-------------------- BEGINNING OF PAGE #1 ------------------- UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 36446 / October 31, 1995 Accounting and Auditing Enforcement Release No. 734 / October 31, 1995 Administrative Proceeding File No. 3-8876 ------------------------- : : : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO CALVIN SHENKIR, JR., : SECTION 21C OF THE SECURITIES : EXCHANGE ACT OF 1934, MAKING Respondent. : FINDINGS AND IMPOSING SANCTIONS : -------------------------- I. The Commission deems it appropriate and in the public interest that public administrative proceedings, pursuant to Section 21C of the Securities Exchange Act of 1934, be and hereby are instituted against Calvin Shenkir, Jr. In anticipation of these proceedings, Respondent has sub- mitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the Commission's findings or conclusions contained herein, Respondent consents to the issuance of this Order, the entry of the findings contained herein, and the imposition of the sanc- tions set forth below. -------------------- BEGINNING OF PAGE #2 ------------------- II. The Commission makes the following findings: -[1]- A. FACTS 1. Respondent Calvin Shenkir, Jr. resides in Temple, Texas. Under the name of Shenkir & Associates, Shenkir brokers real estate, oil, and gas products and investments. Shenkir is a long- standing friend of the former president, chief executive officer, and chairman of Littlefield, Adams & Company ("the CEO"). 2. Other Relevant Entity Littlefield, Adams & Company ("LFA") is a holding company with headquarters in Sturgeon Bay, Wisconsin. LFA's common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act and is listed for trading on the American Stock Exchange, Inc. 3. Shenkir's Acts In the third quarter of 1992, the CEO caused LFA to recog- nize $250,000 in income based on consulting fee income that LFA never earned or received. Through misrepresentations and fabri- cated documents, the CEO made it appear as though he had per- formed consulting services for clients of respondent Shenkir or his firm, Shenkir & Associates, and that LFA had been paid $250,000 for those services. In fact, no such services were ever performed and LFA never earned or received any of this income. As part of a year-end audit of LFA's financial statements for the year ended December 31, 1992, Shenkir received an audit confirmation request from LFA asking Shenkir to confirm directly to LFA's independent auditors that, as of December 31, 1992, Shenkir & Associates was indebted to LFA in the amount of $250,000. The letter stated that the request was "in connection with the audit of" LFA's financial statements. Shenkir discussed his response to this letter with the CEO. The CEO dictated the text of a statement which Shenkir subsequently signed, confirming that LFA was paid $250,000 on May 6, 1993. Shenkir executed the confirmation on August 4, 1993, and caused it to be returned to LFA's auditors. That confirmation was materially false in that it misrepresented that LFA had earned $250,000 in consulting fee income during 1992 and was paid that amount on May 6, 1993. In fact, neither Shenkir nor any of his clients owed or paid any money to LFA for consulting fees. Shenkir knowingly submitted the false letter to the auditors. After receipt of this confirmation from Shenkir, LFA's auditors did not object to LFA's inclusion of income based on the consulting fees in LFA's 1992 Annual Report filed with the --------- FOOTNOTES --------- -[1]- The findings herein are made pursuant to Shenkir's Offer of Settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. -------------------- BEGINNING OF PAGE #3 ------------------- Commission on Form 10-K. As a result, LFA materially understated its 1992 net loss by at least $250,000. B. LEGAL DISCUSSION Shenkir Caused Violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13b2-2 Thereunder Section 21C of the Exchange Act applies to any person who "is, was or would be a cause of [a] violation due to an act or omission the person knew or should have known would contribute to such violation." Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the making of materially false and misleading statements "in connection with the purchase or sale of any security." The materiality element is satisfied by showing that there is a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). The defendants must also act with scienter, Aaron v. SEC, 446 U.S. 680, 694 (1980), which is "a mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194 n.12 (1976). LFA violated Section 10(b) of the Exchange Act and Rule 10b- 5 thereunder by filing a Form 10-K for 1992 that contained materially false and misleading financial statements. As discussed above, its improper recognition of the $250,000 in consulting fee income contributed to a material understatement of its net loss for the year. Shenkir was a cause of this material understatement by knowingly furnishing the letter to LFA's auditors which falsely confirmed that as of the end of 1992, LFA earned $250,000 in income from consulting services for Shenkir & Associates or its clients. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers of registered securities to file annual reports with the Commission reflecting, among other things, a registrant's annual revenues, income and net earnings. The reporting requirements of Section 13(a) necessarily require that the information provided be accurate. In addition, Exchange Act Rule 12b-20 requires that annual reports contain all information necessary to ensure that statements made in them are not materially misleading. See In the Matter of Michael V. Barnes, SEC Exchange Act Release No. 33754, AAER 538 (March 11, 1994). LFA violated Section 13(a) and Rules 13a-1 and 12b-20 by recognizing and reporting the consulting fee income in its 1992 Annual Report on Form 10-K. Shenkir's conduct which gave rise to LFA's violations of Section 10(b) and Rule 10b-5 also caused LFA's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. Rule 13b2-2 prohibits officers and directors of an issuer from, directly or indirectly, making or causing to be made materially false or misleading statements, or omitting to state, or causing another person to omit to state, any material fact in order to make statements made not misleading to an accountant in connection with any audit or examination of the financial statements required to be filed with the Commission, or the -------------------- BEGINNING OF PAGE #4 ------------------- preparation or filing of any document or report required to be filed with the Commission. The confirmation process is an integral and vital part of generally accepted auditing procedures. Subversion of the confirmation process corrupts the integrity of the audit and poses a threat of injury to investors by facilitating the dissemination of false financial information in the marketplace. The CEO violated Rule 13b2-2 by engaging in a scheme to supply LFA's auditors with a false confirmation in connection with their year-end audit of LFA's financial statements relating to LFA's purported entitlement to and receipt of $250,000 in fictitious consulting fee income. These acts and omissions gave rise to the auditors' issuance of an unqualified audit report on LFA's financial statements contained in LFA's 1992 Form 10-K filed with the Commission. Shenkir provided the auditors with a materially false and misleading confirmation regarding the consulting fees, the text of which was dictated by the CEO. Accordingly, Shenkir caused the CEO's violation of Rule 13b2-2. III. Based on this Order and the Offer of Settlement submitted by Shenkir, the Commission finds that Shenkir caused violations of Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13b2-2 thereunder. -------------------- BEGINNING OF PAGE #5 ------------------- IV. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. Accordingly, IT IS HEREBY ORDERED that Calvin Shenkir, Jr. cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13b2-2 thereunder. By the Commission. Jonathan G. Katz Secretary