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UNITED STATES OF AMERICA SECURITIES EXCHANGE ACT OF 1934
ACCOUNTING AND AUDITING ENFORCEMENT
ADMINISTRATIVE PROCEEDING
I. On October 31, 2000, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice against Pat A. Rossetti ("Rossetti").1 Following the institution of those proceedings, Rossetti submitted an Offer of Settlement ("Offer"), 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 in which the Commission is a party, Rossetti consents to the entry of this Order Making Findings, Imposing Cease-and-Desist Order, and Imposing Sanctions Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order") without admitting or denying the findings set forth herein, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which are admitted. The Commission has determined that it is appropriate to accept Rossetti's Offer and accordingly is issuing this Order. II. On the basis of this Order and the Offer, the Commission finds2 the following: A. Respondent Pat A. Rossetti is a resident of North Massapequa, New York. Rossetti became licensed as a certified public accountant in 1983 and is a member of the AICPA and the New York Association of CPAs. In 1995 Rossetti joined Marcum & Kliegman, LLP ("M&K"), a certified public accounting firm based in Woodbury, New York, and became a contract (non-equity) partner with that firm in 1998. B. Detour Magazine, Inc. ("Detour") is a Colorado corporation headquartered in Los Angeles, California. Its common stock has been registered with the Commission pursuant to Section 12(g) of the Exchange Act since 1995 and is quoted on the OTC Bulletin Board. The company has filed periodic reports with the Commission since January 1994. C. In 1996 Detour hired M&K as its independent audit firm. M&K audited and issued reports on the financial statements of Detour for the calendar years ended 1995 through 1998. Rossetti acted as the manager on the 1997 audit and as the concurring reviewer on the 1998 audit. D. In the summer of 1997, Barry H. Peterson-Ross ("Ross") joined Detour as a consultant and was subsequently hired as the company's Chief Financial Officer. One of his first tasks was the preparation of Detour's Form 10-QSB filing for the quarter ended July 31, 1997. Detour's books and records were structured so that the company could not easily break down income and expenses by the quarter in which they were accrued, making preparation of quarterly financial statements difficult. E. Rather than correcting Detour's books so that actual quarterly results of the company's operations could be reported, Ross used fractions ("fractionalized financial statements") of the line item entries appearing in financial statements for the seven months ended July 31, 1997, which had been prepared for Detour's internal use. Using this methodology, Ross prepared the financial statements included in Detour's Form 10-QSB for the quarter ended July 31, 1997 by taking 3/7ths of each line item number contained in Detour's income statement for the seven months ended July 31, 1997. F. Ross continued preparing fractionalized financial statements throughout 1997 following their change to a calendar year end, and these financial statements were included in Detour's quarterly reports on Form 10-QSB. These fractionalized financial statements also appeared, for comparative purposes, in subsequent Forms 10-QSB, through and including Detour's quarter ended September 30, 1998. In all, six of Detour's Forms 10-QSB contained fractionalized financial statements. In addition, in or about November 1997, Detour effected a private placement of its common stock, and fractionalized financial statements were included in the private offering memorandum the company sent to potential investors in connection with that offering. G. Rossetti knew that Ross had included fractionalized financial statements in Detour's Form 10-QSB for the quarter ended July 31, 1997, and knew or should have known that Detour was continuing to use fractionalized financial statements in Detour's Forms 10-QSB. In the course of conducting the audit, Rossetti failed to notify Detour's management or board of directors (other than Ross) of the illegal acts of filing fractionalized financial statements in Detour's Form 10-QSB for the quarter ended July 31, 1997, and subsequent quarters. H. The audited financial statements for the year ended December 31, 1997 contained in Detour's Form 10-KSB omitted to include an expense related to a 1997 transaction in which the company issued stock options to consultants. I. In June 1997, Detour hired an Internet public relations firm called StockPlayer.com, Inc. ("StockPlayer"). StockPlayer arranged for Detour to hire seven consultants to perform services for Detour; most of these consultants were offshore entities. Detour paid the consultants by issuing them options to purchase a total of 2.2 million shares of Detour stock (the "consultant options"). These arrangements were memorialized by consulting agreements dated June 9, 1997, which provided, among other things, that the exercise price of the options would be $.01 a share. The consultants exercised their options as to all the shares in 1998. At the time the consulting agreements were signed, Detour's stock was not yet trading publicly. J. Within three days of granting the consultant options at an exercise price of $.01 a share, Detour granted an option for 2 million shares to another entity, Anchor Capital Management Ltd. ("Anchor"), at an exercise price of $1.50 a share. K. In or about November 1996 Detour effected a private placement of its common stock. In this offering the company sold its shares for net proceeds of approximately $.70 a share. L. In or about November 1997 Detour effected a second private placement of its common stock at a price of $1.50 a share. M. On December 9, 1997, Detour's common stock began trading on the OTC Bulletin Board at $1.00 bid $1.50 ask. N. In its financial statements, Detour accounted for the consultant options by recording the exercise price of the consultant options, $.01 a share, but failed to record as an expense the difference between the fair value of the stock and the exercise price, as measured on the date the options were granted, as required by Generally Accepted Accounting Principles ("GAAP"). O. If Detour had properly recorded the consultant options transaction in conformity with GAAP, it would have recognized an expense on its statement of operations. The amount of this expense would have been the difference between the $.01 a share exercise price and the fair value of the stock underlying the options on the date the options were issued. P. This expense should have been reflected in the financial statements, which were audited by Rossetti and others at M&K, and were contained in Detour's 1997 Form 10-KSB. The expense would also have increased Detour's accumulated deficit for the year ended December 31, 1997, and subsequent years. Q. Rossetti knew or had reason to know that the price of the consultant options was below the fair value of the stock. He also knew, through personal knowledge, or should have known through Detour's filings with the Commission, of the private offerings of Detour stock in 1996 at $.70 a share and 1997 at $1.50 a share. In addition, both the Anchor option and the consulting options were disclosed in the company's 1997 Form 10-KSB and in its Form 8-K dated June 29, 1997. The Form 8-K discusses the Anchor transaction, including the exercise price, which was characterized as having been established at $1.50 a share through arms length negotiations. R. In the course of the audit of Detour's December 31, 1997 financial statements, M&K obtained a copy of a consent of the board of directors, which described and approved both the consultant option and Anchor option transactions. S. Detour's financial statements, as audited by Rossetti and others at M&K, failed to record an expense associated with the issuance of the stock options. Consequently, those financial statements, as contained in Detour's filings with the Commission during 1997 and 1998, materially misrepresented the company's financial condition and results of operations. T. Based on the conduct set forth above, the Commission finds that Respondent Rossetti has willfully violated Section 10A3 of the Exchange Act and willfully aided and abetted Detour's violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, and has engaged in improper professional conduct. U. Rossetti recklessly engaged in improper professional conduct and willfully violated, or willfully aided and abetted the violation of, provisions of the Federal securities laws and rules, for purposes of Rule 102(e)(1)(ii) and (iii) respectively, of the Commission's Rules of Practice. V. Rossetti has submitted a sworn financial statement and other evidence and has asserted his financial inability to pay a civil penalty. III. In view of the foregoing, it is appropriate to impose the sanction agreed to in the Offer. Accordingly, it is hereby ordered, effective immediately, that: A. Rossetti cease and desist from committing or causing any violations and any future violations of Section 10A of the Exchange Act. B. Rossetti is denied the privilege of appearing or practicing before the Commission as an accountant. C. After three years from the date of this Order, Rossetti may request that the Commission consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) to resume appearing or practicing before the Commission as: 1. a preparer or reviewer, or a person responsible for the preparation or review, of any public company's financial statements that are filed with the Commission. Such application must satisfy the Commission that Rossetti's work in his practice before the Commission will be reviewed either by the independent audit committee of the company for which he works or in some other acceptable manner, as long as he practices before the Commission in this capacity; and/or 2. an independent accountant. Such application must satisfy the Commission that: a. Rossetti, or the firm with which he is associated, is a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") that includes peer review, concurring partner review, continuing professional education and other membership requirements that provide appropriate quality controls over an accounting and auditing practice, as long as he practices before the Commission as an independent accountant; b. Rossetti, or the firm, has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and c. as long as Rossetti appears or practices before the Commission as an independent accountant he will remain either a member of or associated with a member firm of the SEC Practice Section and will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education. D. The Commission's review of any request or application by Rossetti to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Rossetti's character, integrity, professional conduct, or qualifications to appear or practice before the Commission; E. That Rossetti comply with his undertaking to, on reasonable notice and without service of a subpoena, provide discovery and testify truthfully at any deposition and at any judicial or administrative proceeding arising from or relating to the matters described in this Order; and F. That the Division of Enforcement ("Division") may, at any time following the entry of this Order, petition the Commission to: (1) reopen this matter to consider whether Rossetti provided accurate and complete financial information at the time such representations were made; (2) determine the amount of the civil penalty to be imposed; and (3) seek any additional remedies that the Commission would be authorized to impose in this proceeding if Rossetti's Offer of Settlement had not been accepted. No other issues shall be considered in connection with this petition other than whether the financial information provided by Rossetti was fraudulent, misleading, inaccurate or incomplete in any material respect, the amount of civil penalty to be imposed and whether any additional remedies should be imposed. Rossetti may not, by way of defense to any such petition, contest the findings in this Order or the Commission's authority to impose any additional remedies that were available in the original proceeding. By the Commission.
Footnotes1 Paragraph 1 of Rule 102(e) provides, in relevant part, that: The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: . . . (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder. 2 The findings herein are made pursuant to the Offer of Settlement of Rossetti and are not binding on any other person or entity named as a respondent in this or any other proceeding. 3 Section 10A requires auditors to take action if in the course of an audit they become aware that an illegal act may have occurred. The statute requires them to notify the appropriate level of management of the illegal act. In some cases, the auditor must go further and inform the board of directors, and, in certain circumstances is required to report the matter directly to the Commission. http://www.sec.gov/litigation/admin/34-44247.htm
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