UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
Securities Act of 1933
Release No. 7401 / March 12, 1997
Securities Exchange Act of 1934
Release No. 38388 / March 12, 1997
Accounting and Auditing Enforcement
Release No. 895 / March 12, 1997
Administrative Proceeding
File No. 3-9271
-----------------------------------
:
In the Matter of : ORDER INSTITUTING
: PROCEEDINGS, AND
MERLE S. FINKEL, CPA : OPINION AND ORDER
: PURSUANT TO RULE 102(e)
Respondent. : OF THE COMMISSION'S
: RULES OF PRACTICE
:
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I.
The Securities and Exchange Commission deems it appropriate
and in the public interest that administrative proceedings be
instituted pursuant to Rule 102(e)(1)(ii) and (iii)-[1]- of
the Commission's Rules of Practice [17 C.F.R. 201.102(e)(1)]
against Merle S. Finkel ("Finkel").
II.
In anticipation of the institution of these proceedings,
Finkel has submitted an Offer of Settlement ("Offer") to the
---------FOOTNOTES----------
-[1]- Rule 102(e)(1) provides in pertinent 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) to
be lacking in character or integrity or to have
engaged in unethical or improper professional
conduct; or (iii) to have willfully violated, or
willfully aided and abetted the violation of any
provision of the Federal securities laws or the
rules and regulations thereunder."
==========================================START OF PAGE 2======
Commission, 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, prior to a hearing pursuant to the
Commission's Rules of Practice, 17 C.F.R. 201.1 et seq., and
without admitting or denying the facts, findings, or conclusions
herein, except as to jurisdiction of the Commission over him and
over the subject matters of this proceeding, which he admits,
Finkel consents to the entry of this Order Instituting
Proceedings and Opinion and Order pursuant to Rule 102(e) of the
Commission's Rules of Practice ("Order"), [17 C.F.R.
201.102(e)], and the entry of the findings and imposition of the
sanction set forth below.
III.
On the basis of this Order and Finkel's Offer, the
Commission makes the following findings:-[2]-
A. Summary
On at least 13 occasions Finkel issued materially false or
inaccurate audit reports on the financial statements of three
publicly traded companies: (i) Systems of Excellence, Inc.; (ii)
Twenty First Century Health, Inc.; and (iii) Combined Companies
International Corp. In each case, Finkel's audit reports falsely
state that he conducted audits of the financial statements of
these companies in accordance with Generally Accepted Auditing
Standards ("GAAS") and falsely represent that the financial
statements were fairly presented in conformity with Generally
Accepted Accounting Principles ("GAAP"). In fact, Finkel did not
perform the audits in accordance with GAAS. For two of the
companies, Finkel also knew that the financial statements he
certified were materially false and misleading. Finally, Finkel
knew that his false audit reports would be included by his
clients in periodic reports and an amended registration statement
on Form 10, and incorporated by reference in 18 registration
statements on Form S-8, all of which were filed with the
Commission.
B. Respondent and Issuers Involved
1. Respondent
Merle S. Finkel is a certified public accountant licensed by
the State of Pennsylvania since about 1959. He has practiced
---------FOOTNOTES----------
-[2]- The findings herein are made pursuant to the Offer
of Settlement submitted by Finkel and are not
binding on any other person or entity named as a
respondent in this or any other proceeding.
==========================================START OF PAGE 3======
before the Commission within the meaning of Rule 102(f) of the
Commission's Rules of Practice in connection with the preparation
of financial statements and other documents filed with the
Commission. Finkel has practiced under the name M.S. Finkel &
Co. On March 12, 1997, Finkel plead guilty to a one-count
criminal information charging him with conspiracy to commit
securities fraud and bank fraud in the action entitled United
States v. Merle S. Finkel, Cr-S-97-45-PMP (D.C. Nev.)
2. Issuers Involved
Systems of Excellence, Inc. ("SOE"), which was incorporated
in Florida in 1989, maintained its offices in Coral Gables,
Florida and McLean, Virginia. It purportedly is engaged in
manufacturing and distributing video teleconferencing equipment.
SOE's stock is registered with the Commission pursuant to Section
12(g) of the Securities Exchange Act of 1934 ("Exchange Act").
Before the Commission suspended trading in SOE's stock on October
7, 1996 (which suspension has since expired), its stock was
quoted on the NASDAQ Bulletin Board. On November 7, 1996, the
Commission filed a Complaint and Applications for a Temporary
Restraining Order, Preliminary Injunction and other emergency
relief in the United States District Court against, among others,
SOE, alleging that SOE had violated the antifraud, registration,
and periodic filing provisions of the federal securities laws.
See SEC v. Charles O. Huttoe et al., Civil Action No. 96-02543
(GK)(D.D.C.).
Twenty First Century Health, Inc. ("TFCH"), located in Las
Vegas, Nevada, was incorporated in Utah in 1981 as Big Valley
Energy, Inc. It purportedly completed an intrastate offering of
its securities in Utah. Thereafter it changed its name to
Biotronic Energy Engineering, Inc., then to The Sonoran Group,
then to Zorro International, Inc., then to Health & Wealth, Inc.,
and finally became Twenty First Century Health in 1995. It
presently holds itself out as a new products development company
in the field of health-related hygienic, home diagnostic,
nutritional supplement and medical technology products. TFCH's
stock is not registered with the Commission pursuant to the
Exchange Act, and accordingly the company does not make periodic
filings with the Commission. Before the Commission suspended
trading in TFCH's stock on February 10, 1997 and again on
February 27, 1997 (the latter suspension being in effect until
11:59 p.m. EST, March 12, 1997), its stock was quoted on the
NASDAQ Bulletin Board.
Combined Companies International Corp. ("CCIC"), is located
in Las Vegas, Nevada. Through its predecessor it was
incorporated in Nevada in 1971, and remained largely inactive
until September 1993 when it merged with a medical supply
disposal company. CCIC has at various times described itself as
engaged in manufacturing and distributing medical and infection
==========================================START OF PAGE 4======
control products, recycling tires and manufacturing and
distributing video games. CCIC's stock is registered with the
Commission pursuant to Section 12(g) of the Exchange Act, and its
stock is quoted on the NASDAQ Bulletin Board.
C. Finkel's Issuance of False Audit Reports and his Role
in the Issuance of Materially False and Misleading Periodic
Reports and Registration Statements
Finkel was engaged as the independent auditor for SOE, TFCH
and CCIC at the direction of a Las Vegas stock promoter who
controls TFCH and CCIC (the "Promoter"). At the Promoter's
instance or direction, Finkel rendered unqualified audit reports
on SOE's, TFCH's and CCIC's financial statements without
performing audits in accordance with GAAS for these companies.
With respect to the two companies controlled by the Promoter,
Finkel knew that the financial statements on which he opined were
materially false.
1. Finkel's Role in the SOE Fraud
From at least March 1995 through September 24, 1996, SOE
engaged in a massive unregistered distribution of its shares.
The stock it distributed purportedly was issued to consultants in
exchange for services rendered to SOE, and purportedly had been
registered pursuant to Registration Statements on Form S-8. In
fact no such services were provided and no Registration
Statements were filed with the Commission.
In the course of its audit of SOE's financial statements for
the fiscal year ended February 29, 1996, SOE's then independent
auditor, Weinberg, Pershes & Co. ("WPC"), discovered that the
purported registration statements had not been filed. In
addition, WPC was unable to obtain evidence that services had
been rendered in exchange for the stock that had been issued, and
obtained other information that suggested irregularities in the
issuance of the stock by SOE and in other matters.
As a result of those discoveries, on September 18, 1996, WPC
informed SOE that it would be necessary to expand the scope of
the audit to, among other things, "perform [an] extensive amount
of testing on the common stock issued by the Company ....". On
September 20, 1996, WPC issued a letter to SOE pursuant to
Section 10A of the Exchange Act alerting it that illegal acts by
the Company may have occurred in contravention of state and
federal law.
On or before September 19, 1996, Charles O. Huttoe
("Huttoe"), then the Chairman of SOE, sought the Promoter's
assistance in resolving the issues raised by SOE's auditors.
Huttoe, at the Promoter's direction, decided that SOE would file
its then delinquent annual report on Form 10-KSB for the period
==========================================START OF PAGE 5======
ended February 29, 1996 (Form 10-KSB") and a quarterly report on
Form 10-Q for the period ended May 31, 1996, and thereafter file
registration statements that would cover the shares previously
distributed by SOE. The Promoter arranged for Finkel to issue an
audit report on SOE's financial statements, which was to be
included in SOE's Form 10-KSB.
On September 21, 1996, Finkel was retained as SOE's independent
auditor. Finkel was present at SOE's offices in McLean, Virginia
during the weekend of September 21 and 22, and on September 23,
and issued an unqualified audit report on SOE's financial
statements for the fiscal years ended February 28, 1995 and
February 29, 1996. The audit report was dated September 21,
1996.
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Finkel's audit report, issued under the name M.S. Finkel &
Co., stated:
We conducted my [sic] audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits [sic] to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
Finkel's audit report stated that, on the basis of the audit
"n our opinion, the financial statements ... present fairly,
in all material respects, the financial position of Systems of
Excellence, Inc. at February 29, 1996 and February 28, 1995, and
the results of its operations and cash flows for the years then
ended in conformity with generally accepted accounting
principles."
Finkel's audit report was materially false or inaccurate.
Finkel did not perform an audit in accordance with GAAS. Finkel
performed no substantive audit procedures and relied solely on
documents and statements prepared or provided to him by Huttoe or
SOE's internal accountant. He failed to make inquiries of WPC or
to review workpapers generated by WPC, as required by GAAS.
Furthermore, despite the fact that more than 80% of SOE's
reported expenses were for "consulting," Finkel made minimal
effort to obtain any evidential matter or determine whether the
purported consultants who had received SOE stock had even
provided any services to SOE. As a result, Finkel failed to
discover that SOE stock was improperly distributed to persons who
had performed no services for the company that would qualify the
stock for S-8 registration.
SOE's Form 10-KSB, incorporating Finkel's audit report, was
filed with the Commission on September 23, 1996. Finkel knew
that his audit report would be included in SOE's Form 10-KSB.
Finkel also consented to the incorporation of his audit report in
16 registration statements on Form S-8 that SOE filed with the
Commission on September 24, 1996, to cover the shares previously
distributed by SOE.
2. Finkel's Issuance of False Audit Reports for TFCH
Between July 22, 1993, and October 4, 1996, at the
Promoter's request, Finkel issued audit reports on at least eight
sets of financial statements of TFCH. Each of those audit
reports falsely stated that Finkel had conducted an audit in
==========================================START OF PAGE 7======
accordance with GAAS, and that the financial statements were
fairly presented in conformity with GAAP.
Finkel did not perform audits in accordance with GAAS of the
financial statements before certifying them. To the contrary,
Finkel knowingly falsified certain of these financial statements
by recording material and nonexistent assets at the Promoter's
request. Those fictitious assets -- capitalized research and
development costs and capitalized organizational costs -- were
the largest assets on TFCH's balance sheet during the period from
June 30, 1993 through June 30, 1995, and were included in six of
the eight financial statements "audited" by Finkel. Those
nonexistent assets resulted in financial statements that
overstated TFCH's assets by an amount ranging from 110% to 321%
during the period from June 30, 1993 through June 30, 1995.
Finkel knew or was reckless in not knowing that the false
audit reports certifying TFCH's false and misleading financial
statements would be disseminated to brokers who would sell TFCH
stock to the investing public.
3. Finkel's Issuance of False Audit Reports for CCIC
Since February 7, 1994, Finkel has issued four audit reports
containing unqualified opinions on the financial statements of
CCIC and its predecessor. Each of those audit reports falsely
stated that Finkel had conducted an audit in accordance with GAAS
and that the financial statements were fairly presented in
conformity with GAAP.
Finkel did not perform any of his audits in accordance with
GAAS. Since 1993, the largest asset CCIC has included on its
balance sheet -- valued at about $2.0 million -- has been
variously characterized as "cash," a "note receivable" and, most
recently, a "certificate of deposit." That asset does not exist.
In the course of his "audits," Finkel obtained letters that he
knew to be false that purported to confirm the existence of that
asset. That fictitious asset plus accrued "interest" resulted in
CCIC's total assets being overstated by 615% as of December 31,
1995.
Finkel knew that his audit reports, falsely stating that he
had conducted audits in accordance with GAAS and that CCIC's
financial statements were presented in conformity with GAAP,
would be filed with the Commission as part of CCIC's annual
report and amended annual report on Form 10-K for its fiscal year
ended December 31, 1994, annual report on
Form 10-K for its fiscal year ended December 31, 1995, and its
amended registration statement on Form 10 filed in March 1994.
Finkel also consented to the incorporation of his false audit
reports in two registration statements on Form S-8 that CCIC
filed with the Commission in April and June 1995.
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D. Finkel Engaged in Improper Professional Conduct For
Purposes of Rule 102(e)(1)(ii) of the Commission's Rules
of Practice
As described above, Finkel routinely issued audit reports
falsely stating that he conducted audits of the financial
statements of SOE, TFCH and CCIC in accordance with GAAS and
falsely representing that the financial statements were fairly
presented in conformity with GAAP. Finkel also issued
unqualified audit reports on financial statements that he knew
were materially false and misleading, and permitted the false
audit reports to be included in periodic reports and registration
statements filed with the Commission.
E. Finkel Willfully Violated the Antifraud Provisions, and
Willfully Aided and Abetted Violations of the Periodic
Filing Provisions, of the Federal
Securities Laws for Purposes of
Rule 102(e)(1)(iii) of the
Commission's Rules of Practice
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
prohibit fraud in connection with the purchase or sale of
securities. Section 17(a) of the Securities Act of 1933
prohibits fraud in the offer and sale of securities. Violations
of these provisions occur when a person employs any device,
scheme or artifice to defraud, makes an untrue statement of a
material fact or omits to state a material fact, or engages in
any act, practice or course of business which operates as a
fraud. Finkel willfully violated these provisions by issuing
false audit reports that he knew were included in periodic
reports and registration statements: (1) that stated that he had
conducted audits in accordance with GAAS, when he knew that he
had not; and (2) that represented that the financial statements
were fairly presented in conformity with GAAP, when he knew that
they were not, and in fact were materially false. See SEC v.
Baker, Lit Rel. 12861 (May 23, 1991)(auditor who signed audit
report despite failing to comply with several major GAAS
provisions violated the antifraud provisions); SEC v. Greenspan,
Lit. Rel. 12862 (May 23, 1991)(same).
Section 13(a) of the Exchange Act, and Rule 13a-1
thereunder, requires issuers with securities registered with the
Commission pursuant to Section 12 of the Exchange Act to file
with the Commission periodic reports that are complete and
accurate.-[3]- By issuing false audit reports that: (1) he
---------FOOTNOTES----------
-[3]- Rule 12b-20 requires that reports filed pursuant
to Section 13(a) contain, in addition to all
(continued...)
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knew would be included in SOE's and CCIC's annual reports on Form
10-KSB and Form 10-K, respectively; and (2) he knew would
substantially assist in the filing of false financial statements
contained in SOE's and CCIC's annual reports on Form 10-K, Finkel
willfully aided and abetted violations of Section 13(a) of the
Exchange Act, and Rules 12b-20 and 13a-1 thereunder.
---------FOOTNOTES----------
-[3]-(...continued)
expressly required disclosures, such other
information as is necessary to ensure that the
statements made in the reports are not materially
misleading.
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IV.
In view of the foregoing, the Commission deems it
appropriate and in the public interest to accept Finkel's Offer,
and,
ACCORDINGLY IT IS HEREBY ORDERED, effective immediately,
that Merle S. Finkel be, and hereby is, denied the privilege of
appearing or practicing before the Commission as an accountant.
By the Commission.
Jonathan G. Katz
Secretary |
