SEC bans Vancouver Solucorp accountant for two years
2003-01-28 09:00 PT - Street Wire
by Brent Mudry
Howe Street chartered accountant Glenn Ohlhauser, who made history as the first accounting whistleblower target of the United States Securities and Exchange Commission, has been cited by the regulator for engaging in "improper professional conduct" for failing to sniff out alleged accounting frauds at controversial former client Solucorp Industries Ltd., and banned from appearing or practicing before the commission for at least two years, with no fine. In recent consent settlements, Mr. Ohlhauser neither admits nor denies ever doing anything wrong.
Mr. Ohlhauser, 49, a partner with MacKay & Partners during his Solucorp period, has since moved to Amisano Hanson, another respected Vancouver accounting firm, and he remains a member in good standing of the Institute of Chartered Accountants of British Columbia. The SEC claims that Mr. Ohlhauser, who served as Solucorp's auditor for 3-1/2 years, discovered that Solucorp management may have backdated a dubious licence agreement in late 1997, but he failed to take the appropriate steps to deal with the issue.
Mr. Ohlhauser referred all comment to his New York attorney Andrew Tretter. "Glenn is a really nice person and a good professional," Mr. Tretter told Stockwatch. "I think this is much ado about nothing." Mr. Tretter, a former prosecutor himself, suggests the SEC picked his client as a "really bad" test case for a four-year-old regulation, and the Ohlhauser prosecution "may have gone away" were it not for the "heightened awareness" of accounting scandals at Arthur Andersen, Enron and others in the past year.
SEC associate enforcement director Paul Berger of Washington, the lead prosecutor in the case, could not be reached for immediate comment.
"In the context of all that was known to him, Ohlhauser's issuance of an unqualified audit report falsely stating that Solucorp's December 31, 1997 financial statements presented fairly, in all material respects, the financial position of the company in conformity with GAAP and that MacKay audited those financial statements in accordance with GAAS was improper," states the SEC in a 10-page administrative order filed Monday. "He recklessly failed to exercise professional skepticism and to gather competent evidential matter necessary to afford a reasonable basis for his audit opinion."
The SEC also confirms that a final judgment was entered Jan. 16 in United States District Court for the Southern District of New York, in which Mr. Ohlauser was permanently enjoined from violating the accountant whistleblower rule in future. In both consent settlements, Mr. Ohlhauser neither admitted nor denied the regulator's allegations against him.
In the administrative action, Mr. Ohlhauser is barred for at least two years from appearing or practising before the SEC. After this time-out, Mr. Ohlhauser can apply for reinstatement.
The SEC filed its initial Solucorp action, one of the harshest prosecutions to date against a former Vancouver Stock Exchange Company, on Dec. 13, 1999. In a 36-page civil complaint, the SEC alleged that Solucorp and seven insiders engaged in a deliberate scheme to defraud investors over a four-year period.
The SEC alleges Solucorp's senior management falsely claimed the company had contracts worth a total of $350-million, but the purported contracts either were non-existent or contained undisclosed material contingencies. (All figures are in U.S. dollars.) The regulator also claims the insiders profited by selling their own shares into the market, benefiting from the continual stream of bogus news releases.
The original defendants included previous securities violator Joseph Kemprowski, of Upper Nyack, N.Y., his wife Arle Pierro,who served as Solucorp's senior vice-president, his brother-in-law Peter Mantia, of Wesley Hills, N.Y., who served as Solucorp's president, former president James Spartz, of Ramsey, N.J., Robert Kuhn, of Ringwood, N.J., former chief financial officer Victor Hermann and W. Bryan Fair, of Vancouver. None have yet settled, with a full trial set for mid-March.
Mr. Kemprowski is well known to regulators. In December, 1994, while serving as president of Solucorp, he agreed in an unrelated SEC settlement to disgorge $135,000 in illegal profits for securities violations made by him and his New Jersey company, Cambridge Consulting, relating to Astro Enterprises. Another Astro player, repeat securities violator Harold Bailey Gallison Jr., was later censured by the SEC for his Astro dealings. Mr. Gallison was the president of controversial San Diego brokerage La Jolla Capital, a keen follower of several dubious Howe Street deals.
Mr. Ohlhauser was added to this Solucorp list in an amended complaint filed Oct. 26, 2000. He was the first accountant ever prosecuted under Section 10A of the Securities Exchange Act of 1934, an amendment enacted in late 1996, which imposes obligations on auditors who discover possible illegal conduct.
This section states that if an accountant conducting an audit "detects or otherwise becomes aware of information indicating that an illegal act (whether or not perceived to have a material effect on the financial statements of the issuer) has or may have occurred," the accountant must ensure that the company's audit committee or board of directors are notified as soon as possible. If the board takes no action within one day, the auditor must resign his or her engagement and submit a copy of the alert report to the SEC one day later.
The SEC claims Mr. Ohlhauser's treatment of a mid-1997 licence deal violated securities regulations. The regulator claims that in reviewing Solucorp's Sept. 30, 1997, financials in the fall of 1997, the MacKay partner concluded that Solucorp had improperly recognized $500,000 in revenues from a licensing agreement with Smart International Ltd., which comprised 40 per cent of Solucorp's total reported revenues for the quarter. The SEC claims the accountant based his conclusion on the fact that the parties' June 4, 1997, agreement was too speculative and vague to support revenue recognition.
Mr. Kemprowski, the Astro securities violator, was Solucorp's principal contact person with Smart, which supposedly had signed an exclusive five-year licensing agreement for the right to produce, market and apply Solucorp's MBS technology in China, with a $2-million licence fee payable in the first year.
Smart was hardly an established company. The SEC notes that had Mr. Ohlhauser obtained the only audited financials available for Smart at the time, for the March 31, 1997, year end, he would have seen the company was dormant as of the end of that period and had minimal assets of about $365.
On Dec. 18, 1997, Mr. Ohlhauser told Solucorp CFO Mr. Herman of his revenue-recognition concerns over the Smart contract. By this time, Smart had paid only $150,000, wired on Oct. 21, 1997, the day before a Solucorp press release described the payment as "confirmation of Smart's commitment to obtaining an exclusive licence to market and apply" Solucorp's MBS technology in China.
The Vancouver accountant told Mr. Herman that the financials were misstated as a result. While Solucorp insiders scrambled to paper things over, including a backdated Sept. 15, 1997, agreement issued at Mr. Mantia's direction, the savvy Mr. Ohlhauser saw through the ruses and figured out the backdating ploy.
Although Mr. Ohlhauser challenged Mr. Herman again, he took the Solucorp official's explanations at face value, and took no further action. (In its broad Solucorp complaint, the SEC claims senior management lied to Mr. Ohlhauser about the date the Smart licence agreement was purportedly finalized.) Mr. Ohlhauser completed his audit of Solucorp's financials, making no reference to the inconsistencies.
The SEC claims that having concluded that Solucorp backdated the licence agreement for suspect purposes, Mr. Ohlhauser should have determined whether it was likely this was an illegal act, reviewed the possible effect of this illegal effect on Solucorp's financials, including making contingencies for penalties, fines and damages, and made sure Solucorp's "appropriate" level of management and its audit committee were adequately informed about this illegal act.
In the aftermath of the Solucorp debacle, Mr. Ohlhauser left MacKay and joined Vancouver stock promoter Brian W. Ransom's CathayOnline Inc., a tiny OTC Bulletin Board promotion which hoped to gain respect as a major player in the Chinese Internet industry. Mr. Ohlhauser was hired as CFO of CathayOnline on July 26, 2000, two months before he was named in the SEC's amended Solucorp complaint.
Like numerous past Vancouver China stock promotions, CathayOnline liked to trumpet the massive size of its target market. "The number of people using the Internet in China has increased 30-fold in five years, with projections for the year 2000 reaching 10 million. With a global Chinese-speaking population in excess of 1.3 billion people, the growth potential for Chinese Web-based E-mail services is significant," stated Mr. Ransom in a press release a few years ago.
Alas, CathayOnline was a financial disaster. The company filed for Chapter 11 bankruptcy in U.S. Bankruptcy Court for the Southern District of New York on June 15, 2001, less than 11 months after the unfortunate Mr. Ohlhauser came on board the sinking ship.
The SEC's Solucorp prosecution has been greatly assisted by several Howe Street witnesses who voluntarily testified in Vancouver, especially securities lawyers Herb Ono and Bernard Pinsky, whose recent testimony will be used in the New York trial in March. There are no allegations of wrongdoing against either Mr. Ono or Mr. Pinsky, Clark Wilson partners who served as Vancouver securities counsel to Solucorp dating back to 1995.
In proceedings in the Supreme Court of British Columbia, Mr. Pinsky and Mr. Ono hoped to be fairly compensated for their preparation fees and reimbursed for fees and disbursements they incurred in taking their own legal advice regarding their compliance with an SEC request letter.
"Mr. Pinsky deposes that his normal hourly rate is $325 and he will require 30 to 40 hours to prepare for the examination. Mr. Ono deposes that his normal hourly rate is $235 and he will require eight to 12 hours of preparation because of his more limited involvement with Solucorp," noted Mr. Justice Ian Pitfield. (All Canadian legal fees are in Canadian dollars.) Mr. Pinsky's request worked out to $9,750 to $13,000, while Mr. Ono's request worked out to $1,900 to $2,800.
"I fix the reasonable amount for preparation by Mr. Pinsky at $1,500 and by Mr. Ono at $750," ruled Judge Pitfield. |
