. Moreover, Madison Group’s auditor, prior to his resignation, determined that the Company needed to have the media assets re- evaluated by an independent specialist and communicated this to Gentile in December 1992.[2] The auditor had concluded that the independent appraisal reports did not constitute sufficient competent evidential matter to support the recorded amounts of the media assets because the Company was unable to provide him with any evidence of revenues generated by the assets and because the assets had continued to be nonproductive. Nevertheless, Respondent continued to use the unrealistic appraisal reports to support the reported amount of media assets when he prepared the Company’s financial statements for the periods from September 30, 1992 through September 30, 1993 that were contained in Forms 10-K and 10-Q filed with the Commission. c. Madison Group did not own the mortgage notes receivable. The Company disclosed in quarterly and annual filings during fiscal 1992 and 1993 that it had acquired from a Turks and Caicos Trust certain mortgage notes receivable, which had a face amount of $11,875,000, in exchange for 6,764,410 shares of its common stock. The transaction, as contemplated, required the issuance of Madison common stock to a corporation, controlled by Madison Group’s chief executive officer, which purported to own certain gold mining and other assets. That entity would then issue shares of its own stock to Madison Group, which Madison Group would transfer in turn to the Turks and Caicos Trust. The triangular arrangement would be concluded with the transfer from the Turks and Caicos Trust to Madison Group of the mortgage notes receivable, representing junior, unperfected security interests in farm land in Canada and the upper midwestern United States. In actuality, however, the parties never consummated the transaction because no stock or other consideration was provided to the Turks and Caicos Trust in exchange for the mortgage notes receivable. Therefore, Madison Group should not have reported the mortgage notes receivable as an asset. d. Respondent’s role in Madison Group’s improper accounting for the mortgage notes receivable. Respondent did not have a basis to record the mortgage notes receivable. In connection with his resignation, the Company’s auditor notified Gentile that there were issues concerning the valuation and ownership of the mortgage notes receivable which required further investigation. Gentile did not research and resolve the valuation and ownership issues raised by the auditor. Had he made appropriate inquiries, Gentile would have learned that Madison Group did not own the mortgage notes receivable because the Company had not issued its shares to the Trust. By December 1993, Respondent knew that the Turks and Caicos Trust had not made any payments on the mortgage notes receivable and that Madison Group had referred the notes to a third party for collection. Nevertheless, he caused Madison Group to report the mortgage notes receivable as an asset in the Company’s financial statements for the year ended September 30, 1993, which were filed with the Commission on January 21, 1994. D. Legal Analysis 1. Gentile Caused Madison Group’s Violations of the Reporting and Anti-Fraud Provisions of the Federal Securities Laws Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated thereunder require issuers with securities registered under Section 12 of the Exchange Act, such as Madison Group, to file annual and quarterly reports with the Commission and to keep this information current. Pursuant to instructions applicable to Form 10-K and Form 10-Q, the financial statements contained in these periodic reports must conform with Regulation S-X which requires conformity with GAAP. 17 C.F.R. §210.4-01(a)(1). An issuer violates these provisions if it files a periodic report that contains materially false or misleading information. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). Exchange Act Rule 12b- 20 further requires the inclusion of any additional material information that is necessary to make required statements, in light of the circumstances under which they were made, not misleading. Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder proscribe a variety of fraudulent practices in connection with the purchase or sale of securities. An issuer and its management and others may violate these provisions by, intentionally or with reckless disregard for the truth, making material misstatements or omissions in Commission filings, which investors rely upon in deciding whether to purchase the issuer’s securities. SEC v. Great American Industries, 407 F.2d 453 (2d Cir. 1968); SEC v. Geotek, 426 F. Supp. 718 (N.D. Cal. 1976), affirmed, 590 F.2d 785 (9th Cir. 1979). As discussed above, Madison grossly overvalued its media assets. An asset received by an entity in exchange for stock generally should be recorded at the fair value of the asset, that is, the amount of cash the asset would bring in a sale to an unrelated party. If such a value cannot be determined objectively and reliably and the future cash flows that may be generated by the asset itself are uncertain, then the asset should not be recognized. See Statement of Accounting Concepts No.2 ("Qualitative Characteristics of Accounting Information"), and Statement of Financial Accounting Concepts No. 5 ("Recognition and Measurement in Financial Statements of Business Enterprises"). In this case, Madison Group was not able to reliably determine the cash value of the media assets because there was no ready market for the assets, and it had no means of determining the future cash flows that might be generated by the assets, if any. Thus, Madison Group should have recorded the media assets at a nominal value. Madison also improperly reported the mortgage notes receivable as an asset. Because Madison Group never issued stock or provided any other consideration in exchange for the notes, the transaction was never consummated and Madison had no legal right to collect on the mortgage notes receivable. Thus, they should not have been reported by Madison Group in its balance sheet as an asset. Moreover, the failure of the obligor to make any scheduled payments under the notes, and Madison’s referral of the notes to a third party for collection in January 1994 demonstrated that the notes had no asset value to Madison. By filing reports that its management knew or was reckless in not knowing were false and misleading, Madison Group violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13 and 12b-20 promulgated thereunder. As described above, Gentile engaged in conduct with respect to maintaining Madison’s financial books and records that he knew or should have known would cause Madison Group to violate Sections 10(b) and 13(a) of the Exchange Act and Exchange Act Rules 10b-5, 13a-1, 13a-13 and 12b-20 thereunder. 2. Gentile Caused Madison Group’s Violations of the Recordkeeping Provision of the Exchange Act Under Section 13(b)(2)(A) of the Exchange Act, Madison Group was required to make and keep books and records which accurately reflected its transactions and disposition of assets. Madison Group’s recording in its books and records of the media assets and the mortgage notes receivable violated this provision. By the same conduct described above, for the periods June 30, 1992 through September 30, 1993, Respondent caused Madison Group’s violations of Section 13(b)(2)(A) of the Exchange Act. Gentile knew or should have known that valuing the media assets based on an unrealistic appraisal and recording the mortgage notes receivable as an asset would result in the falsification of Madison Group’s books and records. III. Based upon the foregoing, the Commission finds that Anthony J. Gentile caused Madison Group’s violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13 and 12b-20 promulgated thereunder. IV. In view of the foregoing, it is in the public interest to impose the sanctions agreed to in the Offer. Accordingly, IT IS HEREBY ORDERED that Gentile, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation, and any future violation, of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 13a-1, 13a-13 and 12b-20 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: On February 10, 1999, the Commission filed the related injunctive action SEC v. William T. Craig and Scott R. Sieck, 99-6165-CIV-Dimitrouleas (S.D. Fla), and the related administrative proceeding In the Matter of Miguel A. Cabrera, Jr., CPA, and M.A. Cabrera & Co., P.A., Exchange Act Rel. No. 34- 41038; Accounting and Auditing Enforcement Release No. 1107. [2]: The auditor resigned on January 12, 1993, shortly after commencing his audit of Madison Group's financial statements as of September 30, 1992 and for the year then ended. M.A. Cabrera & Co. was engaged by Madison Group on or about January 25, 1993 to audit the Company's fiscal year 1992 financial statements.