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UNITED STATES OF AMERICA
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W. DALE McGHIE, CPA, Respondent.
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: : : : : : : : : : : |
ORDER INSTITUTING PUBLIC ADMINISTRATIVE AND CEASE- AND-DESIST PROCEEDINGS, PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND- DESIST ORDER |
I.
The Securities and Exchange Commission ("Commission") deems it appropriate that public administrative and cease-and-desist proceedings be, and hereby are, instituted against W. Dale McGhie, CPA ("Respondent" or "McGhie") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 102(e)(1)(ii) and (e)(1)(iii) of the Commission's Rules of Practice.1
II.
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings. Respondent consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order"), as set forth below.
III.
On the basis of this Order and Respondent's Offer, the Commission finds2 that:
Respondent
1. W. Dale McGhie was for all relevant periods herein and currently is a certified public accountant licensed in Nevada. McGhie served as the auditor of Hexagon Consolidated Companies of America, Inc. ("HCCA") from approximately September 13, 1996, until he was discharged on September 1, 2001. McGhie, 64 years old, is a resident of Reno, Nevada, and is a member of the Nevada Society of certified public accountants.
Other Relevant Entity
2. HCCA is a Nevada corporation located in Reno, Nevada. HCCA's common stock is registered pursuant to Section 12(g) of the Exchange Act. Its common stock was quoted on the OTC Bulletin Board until it was designated ineligible to be quoted on February 24, 2000, for failing to comply with the NASD's "eligible securities" criteria (Rule 6530).
3. The U.S. District Court for the Middle District of Tennessee enjoined HCCA's predecessor from violating Sections 5 and 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) and Rule 10b-5 of the Exchange Act in January 1989. In March 1994, the Commissioner of Commerce and Insurance for Tennessee ordered two predecessors of HCCA to cease and desist violating various state securities laws, including its anti-fraud provisions. In December 1994, the State of South Carolina ordered two of HCCA's predecessors to cease and desist violating various state securities laws, including its anti-fraud provisions.
Improper Accounting: Recognition of Arizona Ore Inventory
4. On or about August 24, 1995, HCCA issued 100 million shares of stock to acquire a company whose only significant asset was a sublease. HCCA claimed that the sublease provided ownership to 500,000 tons of ore inventory located in Arizona. HCCA recorded the ore as an asset on its books and valued it at $200 million. This valuation was a departure from generally accepted accounting principles ("GAAP"). HCCA never owned the ore. Moreover, the ore consisted of waste tailings and there was no reasonable basis to believe that minerals could be economically extracted from such ore. HCCA should have recorded and valued this asset at zero in order to conform with GAAP.
5. Recording this asset as set forth above materially misstated the financial statements that appeared in, inter alia, HCCA's December 1997 Form 10-KSB, December 1998 Form 10-KSB and December 1999 amendment thereto, March 1997 report on Form 10-QSB, and the August 1997 and December 1999 amendments to HCCA's December 1996 Form 10-SB. McGhie issued unqualified audit opinions that were included in the Forms 10-KSB and amendment thereto and in the two amended Forms 10-SB, and his unqualified review report was included in the March 1997 Form 10-QSB.
Improper Accounting: Recognition of California Mining Claims
6. On or about February 6, 1997, HCCA acquired 17 mining claims, located in California, in exchange for 375 million shares of HCCA stock. HCCA acquired the claims from a company managed by HCCA's chief executive officer. This related company acquired the claims in 1996 in exchange for HCCA stock worth approximately $275,000. HCCA recorded the claims it acquired from the related company at $69,375,000. This valuation was a departure from GAAP. There was no reasonable basis to believe that any economically recoverable mineral reserves existed at the site. Indeed, evidence existed showing that there were no economically recoverable reserves located on this property. HCCA should have recorded and valued this asset at zero in order to conform with GAAP.
7. Recording this asset as set forth above materially misstated the financial statements that appeared in, inter alia, HCCA's March 1997 Form 10-QSB, December 1997 and December 1998 Forms 10-KSB, and the December 1999 amendment to HCCA's December 1996 Form 10-SB. McGhie issued audit opinions that were included in the Forms 10-SB and 10-KSB, and his unqualified review report was included in the March 1997 Form 10-QSB.
Improper Accounting: Recognition of Advertising Credits
8. On or about June 26, 1996, HCCA purportedly acquired $100 million of television advertising credits in exchange for 40 million shares of HCCA stock. HCCA recorded and valued these credits at $50 million, or 50% of their face value. However, the credits were of no use to HCCA and had no apparent market for resale or trade purposes. Recording these credits in excess of the seller's historical cost basis of zero was a departure from GAAP.
9. Recording this asset as set forth above materially misstated the financial statements that appeared in, inter alia, HCCA's December 1996 Form 10-SB and December 1996 Form 10-KSB. McGhie issued unqualified audit opinions that were included in these filings.
Improper Accounting: Recognition of Real Estate
10. From August 1997 through December 1999, HCCA reported in various filings that it owned certain real estate. HCCA recorded and valued these assets at approximately $49 million. Reporting these assets with any value was a departure from GAAP because the acquisitions were never consummated.
11. Recording this asset as set forth above materially misstated the financial statements that appeared in, inter alia, HCCA's December 1997 and December 1998 Forms 10-KSB, March 1997 report on Form 10-QSB, and the August 1997 and December 1999 amendments to the December 1996 Form 10-SB. McGhie issued unqualified audit opinions that were included in the Forms 10-SB and 10-KSB, and his unqualified review report was included in the March 1997 Form 10-QSB.
Improper Accounting: Recognition of Notes Receivable
12. From 1996 through 1999, HCCA reported that it held two note receivables. The first note obligated a Mexican corporation to pay HCCA $215,000 plus interest, and the second note obligated two individuals to pay HCCA $45,000 plus interest. HCCA recorded and valued these notes at $260,000. Recording these notes as such was a departure from GAAP because HCCA lacked a reasonable basis for believing that the notes were collectible; in fact, HCCA never collected a single payment on the notes. Although both notes were in default at the time HCCA filed its Form 10-SB in December 1996, HCCA continued to report these notes at their full value in subsequent reports rather than assigning a value of zero.
13. Recording these assets as set forth above materially misstated the financial statements that appeared in, inter alia, HCCA's December 1996 Form 10-SB and both amendments thereto, December 1996 and December 1997 Form 10-KSB, December 1998 Form 10-KSB and the amendment thereto, and March 1997 report on Form 10-QSB. McGhie issued unqualified audit opinions that were included in the Forms 10-SB and 10-KSB, and his unqualified review report was included in the March 1997 Form 10-QSB.
Audit and Review Deficiencies
14. McGhie violated generally accepted auditing standards ("GAAS") by failing to: (1) exercise due professional care in the performance of his audits and in the preparation of his audit opinions (see AU §230, Due Professional Care in the Performance of Work); (2) properly plan his audits (see AU §311, Planning and Supervision); (3) maintain a healthy degree of skepticism during his audits (see AU §316, Consideration of Fraud in a Financial Statement Audit); (4) obtain sufficient competent evidential matter (see AU §326, Evidential Matter); and (5) issue audit opinions that complied with the reporting standards of GAAS (see AU §§410, Adherence to GAAP, §411, The Meaning of "Present Fairly in Conformity With GAAP").
15. McGhie audited and/or reviewed HCCA's false and misleading financial statements that misstated the value of certain assets. The reporting of the Arizona and California mineral properties, advertising credits, real estate, and notes receivable assets, either individually or combined, caused HCCA's financial statements to be overstated in various filings made with the Commission. McGhie failed to conduct any meaningful audit or review procedures when examining these transactions. McGhie failed to create and use audit programs to properly plan his audits as required by GAAS. McGhie also violated GAAS when he failed to obtain competent evidence to verify the existence and legitimacy of these assets. Instead, he relied upon oral representations from HCCA's management and/or outside parties who lacked the expertise to make such representations. During his audits and review, there were ample "red flags" which should have alerted McGhie that none of these assets should have been recognized. On other occasions, he failed to obtain any valid support to justify the recording of the assets, including verifying whether HCCA had legal title to the real estate.
16. McGhie issued independent audit reports that were included in HCCA's 1996 Form 10-SB and two amendments thereto, 1996, 1997 and 1998 Forms 10-KSB, and an amendment to the 1998 Form 10-KSB. McGhie's unqualified audit opinions falsely stated that he had conducted his audit in accordance with GAAS and that HCCA's financial statements had been prepared in conformity with GAAP.
17. Similarly, HCCA's March 1997 Form 10-QSB included McGhie's review report. This report falsely represented that McGhie's review was done "in accordance with standards established by the American Institute of Certified Public Accountants" and that McGhie was "not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles." McGhie failed to make adequate inquiries and to conduct adequate analytical reviews, as required by standards established by the American Institute of Certified Public Accountants ("AICPA") (see AR §100.23-31, Compilation and Review of Financial Statements, Review of Financial Statements). Moreover, McGhie was aware of HCCA's departures from GAAP regarding its recording of the mineral properties, real estate and notes receivable, as required by GAAS (see AU §722.32, Interim Financial Information, Modification of the Accountant's Review Report) and the AICPA (see AR §100.32-41, Compilation and Review of Financial Statements).
Violations
18. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit a person, in connection with the purchase or sale of a security, from making an untrue statement of a material fact or from omitting to state a material fact necessary to make statements made, in light of the circumstances under which they were made, not misleading. To violate Section 10(b) or Rule 10b-5, a defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695, 701-02 (1980), which the Supreme Court has defined as "a mental state embracing intent to deceive, manipulate, or defraud," Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).
19. McGhie willfully violated Section 10(b) and Rule 10b-5 thereunder by issuing audit reports that were included in HCCA's Forms 10-SB and 10-KSB that falsely represented that his audits were performed in accordance with GAAS and that HCCA's financial statements conformed with GAAP. McGhie also issued a review report that was included in HCCA's March 1997 Form 10-QSB. The review report falsely represented that the review was done in accordance with AICPA standards and that McGhie was unaware of any material modifications that needed to be made to the accompanying financial statements in order for them to conform with GAAP. An auditor can be held to have violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by preparing and certifying false financial statements, Anixter v. Home-Stake Production, 77 F.3d 1215, 1225-27 (10th Cir. 1996), or by issuing a false audit report, McGann v. Ernst & Young, 102 F.3d 390, 397 (9th Cir. 1996).
20. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require issuers with securities registered under Section 12 of the Exchange Act to file quarterly and annual reports with the Commission and to keep this information current. The obligation to file such reports embodies the requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979).
21. McGhie willfully aided and abetted and caused HCCA's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder through his issuance of false and misleading audit reports and a review report that were included in the quarterly and annual reports filed by HCCA with the Commission. The quarterly and annual reports overstated HCCA's assets from 119% to 95,920%.
22. Based on the foregoing, the Commission finds that McGhie engaged in improper professional conduct pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice.
23. Based on the foregoing, the Commission finds that McGhie (a) willfully violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and (b) willfully aided and abetted and caused HCCA's violations of Section 13(a) of the Exchange Act, and Rules 13a-1 and 13a-13 promulgated thereunder.
IV.
In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent McGhie's Offer.
Accordingly, IT IS HERBY ORDERED effective immediately, that:
A. McGhie shall cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder; and from causing any violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 promulgated thereunder.
B. McGhie is denied the privilege of appearing or practicing before the Commission as an accountant.
By the Commission.
Jonathan G. Katz
Secretary
1 Rule 102(e)(1)(ii) provides, in relevant part, that:
The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it any person who is found to have engaged in improper professional conduct.
Rule 102(e)(1)(iii) provides, in relevant part, that:
The Commission may deny, temporarily or permanently, the privilege of appearing or practicing before it any person who is found...to have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules or regulations thereunder.
2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
http://www.sec.gov/litigation/admin/34-47473.htm
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