The Securities and Exchange Commission has settled civil charges against an accountant in connection with his audits of the financial statements for a tiny penny-stock company.
Norman Stumacher agreed, without admitting or denying the allegations in the complaint, to disgorge $25,000 plus prejudgment interest of $8,749.11, and to pay a civil penalty in the amount of $20,000, to settle the case involving consumer electronics company Video Without Boundaries Inc.
According to the complaint, Fort Lauderdale, Florida-based VWB, also known as China Logistics Group Inc., recorded fictitious revenue and assets through a number of accounting schemes, including improper revenue recognition, in violation of generally accepted accounting principles (GAAP). The company was described in a separate SEC complaint as an electronics and entertainment technology company.
The complaint also alleged that Stumacher audited VWB’s 2002 and 2003 annual financial statements and issued audit reports containing audit opinions representing that the financial statements were presented in conformity with GAAP. The SEC says the accountant also allegedly conducted his audits in accordance with generally accepted auditing standards (GAAS).
The SEC claims the representations made in the financial statements were false because VWB’s results contained numerous departures from GAAP that “materially overstated” the company’s revenues and understated its net losses. In addition, contrary to Stumacher’s audit reports, his audits were not conducted in accordance with GAAS because he failed to comply with professional standards related to field work and general standards in the performance of his audits.
In a related administrative and cease-and-desist proceeding, the commission also issued a settled order against Stumacher finding that he engaged in improper professional conduct and violated certain securities rules. According to the settlement documents, he was suspended from practicing before the SEC and required to cease and desist from committing or causing any further violations of the provisions charged.
Furthermore, in a related civil action, the SEC charged VWB and two other individuals with accounting fraud related to the company’s annual and quarterly filings and the issuance of false and misleading press releases. The two individuals are former CEO and principal financial and accounting officer Vernon Jeffrey Harrell and VWB’s largest shareholder, David J. Aubel.
Harrell and Aubel could not be reached for comment.
According to the commission’s complaint, from at least April 2003 to November 2005, VWB — at the direction of its then sole officer and director, Harrell — purportedly filed annual and quarterly reports with the commission that, among other things, materially overstated its revenues, improperly accounted for a failed acquisition, and understated its net losses.
Harrell maintained VWB’s books and records, created its financial statements, and certified the company’s annual reports for 2002 and 2003, as well as its quarterly reports for 2002 to 2004, which he knew, or was severely reckless in not knowing, contained material misstatements and omissions.
The complaint also alleges that from November 2003 to September 2006, Harrell and Aubel issued a series of false and misleading press releases about VWB. They then allegedly took advantage of the company’s artificially inflated stock price; Aubel purportedly dumped millions of shares of VWB stock into the market, reaping millions of dollars. Harrell allegedly participated in the scheme by signing bogus stock issuance resolutions that allowed Aubel to sell the shares immediately after he received them. Throughout this time, neither Harrell nor Aubel reported their ownership of VWB stock, or changes in their ownership, according to the complaint.
Among the charges, Aubel is accused of aiding and abetting VWB’s violations of the antifraud provisions of securities law. The SEC charged Harrell with knowingly circumventing or failing to implement a system of internal controls, knowingly falsifying VWB books and records, and falsely certifying a number of the company’s annual and quarterly reports. Harrell and Aubel were also charged with violations arising from their failure to report their ownership of company stock.
The commission’s complaint seeks permanent injunctions against VWB, Harrell, and Aubel, enjoining them from future violations of the provisions charged, an order requiring that VWB and Aubel disgorge their ill-gotten gains, with prejudgment interest, and imposing civil penalties against Harrell and Aubel. The SEC also seeks a penny-stock bar against Harrell and Aubel and an officer and director bar against Harrell.