For the second time in recent months, the Securities and Exchange Commission (SEC) has sought to enforce an aging SEC order suspending an accountant and to disgorge multiple years of the accountant’s compensation. A federal court last month handed the SEC a victory in the first of these lawsuits, ordering the accountant to pay $400,000 in disgorgement. While that lawsuit was pending, the SEC filed a similar action against another barred accountant seeking to claw back over $2 million in compensation. These developments validate our recent warning that such actions, while historically rare, could increase considerably in response to SEC Chair Mary Jo White’s vow to target "gatekeepers" and aggressively combat accounting fraud.
As we previously reported, in August the SEC petitioned a federal court to enforce a 2004 SEC order suspending Michael Taber from practicing as an accountant and to order Taber to disgorge over $730,000 ($584,650 in compensation earned for providing prohibited accounting services plus $146,849 in prejudgment interest). Taber’s bar stemmed from a 2004 SEC settlement with Del Global Technologies Corporation and several of its former officers and directors, including Taber, its former Chief Financial Officer. The SEC alleged that the Del Global defendants perpetrated a financial fraud from 1997 to 2000. Taber settled the charges by consenting to an injunction prohibiting future violations, a permanent bar from serving as a public company officer or director, and a permanent bar from practicing before the SEC as an accountant. Despite his 2004 accounting bar, Taber provided accounting services to public companies from 2005 to 2010. The SEC prevailed against Taber when the U.S. District Court for the Southern District of New York (SDNY) entered orders in October and December 2013 requiring Taber to comply with the 2004 suspension order and disgorge $400,000. Several factors – many unlikely to appear in other cases – influenced the court’s decision not to impose the full disgorgement requested by the SEC. Among the factors considered: Taber was a pro se litigant and "credibly argued" he did not know his conduct violated the order; he is unemployed, fully retired and is allowing his license to lapse; he is partially handicapped as a result of having a brain tumor removed; and he is unable to pay the full disgorgement.
While awaiting the SDNY’s ruling on Taber’s disgorgement, the SEC sued another accountant for violating an even older accounting bar. On November 21, 2013, the SEC filed a complaint in U.S. District Court for the District of Utah against R. Gordon Jones for violating a 12-year-old suspension order. The SEC originally sued Jones in May 2000 for failing to audit the financial statements of Dynamic American Corporation in accordance with Generally Accepted Auditing Standards. Jones subsequently consented to a settlement order in May 2001 barring him from practicing before the SEC as an accountant, with the right to apply for reinstatement after three years. Shortly before agreeing to the bar, Jones allegedly founded a new consulting firm and for the next 12 years he provided prohibited accounting and financial statement preparation services to approximately 200 public companies. Jones never applied to have his bar lifted. The SEC requested the court to order Jones to comply with the bar and disgorge between $1.4 million and $2.1 million in compensation earned for providing prohibited services (plus prejudgment interest).
The SEC’s lawsuit against Jones suggests that the Taber action was not an aberration. As such, barred accountants and attorneys (and the companies that hire such persons) would be wise to heed the recommendations we issued following the Taber action. For example, we suggested that barred accountants thoroughly understand the full scope of activities prohibited by their bar, which includes the preparation, creation, compilation, or computation of any underlying data to be included in a document that is filed with the SEC. Indeed, the SDNY’s finding that Taber "credibly showed" he did not know he was violating the suspension order demonstrates the complexity of this issue. Utmost caution and thorough due diligence in this area would be prudent, as the SEC appears poised to file more actions enforcing practice bars and clawing back compensation (as well as more actions generally against "gatekeepers").
For more information regarding SEC practice bars and the process for barred accountants and lawyers to apply for reinstatement under the SEC rules, please contact Michael Rivera, Hillary Profita, or Joanna Boyd. Mr. Rivera is Chair of Venable’s Securities Enforcement and Compliance Practice Group.