Initial Decision Release No. 1407

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Administrative Proceeding

File No. 3-18292

UNITED STATES OF AME RICA

Before the

SECURITIES AND EXCH A NGE COMMISSION

Washington, D.C. 20549

In the Matter of

Anton & Chia, LLP,

Gregory A. Wahl, CPA,

Michael Deutchman, CPA,

Georgia Chung, CPA, and

Tommy Shek, CPA

Appearances:

Initial Decision

as to Gregory A. Wahl, CPA,

Michael Deutchman, CPA,

and Georgia Chung, CPA

February 8, 2021

Alyssa A. Qualls, Daniel J. Hayes, Ariella O. Guardi, John

E. Birkenheier, Donald Searles, Jennifer Calabrese, Leslie

Kazon, and David Van Havermaat for the Division of

Enforcement, Securities and Exchange Commission

Lahdan Rahmati, in a limited capacity, for Respondents

Gregory Wahl and Georgia Chung 1

Gregory Wahl and Georgia Chung, pro se

John R. Armstrong and Vanoli V. Chander, Horwitz &

Armstrong, APC, for Respondent Michael Deutchman

Before:

Jason S. Patil, Administrative Law Judge

Rahmati appeared for Respondents Wahl and Chung in the limited

capacity of conducting their direct examinations at the hearing. Respondents

otherwise represented themselves at the hearing and in the post -hearing

phase. Additional attorneys appeared for Respondents in prior phases of the

proceeding.

Introduction

This case involves multiple violations of the federal securities laws and

improper professional conduct by accountants associated with Anton & Chia,

LLP, an audit firm registered with the Public Company Accounting Oversight

Board (PCAOB). The misconduct relates to audit or interim review

engagements for three companies: Accelera Innovations, Inc., Premier Holding

Corporation, and CannaVEST Corp.

Respondent Gregory A. Wahl, CPA, was majority owner and managing

partner of Anton & Chia, and served as the engagement partner for Accelera’s

2013 and 2014 year-end audits and five interim reviews from the first quarter

of 2014 through the third quarter of 2015 (with the exception of the third

quarter 2014 review, in which he was not involved), Premier’s 2013 year-end

audit, and CannaVEST’s 2013 interim reviews. Respondent Michael

Deutchman, CPA, was an audit partner at Anton & Chia and served as the

engagement partner during the interim review of Accelera for the third quarter

of 2014 and engagement quality reviewer for Accelera’s 2014 year-end audit

and the interim reviews for 2015.2 Respondent Georgia Chung, CPA, co-owned

Anton & Chia with Wahl and served as the engagement quality reviewer for

CannaVEST’s first quarter of 2013 interim review.

Accelera vastly inflated its financial position and results by treating

another company’s revenues, assets, and liabilities as its own. Premier inflated

and provided an unsupported valuation of an otherwise worthless promissory

note and further improperly allocated the entire purported value of an acquired

company to goodwill. CannaVEST greatly overstated its assets due to its

improper valuation of an acquired company. In performing the audits or

interim reviews of these companies, Respondents egregiously deviated from

multiple PCAOB standards 3 and ignored numerous red flags indicating the

My findings regarding the timeframe of Wahl and Deutchman’s

involvement in the Accelera interim reviews and their respective position titles

differ somewhat from the allegations in the order instituting proceedings

(OIP). See OIP at 5, 16. The discrepancy has no bearing on their degree of

culpability or the sanctions imposed.

In this initial decision, in line with Securities and Exchange Commission

interpretive guidance, I use the term “PCAOB standards,” not the older term

“GAAS” (generally accepted auditing standards), to mean the auditing

standards required by the Commission’s rules when dealing with public

company financial statements. Commission Guidance Regarding the Public

Company Accounting Oversight Board’s Auditing and Related Professional

Practice Standard No. 1, 69 Fed. Reg. 29,064, 29,065 (May 20, 2004)

companies’ financial statements and public filings contained material

misstatements. Moreover, Wahl and Deutchman were reckless in not knowing

that the statements in Anton & Chia’s reports for Accelera and Premier were

false and misleading. In its audit reports, the firm egregiously misrepresented

that it had conducted its work in accordance with PCAOB standards and that

the companies’ financial statements fairly presented their financial positions

according to generally accepted accounting principles (GAAP).

In connection with work related to Accelera, Deutchman aided and

abetted Anton & Chia’s violation of Section 10(b) of the Securities Exchange

Act of 1934 and Rule 10b-5(b)’s antifraud provisions; Wahl and Deutchman

aided and abetted and were a cause of Accelera’s violation of Exchange Act

Section 13(a) and Rules 13a-1 and 13a-13’s requirement that an issuer file

accurate reports; Wahl and Deutchman aided and abetted and were a cause of

Anton & Chia’s violation of Rule 2-02(b) of Regulation S-X due to the

misrepresentations in the firm’s reports; and Wahl and Deutchman willfully

violated or willfully aided and abetted violations of the federal securities laws

or rules within the meaning of Exchange Act Section 4C(a)(3) and Rule

102(e)(1)(iii) of the Commission’s Rules of Practice, and engaged in improper

professional conduct within the meaning of Section 4C(a)(2) and Rule

102(e)(1)(ii).

In connection with his work related to Premier, Wahl violated Exchange

Act Section 10(b) and Rule 10b-5(b), aided and abetted Anton & Chia’s

violations of Section 10(b) and Rule 10b-5(b), aided and abetted and was a

cause of Premier’s violation of Exchange Act Section 13(a) and Rule 13a-1,

aided and abetted and was a cause of Anton & Chia’s violation of Rule 2-02(b)

of Regulation S-X, willfully violated or willfully aided and abetted violations of

the federal securities laws or rules within the meaning of Section 4C(a)(3) and

Rule 102(e)(1)(iii), and engaged in improper professional conduct within the

meaning of Section 4C(a)(2) and Rule 102(e)(1)(ii).

In connection with their work related to CannaVEST, Wahl and Chung

engaged in improper professional conduct within the meaning of Section

4C(a)(2) and Rule 102(e)(1)(ii).

The following sanctions are warranted in the public interest: cease -anddesist orders against Wahl and Deutchman; $160,000 in civil penalties against

Wahl and $40,000 against Deutchman; Wahl and Deutchman are permanently

(“[R]eferences in Commission rules and staff guidance and in the federal

securities laws to GAAS or to specific standards under GAAS, as they relate to

issuers, should be understood to mean the standards of the PCAOB pl us any

applicable rules of the Commission.”).

denied the privilege of appearing or practicing before the Commission as

accountants, and Chung is denied the privilege of appearing or practi cing

before the Commission as an accountant with the right to reapply after one

year.

Procedural History

On December 4, 2017, the Commission issued an OIP against Wahl,

Deutchman, and Chung under Exchange Act Sections 4C and 21C and Rule of

Practice 102(e).4 The Commission also instituted proceedings against Anton &

Chia and Tommy Shek, CPA, but later settled as to those parties. 5 Anton &

Chia, LLP, Exchange Act Release No. 87033, 2019 WL 4572716 (Sept. 20,

2019) (Anton & Chia); Anton & Chia, Exchange Act Release No. 83622, 2018

WL 3388553 (July 12, 2018) (Shek).

On January 5, 2018, Respondents answered by generally denying the

allegations and asserting affirmative defenses. See Wahl Answer; Deutchman

Answer.6 The affirmative defenses contain assertions against the elements of

The proceeding was instituted under Section 21C as to Wahl and

Deutchman, but not Chung.

Allegations in the OIP about the failure to maintain an adequate system

of quality controls pertained only to Anton & Chia, and thus I do not address

them in this decision. For the same reason, I do not address the 2015 year -end

audit of Accelera.

Citations to the answer filed by Anton & Chia, Wahl, and Chung are noted

as “Wahl Answer at __”; citations to Wahl and Chung’s post-hearing brief,

proposed findings of fact and conclusions of law, and response to the Division

of Enforcement’s proposed findings of fact, are noted as “Wahl Post-hr’g Br. at

__,” “Wahl PFOF at __,” and “Wahl Resp. to Div. PFOF at __,” respectively.

When referring to arguments made in Wahl and Chung’s post-hearing briefing,

I state “Wahl and Chung argue” only when the argument is relevant to both of

them; otherwise I merely state “Wahl argues.” Citations to Respondent

Deutchman’s answer and his proposed findings of fact and conclusions of law

are noted as “Deutchman Answer at __” and “Deutchman Post-hr’g Br. at __,”

respectively. Citations to the Division’s post-hearing brief, proposed findings

of fact, response to Wahl’s PFOF, response to Deutchman’s PFOF, and posthearing reply brief, are noted as “Div. Post-hr’g Br. at __,” “Div. PFOF at __,”

“Div. Resp. to Wahl PFOF at __,” “Div. Resp. to Deutchman PFOF at __,” and

“Div. Post-hr’g Reply Br. at __,” respectively. Citations to the hearing

transcript are noted as “Tr. __.” When exhibits lack both consistent internal

pagination and Bates style numbering, I cite to the page of the PDF and follow

the PDF page number with “(PDF).”

the allegations and also raise constitutional issues, reliance on professionals,

and various other defenses that were not supported by further briefing, such

as the doctrines of laches and estoppel. See Wahl Answer at 27–30; Deutchman

Answer at 22–24. All three Respondents were initially represented by counsel,

but Wahl and Chung’s attorneys withdrew; Wahl and Chung now defend

themselves.

This proceeding was initially assigned to another administrative law

judge, but after the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044

(2018), it was reassigned to a different judge, and then was reassigned to me

prior to the hearing. See Pending Admin. Proc., Admin Proc. Rulings Release

No. 5955, 2018 SEC LEXIS 2264, at *1–3 (ALJ Sept. 12, 2018) (reassignment

post-Lucia); Anton & Chia, Admin Proc. Rulings Release No. 6690, 2019 SEC

LEXIS 3410, at *1 (ALJ Sept. 27, 2019) (assigning proceedings to me).

The evidentiary portion of the hearing took place in Los Angeles,

California, over the course of 25 days: October 15–18, November 4–8 and 18–

22, and December 2–6 and 16–18, 2019, and January 6–8, 2020. Closing

arguments were conducted through videoconference on January 15, 2020.

After the hearing, I admitted multiple exhibits into evidence and

rescinded the inclusion of one exhibit. See Anton & Chia, Admin Proc. Rulings

Release No. 6726, 2020 SEC LEXIS 2622, at *1 (ALJ Jan. 28, 2020) (admitting

Ex. 772); Anton & Chia, Admin Proc. Rulings Release No. 6727, 2020 SEC

LEXIS 3143, at *1 (ALJ Jan. 29, 2020) (admitting Exs. 432 and 1119); Anton

& Chia, Admin Proc. Rulings Release No. 6741, 2020 SEC LEXIS 658, at *1

(ALJ Mar. 9, 2020) (admitting Ex. 839.8); Anton & Chia, Admin Proc. Rulings

Release No. 6766, 2020 SEC LEXIS 3435, at *2–3 (ALJ June 10, 2020)

(admitting Exs. 13, 14, 15, 1203, 1281, 1283, and 1284; rescinding admission

of Ex. 44.1); Anton & Chia, Admin Proc. Rulings Release No. 6801, 2020 SEC

LEXIS 5066 (ALJ Dec. 3, 2020) (admitting Ex. 1285). Post-hearing briefing

closed on August 10, 2020, and the matter is now ripe for decision. All

arguments inconsistent with this decision have been considered and rejected.

Preliminary Issues

Before my findings of fact and legal conclusions on the merits, I address

two preliminary issues: Respondents’ constitutional arguments, and the

weight that I give to expert evidence, which includes the resolution of pending

motions in limine.

1. Respondents’ constitutional arguments are moot or unsuccessful.

Wahl, Chung, and Deutchman raise several constitutional arguments:

(1) the proceeding violates the Appointments Clause, Wahl Answer at 28;

Deutchman Answer at 22–23; (2) disgorgement is unlawful on unspecified

constitutional grounds, Wahl Answer at 30; Deutchman Answer at 24; Wahl

Post-hr’g Br. at 75; see Wahl PFOF at 768–69 (PDF); (3) having an

administrative law judge preside over this proceeding violates Respondents’

right to due process, Wahl Answer at 28; Deutchman Answer at 22–23; and

(4) the proceeding violates Respondents’ right to jury trial, Wahl Answer at 30;

Deutchman Answer at 24; see Wahl PFOF at 184 (PDF).

Further, Wahl and Chung assert that (5) the issuance of a press release

regarding the OIP and the filing of proof of claim in Wahl’s bankruptcy

proceeding deprived them of due process of law, Wahl Post-hr’g Br. at 76; Wahl

PFOF at 54–58, 631–33, 639–41, 643–45, 673–75, 680–85, 705, 749 (PDF); and

(6) the press release and claim constituted an unconstitutional taking of their

property, Wahl Post-hr’g Br. at 76–77; Wahl PFOF at 680–88, 765, 797, 805

(PDF). Finally, although not a constitutional claim, Wahl and Chung assert

that this proceeding is time-barred. Wahl Post-hr’g. Br. at 71–72.

The first argument is mooted by the reassignment of this proceeding to a

different, properly appointed administrative law judge for a new hearing

following the Supreme Court’s decision in Lucia. Pending Admin. Proc.,

Exchange Act Release No. 83907, 2018 WL 4003609, at *1 (Aug. 22, 2018);

Anton & Chia, 2019 SEC LEXIS 3410; Pending Admin. Proc., 2018 SEC LEXIS

2264, at *2–3; see Pending Admin. Proc., Exchange Act Release No. 82178,

2017 WL 5969234, at *1 (Nov. 30, 2017) (ratifying the appointment). The

second is mooted by the Division’s decision to abandon its request for

disgorgement. Div. Post-hr’g Reply Br. at 1. The remaining constitutional

arguments are unsuccessful for the reasons discussed below.

1.1. A proceeding before an administrative law judge does not deprive

Wahl, Chung, and Deutchman of due process.

Wahl, Chung, and Deutchman argue, without elaboration, that having a

Commission administrative law judge adjudicate this proceeding violates the

Due Process Clause. Wahl Answer at 28; Deutchman Answer at 22–23.

However, courts have long rejected the argument that adjudication before an

agency deprives a respondent of due process. See Blinder, Robinson & Co. v.

SEC, 837 F.2d 1099, 1104–08 (D.C. Cir. 1988). The Commission has the

authority to preside over administrative proceedings involving alleged

securities law violations and may delegate that authority to an administrative

law judge as it has done here. 15 U.S.C. § 78d-1(a); 17 C.F.R. § 201.110; see

OIP at 42. Respondents have been given the opportunity to be heard, put on

evidence, and make arguments. See Matthews v. Eldridge, 424 U.S. 319, 333

(1976). They have been provided the required process.

1.2. Wahl, Chung, and Deutchman are not entitled to a jury trial in this

administrative proceeding.

Wahl, Chung, and Deutchman assert as affirmative defenses that

“[d]etermination of this proceeding by an ALJ violates [their] right to a jury

trial pursuant to the Seventh Amendment.” Wahl Answer at 30; Deutchman

Answer at 24. But it is well established that “the Seventh Amendment is not

applicable to administrative proceedings.” Tull v. United States, 481 U.S. 412,

418 n.4 (1987); see John Thomas Capital Mgmt. Grp., Securities Act Release

No. 10834, 2020 WL 5291417, at *27 (Sept. 4, 2020) (“[The Commission] ha[s]

repeatedly rejected claims that [its] administrative proceedings violate the

Seventh Amendment.”). Respondents in administrative proceedings are not

entitled to a jury trial. See Atlas Roofing Co. v. Occupational Safety & Health

Review Comm’n, 430 U.S. 442, 450, 460–61 (1977); Kabani & Co., Exchange

Act Release No. 80201, 2017 WL 947229, at *20 (Mar. 10, 2017), pet. denied,

733 F. App’x 918 (9th Cir. 2018).

1.3. The press release and bankruptcy claim did not deny Wahl and Chung

due process.

Wahl and Chung argue that they were denied due process by a press

release announcing the issuance of the OIP against them and by the

Commission’s filing of a proof of claim in Wahl’s personal bankruptcy

proceeding. Wahl Post-hr’g Br. at 76. They imply that this proceeding must be

dismissed because these two statements defamed them “without ANY actual

evidence,” resulting in their “financial ruin” by “steal[ing] away their

livelihoods,” and inflicted emotional distress. Id.; Wahl PFOF at 680–85 (PDF).

But both actions were lawful. Neither deprived them of due process in this

proceeding; rather, this proceeding provided them the process to which they

were entitled. See Jonathan Feins, Exchange Act Release No. 41943, 1999 WL

770236, at *7 (Sept. 29, 1999) (“Administrative due process is satisfied where

the party against whom the proceeding is brought understands the issues and

is afforded a full opportunity to meet the charges during the course of the

proceeding.”).

The press release issued by the Commission on December 4, 2017, states

that the OIP was filed, summarizes its allegations, and quotes statements of

opinion by the two co-directors of the Division. Ex. 1285. The Exchange Act

authorizes the Commission to make this type of release, “in its discretion, to

publish information concerning any … violations” of the securities laws. 15

U.S.C. § 78u(a)(1); see SEC v. Rivlin, No. 99-1455, 1999 WL 1455758, at *3

(D.D.C. Dec. 20, 1999). Moreover, Commission proceedings—like the majority

of government adjudications in the United States—are presumptively public,

so even without a press release some reputational harm may be unavoidable.

17 C.F.R. §§ 201.301, .322(b); cf. Disciplinary Proceedings Involving

Professionals Appearing or Practicing Before the Commission, 53 Fed. Reg.

26,427, 26,429 (July 13, 1988) (“recogniz[ing] that any public proceeding may

involve reputational damage to the respondent,” but concluding that

proceedings under the predecessor to 17 C.F.R. § 201.102(e) should be public

like other administrative proceedings). A press release that does little more

than repeat the allegations in an already public OIP is well within the

discretion granted by the Exchange Act to publish information about securities

law violations.

Similarly, the proof of the Commission’s contingent, unliquidated claim

that was filed in Wahl’s bankruptcy proceeding on December 20, 2018, stated

only that this proceeding had been brought and that it might result in a

judgment payable to the Commission in an unspecified amount. Proof of Claim,

In re Gregory Anton Wahl, No. 8:18-bk-12449 (Bankr. C.D. Cal. Dec. 20, 2018),

Claim 16-1. The amended proof of claim filed on May 20, 2019, merely valued

the claim at $456,000 based on the Division’s claims for disgorgement (which

the Division was then seeking), civil penalties, and prejudgment interest.

Ex. 1283 at 2. The proofs of claim did not decide the issues in this proceeding

or imply that they had already been decided. Rather, both the claim and

amended claim fall within the bankruptcy code’s broad definition of “claim,”

which includes “unliquidated” and “contingent” rights to payment. 11 U.S.C.

§ 101(5)(a); accord In re Castellino Villas, A.K.F. LLC, 836 F.3d 1028, 1033–34

(9th Cir. 2016) (observing that a claim—such as one for attorneys’ fees not yet

earned—can arise when it can fairly or reasonably be contemplated even if the

cause of action had not accrued under nonbankruptcy law). The Commission

was not just entitled, but was required to file a proof of claim for potential

recovery in pending pre-bankruptcy-petition litigation if it wished to preserve

its right to recovery. Bendall v. Lancer Mgmt. Grp., 523 F. App’x 554, 558 (11th

Cir. 2013); see Fed. R. Bankr. P. 3003(c)(2) (requiring any creditor “whose claim

or interest is not scheduled or scheduled as disputed, contingent, or

unliquidated” to file a proof of claim). Moreover, like the press release, the

proofs of claim did not make this already public proceeding any more public

than it already was.

Thus, neither of these routine actions by the Commission deprived Wahl

and Chung of due process of law in this proceeding. And although the release

and the proof of claim may have caused them “reputational and professional

harm,” their arguments “do not give rise to due process relief unless they

prejudiced the hearing process,” which they did not do. Kevin Hall, CPA,

Exchange Act Release No. 61162, 2009 WL 4809215, at *23 (Dec. 14, 2009);

accord United States v. Black, 733 F.3d 294, 302 (9th Cir. 2013) (holding that

to completely invalidate a criminal prosecution based on investigative conduct,

the government’s actions must have “‘violate[d] fundamental fairness’ and

[been] ‘so grossly shocking and so outrageous as to violate the universal sense

of justice’” (quoting United States v. Stinson, 647 F.3d 1196, 1209 (9th Cir.

2011))); United States v. Smith, No. CR-13-14, 2014 WL 1744253, at *2–3 (E.D.

Wash. Apr. 30, 2014) (rejecting defense based on allegedly defamatory press

release calling defendants “snake oil salesmen”). This is because “[t]he

fundamental requirement of due process is the opportunity to be heard ‘at a

meaningful time and in a meaningful manner.’” Matthews, 424 U.S. at 333

(quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965)); cf. Bd. of Regents of

State Colleges v. Roth, 408 U.S. 564, 573 (1972) (holding that the remedy for

unconstitutional defamation is “an opportunity to refute the charge”). The OIP

in this proceeding began the process before a neutral adjudicator. See Rivlin,

1999 WL 1455758, at *3; see also Concrete Pipe & Prod. of Cal., Inc. v. Constr.

Laborers Pension Tr. for S. Cal., 508 U.S. 602, 618 (1993); cf. Hall, 2009 WL

4809215, at *23 & n.111 (citing Hannah v. Larche, 363 U.S. 420, 443 (1960)).

I have served as that neutral adjudicator in this proceeding, and whatever

reputational harm may have been caused by the press release and proof of

claim does not undermine my neutrality. See FTC v. Cinderella Career &

Finishing Schs., Inc., 404 F.2d 1308, 1312–15 (D.C. Cir. 1968); Bowman v. U.S.

Dep’t of Agric., 363 F.2d 81, 86 (5th Cir. 1966).

Finally, insofar as Wahl and Chung are attempting to assert an

affirmative claim for damages based on unconstitutional defamation or some

other theory, I must deny this claim. The Rules of Practice do not permit

respondents to assert counterclaims for damages against the Commission. See

17 C.F.R. § 201.220(c) (detailing the permitted contents of an answer to the

OIP).

1.4. The press release and bankruptcy claim did not take Wahl and Chung’s

property without compensation.

Along with their due process arguments, Wahl and Chung contend that

the Commission “unconstitutionally took Respondents property without

compensation” by issuing the OIP and accompanying press release and filing

the proof of claim. Wahl Post-hr’g Br. at 76; see Wahl PFOF at 683 (PDF).

Under the theory that Respondents’ professional licenses were rendered

“worthless”—as opposed to being actually revoked or taken by the

Commission—they characterize the press release and proof of claim as a

“regulatory taking of property.” Tr. 6190; Wahl PFOF at 684 (PDF). But

“diminution of property values caused by government action is not a regulatory

taking.” Eagletech Commc’ns, Inc., Exchange Act Release No. 54095, 2006 WL

1835958, at *3 & n.12 (July 5, 2006); see Penn Cent. Transp. Co. v. City of New

York, 438 U.S. 104, 131 (1978). And, as noted above, insofar as Wahl and

Chung seek money from the Commission in this proceeding, the Rules of

Practice do not permit respondents to assert counterclaims for damages. See

17 C.F.R. § 201.220(c); Wahl Post-hr’g Br. at 76–77.

1.5. The proceeding is not time-barred.

Wahl and Chung assert that the statute of limitations on the charges

against them has expired because, under 28 U.S.C. § 1658(b)(1), the proceeding

cannot be brought more than “2 years after the discovery of the facts

constituting the violation.” Wahl Post-hr’g Br. at 71–72. But this is incorrect.

Section 1658 applies to “a private right of action,” 28 U.S.C. § 1658(b), not a

Commission proceeding, which under Section 2462 has a five year statute of

limitations. 28 U.S.C. § 2462; see Gabelli v. SEC, 568 U.S. 442, 444–45 (2013)

(holding that Section 2462 applies to Commission proceedings seeking civil

penalties). The proceeding commenced in December 2017, less than five years

after the audit engagements at issue.

2. Weight given to expert testimony

Two experts testified at the hearing: Harris Devor for the Division and

John M. Misuraca for Wahl and Chung. William W. Holder prepared an expert

report for Wahl and Chung during the Commission’s investigation but he was

not engaged and did not prepare a report or testify in this proceeding.

2.1. The Division’s accounting and auditing expert Harris Devor

The Division offered Harris Devor as an expert in accounting and

auditing. Tr. 1120. Respondents conducted a voir dire of Devor regarding his

qualifications, especially as it concerned audits of public companies and

microcap public companies. Based on Devor’s education, experience, and

credentials, I found him qualified to opine about those topics in this proceeding.

Tr. 1140–41. As I explained at the hearing, I would consider arguments from

Respondents in determining what weight to give Devor’s opinions. Wahl and

Chung have argued that I should generally not give weight to Devor’s opinions

because (1) there is no legal standard for expert testimony in Commission

administrative proceedings, (2) Devor lacks the experience and credentials to

opine about public company audits or PCAOB standards, (3) Devor is biased in

favor of the Commission, and (4) his expert testimony has been excluded four

times in federal court.

2.1.1. Standard for expert testimony in Commission proceedings

Wahl and Chung assert that “there is no legal standard for an expert” in

Commission administrative proceedings, which allows supposed experts to act

in a “lawless and reckless” manner. Wahl Post-hr’g Br. at 43. This is untrue.

Although the standard for admitting expert testimony in Commission

administrative proceedings differs from the standard in federal court, like all

other admissible evidence in Commission proceedings, an expert’s testimony

must be relevant and cannot be immaterial, unduly repetitious, or unreliable.

17 C.F.R. § 201.320(a). In addition, an expert witness must prepare a written

report and submit a statement of qualifications and other initial disclosures.

17 C.F.R. § 201.222(b).

Expert testimony in federal court is subject to the Daubert standard,

codified in Federal Rule of Evidence 702, under which the district court

performs a “gatekeeping” role to ensure that only reliable expert evidence

reaches the jury. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141 (1999); see

Fed. R. Evid. 702; Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 597

(1993). The Daubert standard does not apply in administrative proceedings,

however. Ralph Calabro, Securities Act Release No. 9798, 2015 WL 3439152,

at *11 (May 29, 2015). This is because the “gatekeeping” role is unnecessary in

a nonjury proceeding such as this one. See City of Anaheim, Exchange Act

Release No. 42140, 1999 WL 1034489, at *2 (Nov. 16, 1999) (“Administrative

agencies such as the Commission are more expert fact-finders, less prone to

undue prejudice, and better able to weigh complex and potentially misleading

evidence than are juries.”). The Commission has thus seen “no reason why a

law judge, if he deems it appropriate, cannot hear expert testimony (and crossexamination) and then determine what weight to give that testimony.”

Calabro, 2015 WL 3439152, at *11 n.66.

This is why I allowed Devor, as well as Wahl and Chung’s expert

Misuraca, to testify at the hearing while reserving ruling on the weight to give

their testimony. In weighing this expert testimony, I will consider the “spirit

of Daubert.” Niam v. Ashcroft, 354 F.3d 652, 660 (7th Cir. 2004) (“‘Junk science’

has no more place in administrative proceedings than in judicial ones.”);

Calabro, 2015 WL 3439152, at *11 n.67 (citing Niam). I will not give any

weight to unreliable or misleading expert testimony, just as I will give no

weight to unreliable or misleading factual testimony. Wahl and Chung’s

argument that there is no standard for expert testimony is incorrect, and I do

not give diminished weight to any expert on that basis.

2.1.2. Experience and credentials

Wahl and Chung argue that Devor lacks the expertise to opine about

public company accounting and PCAOB auditing standards. Wahl Post-hr’g

Br. at 42–45. Wahl and Chung point out, and Devor candidly acknowledges,

that he has not personally audited a public company since 1990, has not

conducted an audit subject to PCAOB standards, and has no experience

auditing microcap companies or companies in the cannabis industry. Wahl

PFOF at 102, 126–27 (PDF).

Performing public company audits is one way to gain auditing expertise,

but it is not the only method. Cf. Fed. R. Evid. 702 (expert may be qualified

based on “knowledge, skill, experience, training, or education”); United States

v. Frazier, 387 F.3d 1244, 1260 (11th Cir. 2004) (“[E]xperts may be qualified in

various ways.”). Since he stopped auditing public companies, Devor has

maintained his knowledge of public company auditing issues and has testified

extensively as an expert witness about public company accounting. Tr. 1112,

1114–17. He has testified as an expert in high-profile accounting cases such as

the WorldCom securities litigation, litigation related to the collapse of Lehman

Brothers, and the Petrobras securities litigation. Tr. 1116, 1118. Devor’s

testimony on both direct and cross-examination showed his competence and

understanding of the subject matter.

Devor’s body of training and experience is also sufficient for him to qualify

as an expert in accounting and auditing. Devor is a certified public accountant

and has forty-six years of experience in administering and supervising audits.

Ex. 88, Resume at 1. Although his recent experience is with private companies,

to the degree there are differences in accounting issues and standards between

private and public companies, no pertinent differences were identified that

would disqualify Devor testifying. Tr. 1112–13, 1118–20; see Crowdfunding, 80

Fed. Reg. 71,388, 71,414 (Nov. 16, 2015) (“As the standards for non-public

business entities are new, there are currently very few distinctions between

U.S. GAAP for public and non-public business entities.”).

2.1.3. Bias

Wahl and Chung argue that because the Commission is Devor’s largest

client for his services as an expert witness, Devor is biased. Wahl PFOF at

121–22 (PDF). This argument is unpersuasive. The potential for bias exists for

any expert retained and compensated by a party. The remedy is for the expert’s

opinions to be tested by cross-examination and weighed by the trier of fact.

Calabro, 2015 WL 3439152, at *38 & n.179. I did not see any evidence of

improper bias during Devor’s testimony. Devor has testified as an expert on

behalf of many clients, including for defendants against the Commission. See,

e.g., SEC v. Guenthner, 395 F. Supp. 2d 835, 843–44 (D. Neb. 2005). His expert

services are only one aspect of his business. See Tr. 1114 (“I can go years

without testifying.”). Even if the Commission is his largest client with respect

to expert engagements, it does not appear to be such a large portion of his work

as to presume bias that would require discounting his testimony in this

proceeding.

2.1.4. Exclusion of Devor’s testimony in other proceedings

Wahl and Chung point to several instances in which Devor’s testimony

was allegedly excluded in federal district court. Although it is permissible to

impeach an expert based on the exclusion of testimony in other proceedings,

the cases cited by Wahl and Chung are not persuasive. Wahl and Chung assert

that “Devor’s testimony was dismissed four times in Federal Court.” Wahl

Post-hr’g Br. at 42. They do not list these four cases. Of the cases that they cite

in their filings, I have identified five in which Devor served as an expert

witness. See id. at 42–43, 45; Wahl PFOF at 734–47 (PDF). None of these five

cases support their contention.

In citing Lawrence E. Jaffe Pension Plan v. Household International, Inc.,

No. 02-cv-5893 (N.D. Ill.), for example, Wahl and Chung quote a party’s brief—

not the court—criticizing Devor. See Wahl Post-hr’g Br. at 42 (quoting Defs.’

Reply Daubert Mot. at 5, Jaffe Pension Plan (Feb. 13, 2009), ECF No. 1456,

2009 WL 464036). The court in that case limited Devor’s testimony in one area

but otherwise found his opinions to be “permissible expert testimony.” Minute

Order at 2, Jaffe Pension Plan (Mar. 23, 2009), ECF No. 1528.

The district court in Acceptance Insurance Cos., Inc. Securities Litigation,

352 F. Supp. 2d 940, 948 (D. Neb. 2004), excluded an affidavit by Devor from

the summary judgment record, finding that it failed to “describe the analytical

processes he went through to reach his opinions.” The court noted, however,

that it resolved the summary judgment motions before the close of expert

discovery and disclosure, which may have provided additional foundation for

expert opinions. Id. at 947–48. And unlike the affidavit in Acceptance

Insurance, I find Devor’s lengthy expert report to be supported satisfactorily in

this case.

Devor’s proposed testimony was also excluded in L&M Beverage Co. v.

Guinness Import Co., No. 94-cv-4492, 1996 WL 368327 (E.D. Pa. June 24,

1996). In that case, Devor offered an opinion about the plaintiff ’s lost profits,

but the district court determined that the proper measure of damages was the

diminution in value of distribution rights, not lost profits. Devor’s lost profits

opinion was excluded as not relevant. Id. at *3–4. Here, Devor’s opinions are

relevant to the allegations.

The fourth case in which Wahl and Chung allege Devor’s testimony was

excluded from is SEC v. Cole, No. 12-cv-8167 (S.D.N.Y.). Wahl and Chung

assert that Deutchman, who was an expert for defendant Timothy Quintanilla,

“beat” Devor in that case and that the district judge “saw through” Devor’s

testimony. Wahl Post-hr’g Br. at 43. But the court did not exclude Devor.

Quintanilla objected to Devor’s expert report as hearsay, irrelevant, improper

opinion testimony, and lacking foundation. Def.’s Objections to Decl. Supp’g

Summ. J. at 22, Cole (June 5, 2014), ECF No. 130. The court rejected

Quintanilla’s objections to Devor’s report and other evidence as “unsupported

boilerplate assertions presented in a clumsy attempt to strike the entirety of

the SEC’s evidence.” Cole, 2015 WL 5737275, at *4 (Sept. 19, 2015). In denying

the parties’ cross motions for summary judgment, the court did not reference

Devor’s opinions positively or negatively. See generally id. at *4–10. The case

was ultimately resolved by a settlement.

Finally, Devor served as a defense expert witness in SEC v. Guenthner.

Devor’s testimony was not excluded by the court. Instead, the court heard the

testimony of Devor during a bench trial and included Devor’s expert opinions

in its findings of facts. 395 F. Supp. 2d at 837, 843–44. Although the court

granted the defendants’ motion for judgment as a matter of law on other

grounds, it noted that, in the alternative, “it would find in favor of defendants

based on all the evidence adduced in this case,” including Devor’s testimony.

Id. at 848 & n.8.

The cases cited by Wahl and Chung about Devor’s work in other

proceedings do not convince me to give diminished weight to Devor’s testimony

here.

2.1.5. Devor’s opinions are generally helpful but those about specific

violations will not be considered.

Devor’s testimony helped provide a general understanding of some of the

accounting and auditing issues in this case. His testimony also provided a

vehicle for many of the relevant documents the Division introduced in its casein-chief. I have considered his opinions for this general background

information.

I have not relied, however, on Devor’s opinions about specific violations of

GAAP or PCAOB standards. Whether a specific accounting or auditing

standard is violated is often a mixed question of fact and law. See Russell

Ponce, Exchange Act Release No. 43235, 2000 WL 1232986, at *8 n.33 (noting

that whether an activity is manufacturing or research and development under

GAAP “is a mixed question of law and fact”), pet. denied, 345 F.3d 722 (9th Cir.

2003); cf. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1421 (3d Cir.

1997) (“[I]t is a factual question whether BCF’s accounting practices were

consistent with GAAP.”); SEC v. Caserta, 75 F. Supp. 2d 79, 91 (E.D.N.Y. 1999)

(“Whether GAAP has been violated is a fact-specific issue.”). Although it may

be appropriate to rely on expert testimony for thorny fact-bound issues related

to GAAP or PCAOB standards, I have not done so here. Instead, I have

considered the documentary evidence and testimony of percipient witnesses.

And I have not relied on Devor’s testimony to resolve legal questions. See

optionsXpress, Inc., Securities Act Release No. 10125, 2016 WL 4413227, at

*27 (Aug. 18, 2016) (“[W]e do not defer to expert testimony about the meaning

of the law.”); Robert D. Potts, CPA, Exchange Act Release No. 39126, 1997 WL

690519, at *10 n.56 (Sept. 24, 1997) (“The testimony of expert witnesses on

questions of law may be precluded, because adjudicators—courts and

administrative law judges—are themselves qualified to determine and

interpret the law.”), pet. denied, 151 F.3d 810 (8th Cir. 1998).7

2.2. Wahl and Chung’s valuation expert John M. Misuraca

John M. Misuraca is a certified public accountant who specializes in

forensic accounting and business valuation. Ex. 1036 at 2; Tr. 3391–92.

Misuraca prepared two expert reports. One dealt with CannaVEST’s purchase

of PhytoSphere Systems, LLC, and the valuation and subsequent impairment

of goodwill from that purchase. Ex. 1036. The second report discussed the

valuation of a promissory note held by Premier. Ex. 1122. At the hearing, I

admitted the Premier report, and noted that the CannaVEST report would

come into the record in some fashion, but I deferred ruling on its admissibility.

Tr. 3398–99, 3437–38, 3631–32. I turn to that question now, and I also consider

the evidentiary weight to give to either report.

2.2.1. CannaVEST report

This report relied on information Misuraca received from Wahl that

purported to be financial projections prepared for CannaVEST management,

but Wahl misled Misuraca about the origins of those projections. For this

reason, although I admit the report (Exhibit 1036) as an exhibit, its admission

is to provide context only, and I give Misuraca’s opinions in it no weight. In

addition, and more troubling, Wahl submitted a perjurious declaration in

support of his opposition to the Division’s motion to exclude Misuraca’s

testimony and lied about the projections under oath at the hearing.

Misuraca advanced three opinions in the CannaVEST expert report: (1)

the internal rate of return for CannaVEST at the time of the purchase was

20.48%, (2) this rate of return was reasonable, and (3) there was no impairment

of goodwill as of the purchase date of Phytosphere. Ex. 1036 at 6. These

opinions were based on “the forecast provided by Greg Wahl from an email he

sent to Tommy Shek and Richard Koch on November 8, 2013.” Id. at 5; see

Wahl and Chung also raise various arguments about the reliability of

Devor’s opinions regarding specific violations. Because I have not relied on

Devor’s opinions about specific violations, I do not address those arguments

here.

Tr. 3476–77. Misuraca accepted this forecast as true and did not independently

verify or test the figures. Ex. 1036 at 6.

Unbeknownst to Misuraca, his reliance on these figures was misplaced.

Wahl altered the email he provided Misuraca—it was not the original email he

sent to Shek and Koch. The actual CannaVEST financial projections were

attached to the original email. Wahl did not forward the attachment to

Misuraca; instead, he typed different figures into the email he forwarded to

Misuraca. The numbers Wahl typed in looked like they were part of the original

email, and Misuraca accepted them as genuine. Compare Ex. 824 (original

email), with Ex. 823 (email forwarded to Misuraca adds, “Below is what we had

for original projections, etc.” and Wahl’s typed projections).

Wahl provided shifting and incredible explanations for his alteration of

the email. When the Division moved to exclude Misuraca’s testimony and

pointed out the discrepancies, Wahl’s opposition called the Division’s allegation

“a preposterous theory” that is “half baked and factually erroneous.” Opp’n to

Mot. to Exclude Misuraca at 3 (Oct. 1, 2019). Wahl declared, in support of the

opposition and under penalty of perjury, that he had simply “pasted” into the

body of the email the actual projections that were attached to the original

email. Id. at 7. Those projections, he claimed, were from page 36 of projections

prepared by a valuation firm, Vantage Point Advisors, Inc., and were what he

had considered during the CannaVEST review engagement. Id.

Wahl’s declaration is untrue. The Vantage Point projections attached to

the original email differ from the figures Wahl sent to Misuraca. Compare

Ex. 824, ASC 718 IRC 409A Report at 36, with Ex. 823, and Ex. 1036 at 11.8

The figures for the five categories Wahl provided Misuraca—revenue, cost of

goods sold, gross profit, operating expenses, and pre-tax net profit—are

significantly different from the numbers in the Vantage Point report. For four

of the five years of figures that Wahl provided, he reduced total revenue

between 55% and 33% and decreased gross revenue between 48% and 13%.

Compare Ex. 824, ASC 718 IRC 409A Report at 36, with Ex. 823. He increased

operating expenses for three of the five years of data and decreased it in the

other two years. Compare Ex. 824, ASC 718 IRC 409A Report at 36, with

Ex. 823. Wahl even sent Misuraca quarterly data for 2013 that was not

included at all in the Vantage Point report. See Tr. 5503–05. Compare Ex. 824,

ASC 718 IRC 409A Report at 36, with Ex. 823. Thus, in addition to altering

actual data by wide margins, Wahl also fabricated data for periods for which

no data was ever reported previously.

A chart comparing the projections in the original attachment to the figures

Wahl emailed Misuraca is in the appendix to this initial decision.

When the Division questioned Wahl about the email at the hearing, Wahl

at first maintained his story that he had “copied and pasted” the valuation

report into the email. Tr. 5498. He claimed he meant to paste the financial

projections at the top of the email and that it was a mistake that they ended

up at the bottom, where they looked like part of the original email. Tr. 5501–

02. When the Division informed Wahl that the revenue figure for the second

quarter of 2013 he sent Misuraca did not match actual revenue, Wahl testified

that he “could have done a typo.” Tr. 5505. When the Division pressed him on

why other numbers did not match, Wahl said he was in a hurry and

“ballparked” the numbers. Tr. 5506. Wahl then contradicted his sworn

declaration and his testimony from just minutes earlier and denied that he had

copied and pasted the numbers—he now testified that he had to type the

numbers in because the original was a PDF. Tr. 5507. When asked whether

the figures in the Vantage Point report were the same as what he typed, Wahl

first said, “I believe it’s pretty close to what I typed in.” Tr. 5507. Then he

almost immediately backtracked and said the figures he provided Misuraca

were lower than those in the Vantage Point report. Tr. 5507. Not slightly lower

but lower by half, he claimed. Tr. 5508–09. Wahl did this, he averred, because

he wanted Misuraca’s analysis to be “conservative” and not overstate the value

of CannaVEST’s goodwill. Tr. 5508–09. He testified that he did not lie but had

forgotten that he had reduced the figures. Tr. 5515. In his post-hearing filings,

Wahl claimed that he did not intentionally “doctor” the email he sent to

Misuraca but “made a harmless error in copying and pasting the numbers from

the valuation and reduced them by approximately 50% which would reduce the

discount rate by 50%.” Wahl Resp. to Div. PFOF at 239–40 (PDF).

Wahl’s conduct and testimony was neither harmless nor merely an error.

As Wahl’s explanations disintegrated under cross-examination, he changed his

story again and again, often in contradictory ways. First he said that he copied

and pasted the numbers, then that he made a typo, then that he was in a hurry

and only estimated the numbers, then that he intentionally reduced the

numbers by about half to be conservative. His claim that he had simply

forgotten that he altered the projections is not credible. The only reas onable

conclusion from his dissembling testimony is that Wahl intentionally misled

Misuraca and repeatedly lied about it under oath.

As a result, I cannot give Misuraca’s CannaVEST opinions any weight.

Misuraca was under the false impression that he was re viewing financial

projections prepared for CannaVEST management. Ex. 1036 at 5. Wahl never

told him that he reduced those figures by half. Tr. 5511 (“I could have trued it

up with him, but I didn’t have time.”), 5512 (“I should have sent the Excel

spreadsheet to him and had a discussion with him, but I didn’t have time.”).

Wahl claimed that he was not misleading Misuraca because if he wanted to

mislead Misuraca, he would have increased the projections to make

CannaVEST’s goodwill look stronger rather than reduce the projections to be

conservative. Tr. 5512, 5516. While decreasing the projections could make

CannaVEST’s goodwill appear smaller, evaluating CannaVEST’s goodwill was

not the only topic Misuraca addressed. He also calculated CannaVEST’s

internal rate of return and opined on its reasonableness. Ex. 1036 at 4, 6. Wahl

himself testified that he believed CannaVEST’s projections were “a little

overstated.” Tr. 5510. Moreover, Wahl altered the figures he provided

Misuraca by varying amounts, not by a simple division in half. Misuraca thus

analyzed figures that had no relationship to CannaVEST management’s

projections. Misuraca’s resulting opinions are not tied to the facts and are

entitled to no evidentiary weight. See Ira Weiss, Securities Act Release

No. 8641, 2005 WL 3273381, at *6 n.21 (Dec. 2, 2005) (giving “such weight to

the expert testimony as [the Commission] consider[s] is indicated by the

relevant facts in the record”), pet. denied, 468 F.3d 849 (D.C. Cir. 2006).

That leaves Wahl’s false statements under oath. Perjury is troubling in

any context, and giving false testimony in Commission proceedings can in itself

constitute improper professional conduct. Exchange Act Section 4C and Rule

of Practice 102(e) allow the Commission to bar from practicing before it those

who are “lacking in character or integrity.” 15 U.S.C. § 78d–3(a)(2); 17 C.F.R.

§ 201.102(e)(1)(ii); see William A. Dougherty, Public Utility Holding Company

Act of 1935 Release No. 13567, 1957 WL 52386, at *3 (Oct. 18, 1957) (finding

that an attorney’s false testimony in a Commission investigation was improper

professional conduct and barring the attorney from practicing before the

Commission).9 But the OIP in this case did not reference the “character or

integrity” part of Section 4C or Rule 102(e) as a basis for this proceeding. OIP

at 1 nn.1–2; id. at 3–4, 20–21, 31, 40–42. Because Wahl’s false testimony does

not come within the scope of the OIP, I do not rely on it to find any violations.10

See OIP at 40–42 (charging violations based on “the conduct described” in the

OIP, and directing for a determination as to whether the “allegations set forth

In Dougherty, the Commission considered whether the attorney

committed improper professional conduct under former Rule 2(e) of the Rules

of Practice. Rule 102(e) is the successor to Rule 2(e), and the text of Rule 2(e)(2)

is identical to Rule 102(e)(1)(ii). See Steven C. Wolfe, Sr., CPA, Exchange Act

Release No. 39589, 1998 WL 28039, at *1 n.1 (Jan. 28, 1998) (“While we revised

comprehensively our Rules of Practice in 1995, we made no substantive

changes to Rule 2(e), other than to renumber it as Rule 102(e).”). Compare 17

C.F.R. § 201.2(e)(2) (1949), with 17 C.F.R. § 201.102(e)(1)(ii).

This decision has no bearing on whether the Commission or another

authority takes subsequent action based on Wahl’s perjury.

in Section II [of the OIP] are true” and whether sanctions should be imposed);

see also Russell W. Stein, Exchange Act Release No. 47504, 2003 WL 1125746,

at *8 n.34 (Mar. 14, 2003), recons. granted on other grounds, Exchange Act

Release No. 50168, 2004 WL 1778889 (Aug. 9, 2004). Nevertheless, I consider

Wahl’s misconduct in the context of whether a sanction is in the public interest.

See infra Sanctions §§ 2, 2.11.

2.2.2. Premier report

Misuraca opined in his Premier report that the valuation of an unsecured

promissory note that Premier received was reasonable and “in conformity with

GAAP” and that Wahl’s work as engagement partner on Anton & Chia’s audit

of Premier for 2013 materially complied with GAAS and GAAP. Ex. 1122 at 6.

The Division argues that these opinions should not be given any weight

because Misuraca has never worked as an auditor or audited a public company

and is not an expert in GAAS or GAAP. Div. Mot. to Exclude Misuraca at 11–

12 (Sept. 16, 2019); see Tr. 3392, 3466–67.

The scope of Misuraca’s review of the Premier audit and his opinions is

limited. He focused on valuation issues and the method of valuing the note.

Tr. 3469–70. He has the requisite expertise to opine on valuation issues, and I

will consider his opinion on the issue of the valuation of the promissory note.

Misuraca stated in his report that, “[b]ased on [his] review of Greg Wahl’s work

in this action,” it was his opinion that Wahl’s work materially complied with

GAAP and GAAS. Ex. 1122 at 6. In his hearing testimony, however, Misuraca

clarified that his review of Wahl’s work was limited. Tr. 3446–47 (testifying

that he looked at various Anton & Chia workpapers but did not read them line

by line). He testified that he was not offering an opinion about whether Premier

complied with GAAP or Anton & Chia’s audit complied with GAAS. Tr. 3467.

As with Devor’s testimony, I do not rely on Misuraca’s testimony to decide

whether specific conduct complied with the PCAOB standards or GAAP. See

optionsXpress, 2016 WL 4413227, at *27; Potts, 1997 WL 690519, at *10 n.56.

2.3. Wahl’s valuation expert William W. Holder

Wahl engaged William W. Holder as an expert during the Commission’s

investigation before this proceeding began, and Holder prepared an expert

report. Holder was not retained as an expert for the proceeding, and I

provisionally granted the Division’s motion to exclude him from testifying as

an expert witness at the hearing. Anton & Chia, Admin. Proc. Rulings Release

No. 6694, 2019 SEC LEXIS 3758, at *3 (ALJ Oct. 7, 2019). I reserved ruling on

the admissibility of Holder’s report because Misuraca may have relied on it in

forming the opinions in his Premier report. Id. at *4. At the hearing, however,

Misuraca testified that he did not rely on Holder’s report. Tr. 3594, 3627. For

this reason, Holder’s report, Exhibit 1113, is not admitted.

Findings of Fact and Violations of Accounting Standards

1. Legal standard for factual findings

I base the findings of fact herein on the entire record; the parties’

stipulations, see 17 C.F.R. § 201.324; and on facts officially noticed from

publicly available court filings, see id. § 201.323; Global Network Commc’ns

Inc. v. City of New York, 458 F.3d 150, 157 (2d. Cir. 2006). I apply

preponderance of the evidence as the standard of proof. See Rita J. McConville,

Exchange Act Release No. 51950, 2005 WL 1560276, at *14 (June 30, 2005),

pet. denied, 465 F.3d 780 (7th Cir. 2006).

2. Respondents

Anton & Chia, LLP, was a PCAOB-registered audit firm with three offices

in California that was founded in 2009. Ex. 840 ¶ 21 (stipulations). The firm

filed for bankruptcy in July 2018, and the case was converted to Chapter 7

liquidation in August 2018. Tr. 4912. Anton & Chia’s audits and interim

reviews of Accelera Innovations, Inc., Premier Holding Corporation, and

CannaVEST Corp. are the subject of this proceeding. See id.; OIP at 8–40.

Gregory Wahl is a certified public accountant who was the managing

partner of Anton & Chia during the relevant period and also owned 90% of the

firm. Ex. 839.6 at 156 (PDF) (designated portions of Wahl’s deposition). Wahl

was the engagement partner for Accelera’s 2013 and 2014 year-end audits and

five 2014 and 2015 interim reviews, Premier’s 2013 year-end audit, and

CannaVEST’s 2013 interim reviews. Wahl Answer at 5.

Michael Deutchman was a non-equity partner at Anton & Chia and was

either the engagement partner or engagement quality review partner on

multiple reviews of Accelera’s financial statements in 2014 and 2015 and the

2014 audit. Tr. 638–39.

Georgia Chung is a certified public accountant who helped set up Anton &

Chia in 2009 and served as the engagement quality reviewer for CannaVEST’s

2013 first quarter interim review. Ex. 840 ¶ 23; Tr. 5143, 5153. She is married

to Wahl. Tr. 4926.

3. Accelera facts and accounting violations

3.1. Introduction and summary

Accelera Innovations, Inc., a Delaware corporation doing business in

Frankfort, Illinois, was incorporated in April 2008 as a shell company in the

business of acquiring and managing other companies, primarily in the

healthcare and information technology service industries. Ex. 840 ¶¶ 24, 35;

Tr. 54.

On November 11, 2013, Accelera signed a stock purchase agreement with

Behavioral Health Care Associates, Ltd., a health care provider in

Schaumberg, Illinois, specializing in psychiatry and substance abuse

treatment. Tr. 193–94; Ex. 184; Ex. 840 ¶ 25. The agreement provided for

Accelera to acquire Behavioral’s stock once it paid $1 million as consideration

90 days after closing, with the rest of the $4.55 million purchase price to be

paid in installments over time. Ex. 184 §§ 1.1, 1.1.1, 1.1.1.1.

Despite never making any of the payments due under the agreement,

Accelera consolidated Behavioral’s revenues, assets, and liabilities with those

of its own in its Commission filings from 2013 through 2015. Consolidation did

not comply with GAAP, which requires the acquirer to have obtained control

of the acquired company and for consideration to change hands. By

consolidating Behavioral’s finances with its own, Accelera’s revenues were

overstated by 90% in 2013 and 2014.

Relevant here are the six interim reviews and two year -end audits for

Accelera from year-end 2013 through the third quarter of 2015 that Anton &

Chia performed. See Ex. 840 ¶ 18. In 2013 and 2014, Anton & Chia issued an

unqualified audit opinion for Accelera’s financial statements. Wahl was the

engagement partner on both year-end audits and all but one of the other

engagements. Ex. 1.1 at 3; Ex. 1.4 at 3; Ex. 1.6 at 3; Ex. 136 at 5; Ex. 152 at 3;

Ex. 166 at 3; Ex. 171 at 5; Ex. 178 at 3. Deutchman was the engagement

quality reviewer (EQR) for the 2014 audit and the three quarterly reviews in

2015, and was engagement partner for the third quarter interim review in

2014. Ex. 1.4 at 3; Ex. 1.6 at 3; Ex. 152 at 3; Ex. 171 at 5; Ex. 178 at 3.

Wahl and Deutchman did not comply with the PCAOB’s auditing

standards in their respective roles during the audits and quarterly reviews of

Accelera. As detailed below, both failed to note several red flags indicating that

consolidation was inappropriate. Both failed to exercise due professional care

and professional skepticism, failed to gather appropriate audit evidence, and

did not adequately question the representations of Accelera’s management in

the year-end audits and the interim reviews. Both insufficiently documented

issues concerning the Behavioral acquisition. Wahl failed to properly supervise

one of the staff accountants during the 2013 audit, and Deutchman failed to

act appropriately in carrying out the engagement quality review during the

2014 audit.

3.2. Accelera’s consolidation of Behavioral

3.2.1. Accelera signed agreements to acquire Behavioral upon initial

payment of $1 million.

Accelera’s common stock was quoted on OTC Link operated by OTC

Markets Group, Inc., under the ticker symbol ACNV, starting in January 2014.

Ex. 840 ¶ 24. John Wallin was the company’s CEO, and Cynthia Boerum was

its chief strategic officer. Tr. 55, 378. From September 2014 through March

2015, Daniel Freeman was Accelera’s CFO. Tr. 54–55. Dr. Blaise Wolfrum was

the president and CEO of Behavioral. Tr. 194.

The stock purchase agreement signed November 11, 2013, provided that

Behavioral will “become a wholly owned subsidiary of [Accelera] upon receipt

of [the] purchase price set forth in Section 1.1.1.1” of the agreement. Ex. 184

at 1 (recitals). Section 1.1.1.1 in turn states that ninety days after closing

(which, as defined in Section 2.1, was the date the agreement was signed),

Accelera was to pay Wolfrum $1 million, and would pay the full purchase price

of $4.55 million over time. Id. § 1.1.1.1; see also id. §§ 1.1.1.2–.3, 2.1. The

operative paragraphs of the agreement reiterated the language from the

recitals that Behavioral’s stock would transfer only upon its receipt of the

initial $1 million payment. Id. § 1.1. Both Wolfrum and Boerum understood

these clauses to indicate that Behavioral would not be owned by Accelera until

the $1 million payment was made. Tr. 199, 382. Accelera never made any

payments to Wolfrum under the agreement, and thus never acquired its stock.

Tr. 62–63, 202–03, 212, 382–83.

Sections 2.2, 2.3, and 2.4 of the agreement required deliveries of certain

documents by Accelera, Wolfrum, and Behavioral at closing. These documents’

terms are consistent with the stock purchase agreement in that they indicate

that Behavioral’s stock would not transfer until payment of $1 million 90 days

later. The bill of sale stated that Wolfrum will convey Behavioral’s stock to

Accelera once the $1 million payment is paid. Ex. 194. A stock powers

certificate said the same. Ex. 189. Accelera signed a promissory note for $3.55

million, effective once the $1 million was paid, to cover the rest of the $4.55

million purchase price the parties had agreed upon. Ex. 186 at 1. According to

a stock pledge and escrow agreement (also effective upon payment of the $1

million), Behavioral’s shares would be placed in escrow and held as security

until the entire purchase price was paid. Ex. 188 at 142959–60. A security

agreement added that Wolfrum would retain a security interest in Behavioral’s

assets until Accelera paid Wolfrum the full purchase price. Ex. 1207 §§ 1, 2,

7(d), Ex. A. An operating agreement provided for the creation of an entity

called Accelera Healthcare Management Service Organization LLC, and a

shareholder action agreement said that Wolfrum would become the manager

of the new management service organization and the president of Behavioral,

which was to become a wholly owned subsidiary of Accelera. Ex. 185; Ex. 191

at 143275. But the shareholder agreement stated that Wolfrum would remain

CEO of Behavioral until Accelera made the $1 million payment. Ex. 191 at

143275. And no assets were ever moved to the management service

organization. Tr. 70–71, 214–16. Finally, the parties signed an employment

agreement providing that Wolfrum would become president of Acceler a’s

Behavioral unit, would report to Wallin, and would receive $300,000 in annual

salary. Ex. 190 at 1. Although the employment agreement said nothing about

when it would become effective, Wolfrum understood that like the other

agreements, its effectiveness was dependent on Accelera’s payment of the

initial $1 million. Tr. 218. Further, it was a “condition of employment” that

Wolfrum sign a confidentiality agreement, and that agreement was only

effective upon the payment of the initial $1 million. Ex. 190 at 2, 18. In any

event, Wolfrum never reported to Wallin or collected a salary from Accelera.

Tr. 216–17, 388.

In addition to all these agreements which never took effect, Accelera never

made any management decisions for Behavioral or entered into contracts on

its behalf; never paid its expenses or controlled its bank accounts; never

supervised Wolfrum or decided his salary; never directed or made employment

decisions about Behavioral’s employees; never directed Behavioral’s day-to-day

operations; and never received any of Behavioral’s revenues. Tr. 73–74, 77–78,

245–46, 387.

Recognizing that Accelera had not made its initial $1 million payment,

Wolfrum and Accelera entered into four amendments to the stock purchase

agreement between February 2014 and May 2015. Exs. 197, 201, 205, 257.

Each amendment substituted a new Section 1.1.1.1 of the stock purchase

agreement for the old one. The new Section 1.1.1.1’s provided more time for

Accelera to pay the $1 million. Ex. 197 at 1; Ex. 201 at 1; Ex. 205 at 2; Ex. 257

at 2. Each amendment also provided Wolfrum with shares of Accelera as

consideration for the extension of time. Ex. 197 at 1–2; Ex. 201 at 2; Ex. 205 at

2–3; Ex. 257 at 2–3. But none of the amendments altered the fundamental

nature of the transaction, namely, that Behavioral’s stock would only transfer

to Accelera upon Accelera’s payment of the initial $1 million.

3.2.2. Accelera consolidated Behavioral’s financials with its own

despite never making the initial $1 million payment to acquire

Behavioral.

Despite never making the initial $1 million payment to acquire

Behavioral, Accelera consolidated Behavioral’s revenues, assets, and liabilities

with those of its own in its publicly filed financial statements from its 2013 10K through its 2015 10-K. E.g., Ex. 105 at F-3–4 (Accelera 2013 Form 10-K);

Ex. 114 at F-3–4 (Accelera 2014 Form 10-K) (consolidating Behavioral but

writing off the goodwill); Ex. 132 at F-21 (Accelera 2015 Form 10-K)

(consolidating Behavioral but counting it as a discontinued operation from

January 1, 2016, and onward because of the termination of the stock purchase

agreement); Ex. 135 at 7 (Accelera 2016 Form 10-K) (explaining that “[t]he

2015 financial statements included elsewhere in this Form 10-K have been

restated to remove [Behavioral] from our consolidated financial statements”).

Freeman testified that Accelera decided to consolidate Behavioral’s

financials with its own because it had no other operations and would otherwise

have been considered a shell company. Tr. 81. Indeed, in its Form 10-Q directly

preceding the stock purchase agreement with Behavioral, Accelera reported no

revenues and only $50 of assets. Ex. 840 ¶ 35. Once Accelera consolidated

Behavioral, Behavioral comprised 90% of its revenue in 2013 and 2014. Ex. 105

at F-4; Ex. 175 (2014 consolidated trial balance worksheet); Tr. 2321–23 (Shek

explaining how the trial balance supports his earlier statement that 90% of

Accelera’s 2014 revenue came from Behavioral).

3.2.3. Accelera’s agreement to purchase Behavioral was terminated,

and a new auditor restated Accelera’s 2015 Form 10-K.

In mid-October 2015, Wolfrum emailed Accelera, reiterating his belief that

Accelera did not own Behavioral until he was paid for the shares. Ex. 307 at

1340–41. On March 31, 2016, Wolfrum and Accelera terminated the stock

purchase agreement, effective as of January 1, 2016. Ex. 133, Ex. 10.1 at 1, 6

(termination agreement); Ex. 840 ¶ 37. An earlier draft of the termination

agreement included a paragraph that would have required Accelera to file a

Form 8-K disclosing that it “should not have recognized on its books and

records the revenue and expenses of” Behavioral. Ex. 264 § 4. But Accelera did

not agree to put that paragraph in the final version of the termination

agreement. Tr. 288–89.

In November 2016, Accelera terminated its relationship with Anton &

Chia and engaged AJ Robbins CPA, LLC, as its auditor instead. Ex. 134 at 2.

Accelera specifically wanted an auditor who would restate the reports where

Behavioral had been consolidated. Tr. 409–10. Robbins told Boerum that

Accelera should not have been recognizing revenue based on the stock

purchase agreement. Tr. 409–10. In its 2016 Form 10-K, Accelera restated its

2015 financial statements because it “determined that the financial statements

of [Behavioral] should have never been consolidated with those of the Company

since the Company was never able to take control of [Behavioral] due to nonpayment of the purchase price.” Ex. 135 at F-19.

3.3. Accelera’s consolidation of Behavioral’s financials with its own did not

comply with GAAP.

Accelera’s consolidation of Behavioral did not comply with GAAP. The

Financial Accounting Standards Board (FASB) establishes the financial

accounting and reporting standards for public and private companies that

follow GAAP. FASB Accounting Standards Codification (ASC) 805 covers

business combinations, or, in other words, a “transaction or other event in

which an acquirer obtains control” of a business. ASC 805-10-20. Control is the

“direct or indirect ability to determine the direction of management and

policies through ownership, contract, or otherwise.” Id. A business combination

must be accounted for using the acquisition method, which requires, as its

second step, “[d]etermining the acquisition date.” ASC 805-10-05-4. The

acquisition date is “the date on which [the acquirer] obtains control of the

acquiree” and “generally is the date on which the acquirer legally transfers the

consideration, acquires the assets, and assumes the liabilities of the acquiree—

the closing date. However, the acquirer might obtain control on a date that is

either earlier or later than the closing date.” ASC 805-10-25-6–7. Further, ASC

810 discusses when financial statements should be consolidated. See ASC 81010-05. It provides that “[f]or legal entities other than limited partnerships,

consolidation is appropriate if a reporting entity has a controlling financial

interest in another entity” and that “[t]he usual condition for a controlling

financial interest is ownership of a majority voting interest.” ASC 810-10-251; see ASC 805-10-20 (defining “control” as having the same meaning as

“controlling financial interest” in ASC 810). 11

ASC 810 also discusses the variable interest entity (VIE) model for

consolidation, according to which “a controlling financial interest may be

achieved other than by ownership of shares or voting interests” when the

acquiring company has both the “power to direct the activities that most

significantly impact the VIE’s economic performance” and “[t]he obligation to

absorb losses of the VIE that could potentially be significant to the VIE or the

right to receive benefits from the VIE that could po tentially be significant to

the VIE.” ASC 810-10-05 (General Note on Consolidation). But there is no

indication that VIE accounting would have been appropriate here. The

Accelera entered into an agreement to purchase Behavioral’s shares. But

because it never paid for the shares, it never obtained them. Ex. 184 §§ 1.1,

1.1.1.1. Accelera thus did not have a “controlling financial interest” in

Behavioral that would make consolidation appropriate under ASC 810-10-251. Further, the acquisition date as defined in ASC 805-10-05-4 never came to

pass. Although the closing date of the stock purchase agreement was the day

it was signed on November 11, 2013, consideration—which was the initial $1

million payment—never transferred. As ASC 805 recognizes, sometimes

control passes only after the closing date. ASC 805-10-25-7. Finally, Accelera

never controlled Behavioral by other means either. As Boerum, Freeman, and

Wolfrum testified, Accelera had no ability to “determine the direction” of

Behavioral’s “management and policies.” ASC 805-10-20. Accelera was not

following GAAP when it consolidated Behavioral’s financial statements with

its own.

3.4. Wahl and Deutchman’s arguments that consolidation was appropriate

are unpersuasive.

Wahl argues that consolidation was appropriate because the stock

purchase agreement defined the date it was signed as the “closing” date and

said it was “effective” as of the closing. Wahl Post-hr’g Br. at 62. Yet as

explained above, the fact that the closing date of the transaction was the date

it was signed does not mean control transferred on that date. See ASC 805-1025-7. To the contrary, the agreement made it clear that Behavioral’s stock

would not transfer until $1 million was paid, and that even then, it would be

held in escrow until the rest of the purchase price was paid. Ex. 184 §§ 1.1,

1.1.1.1; Ex. 188 at 142959–60. The same is true regarding other documents

such as the promissory note documenting Accelera’s liability and the

shareholder action agreement; the note became effective only once the $1

million was paid, and the shareholder agreement stated that Wolfrum would

remain Behavioral’s CEO until the $1 million was paid. Ex. 186 at 1; Ex. 191

at 143275; see Wahl Post-hr’g Br. at 62, 68.

Wahl further argues that Accelera had control because the operating

agreement, which was effective as of November 2013, called for the creation of

transaction was a straightforward stock purchase in which controlling

financial interest would be achieved once Accelera paid for Behavioral’s stock.

Further, as noted, Accelera had no power to direct Behavioral’s activities,

which would be required for consolidation under the VIE model. To the extent

that Wahl attempts to claim in his proposed findings that VIE accounting is

applicable, see Wahl PFOF at 534–38 (PDF), his arguments are unclear.

Moreover, I will not consider arguments made only in a party’s proposed

findings of fact.

a management service organization with Wolfrum at its head, and the security

agreement spoke of the purchase of Behavioral’s stock in the past tense, as if

it had already occurred. Wahl Post-hr’g Br. at 63; see Ex. 1207 § 2; Ex. 185 at

1; Tr. 4658–59 (Wahl, speaking about the operating agreement’s creation of the

new organization, wondered, “if the business intent isn’t to close a transaction,

why go through all this trouble and why have this clause in the agreement?”).

But these agreements did not provide Accelera with control of Behavioral. They

were ancillary documents; neither consummated the stock purchase. No assets

were ever moved to the management service organization created by the

operating agreement. Tr. 70–71, 214–15. And the security agreement was

relevant only once Accelera had paid Wolfrum the initial $1 million; it gave

him a continued security interest in Behavioral’s assets until he was paid in

full by Accelera. See Ex. 1207 §§ 1, 2, 7(d), Ex. A.

Similarly, although Wahl argues that the employment agreement between

Accelera and Wolfrum was effective as of November 2013, Wahl Post-hr’g Br.

at 63–64, the agreement alone provides no basis for control. Wolfrum was

never actually employed by Accelera in any meaningful way. Tr. 216–17, 388

(Wolfrum never reported to Wallin or collected a salary from Accelera). 12

Pointing to both the language of the employment agreement and an April 2016

document from Accelera’s board of directors following the termination

agreement, Wahl maintains that Wolfrum must have been an employee

because he received 600,000 shares of Accelera as compensation pursuant to

the employment agreement. Wahl Post-hr’g Br. at 63–65, 68; Ex. 190 at 1–2;

Ex. 1259 at 2 (PDF) (Accelera’s board in 2016 “confirms that the 600,000

shares were earned as compensation under the November 20, 2013

Employment Agreement in increments of 200,000”). However, the Division

disputes that Accelera granted Wolfrum the shares under the te rms of the

employment agreement, noting that Wahl’s assertion is belied by the

termination agreement itself and that Wolfrum and Boerum testified to a

different reason for his receipt of the shares. Div. Resp. to Wahl PFOF at 563–

64, 570 (PDF); Ex. 133, Ex. 10.1 at 2 (“The Parties agree that the transfer of

Shares from the Purchaser to Seller shall not be deemed to be consideration

The fact that several of Accelera’s 10-Ks call Wolfrum an “executive

officer” of Accelera also does not demonstrate that Accelera had control of

Behavioral. See Wahl Post-hr’g Br. at 63, 65; Ex. 105 at 49–50; Ex. 114 at 26–

27; Ex. 132 at 29–30. The 10-Ks stating that Wolfrum was actually employed

by Accelera were as mistaken as they were in other respects; indeed, the 2014

10-K is equally mistaken when it refers to Behavioral as a 100% owned

subsidiary of Accelera, and its statements alone cannot be used to support

consolidation. Ex. 114 at F-7; see Wahl Post-hr’g Br. at 65.

under or pursuant to any of the Stock Sale Agreements.”); Tr. 285, 404–05

(Wolfrum and Boerum testified the shares were compensation for the hassle of

allowing Behavioral to be audited in early 2016 for the 2015 audit while the

termination agreement was already being negotiated). Regardless of whether

the shares granted were compensation contemplated by the original

agreement, the fact remains that Wolfrum never worked for Accelera in any

way that could support Accelera’s control of Behavioral for accounting

purposes.13

Wahl appears to assert that the amendments to the stock purchase

agreement somehow created a new means of transferring control of Behavioral

to Accelera. He notes that each amendment deleted the outdated Section

1.1.1.1 of the agreement—the provision requiring Accelera to pay Wolfrum $1

million 90 days after closing to obtain Behavioral’s stock. Wahl Post-hr’g Br.

at 65–67. Wahl argues the amendments instead provided for a different type

of consideration: “an obligation to pay Wolfrum $4.5MM and … compensat[e]

him with shares at each event of default.” Id. at 66 n.75 (emphasis omitted);

see also Wahl PFOF at 520 (PDF). He explains that since the first two

amendments became effective in February and March 2014, respectively,

during the 2013 audit, the amendments overrode the original stock purchase

agreement for that period. Wahl Post-hrg Br. at 65–67. But the amendments

merely substituted a different Section 1.1.1.1 with new payment deadlines in

place of the old one. Ex. 197 at 1; Ex. 201 at 1. The terms of the agreement

never changed in principle; Accelera would control Behavioral only after it paid

for its stock. Moreover, the 2013 audit was about Accelera’s 2013 finances; the

2014 amendments were not retroactive and could not have changed the

Insofar as Accelera’s 2016 board resolution purports that the transfer of

shares was compensation under the employment agreement, that resolution

cannot alter the terms of the termination agreement, which made clear that:

the transfer of shares was not consideration under prior agreements including

the original stock purchase agreement, employment agreement, or any

subsequent amendments (collectively referred to as the stock sale agreements

in the termination agreement); Accelera did not make payments required by

the stock sale agreements; and the termination agreement constituted the

entire agreement among the parties and superseded any prior understandings,

agreements, or representations. See Farmers Auto. Ins. Ass’n v. Wroblewski,

887 N.E.2d 916, 923 (Ill. App. Ct. 2008) (indicating that under Illinois law,

contracts are interpreted by first considering the contractual language and

that extrinsic evidence cannot modify unambiguous terms in a written

contract); Ex. 133, Ex. 10.1 at 1, 2, 5. Thus, the transfer of shares did not fulfill

the purchase price requirement and do not show that Accelera employed

Wolfrum in any meaningful way that established control over Behavioral.

accounting for 2013. No better is Wahl’s argument that consolidation was

appropriate because the first amendment removed the provision allowing

either party to terminate the agreement before the payment of the purchase

price, and the second amendment restricted Accelera’s ability to cancel. Wahl

Post-hr’g Br. at 65, 67; Ex. 197 at 1; Ex. 201 at 2. The lack of an ability to

terminate does not mean that the agreement was actually consummated.

Wahl asserts that Wolfrum never said that the transaction had not closed,

and to the contrary, he confirmed the debt Accelera owed him each year upon

Anton & Chia’s request and he cooperated with the audits. Wahl Post-hr’g Br.

at 68–69. But these points have little to do with who actually controlled

Behavioral. That Wolfrum cooperated with the audit does not mean Accelera

actually controlled his company or even that he believed it did. And the fact

that Wolfrum confirmed that the full $4.55 million was still owed to him

indicates that control never passed to Accelera.

Deutchman, for his part, points out that ASC 805 provides many ways of

obtaining control, even “without transferring consideration,” including “by

contract alone.” ASC 805-10-25-11; see Deutchman Post-hr’g Br. at 18. He

asserts that there was “common control” between Behavioral and Accelera

because the agreements had been signed, Wolfrum was a contractual employee

of Accelera, he was paid Accelera shares, and the parties wanted to merge.

Deutchman Post-hr’g Br. at 19. In such a situation, according to Deutchman,

consolidation was appropriate even though no consideration transferred as

long as the Accelera’s debt to Behavioral was booked on its balance sheet and

Accelera did not recognize any goodwill from the transaction. Id. But

Deutchman’s theory has no basis. The transaction between Accelera and

Behavioral was a stock purchase agreement, and the agreement was quite

clear that Behavioral’s shares would not transfer until the stock was paid for.

This was not a situation where the contract provided for control without

payment of consideration.

Next, Deutchman argues that consolidation was permitted by Commission

regulations. Rule 3-05 of Regulation S-X concerns “[f]inancial statements of

businesses acquired or to be acquired,” and states that “[f]inancial statements

prepared and audited in accordance with this regulation should be furnished”

if a “business combination has occurred or is probable,” or “[c]onsummation of

a combination between entities under common control is probable.” 17 C.F.R.

§ 210.3-05(a)(1)(i)–(ii) (emphasis added). Further, Rule 3-05 provides:

“Acquisitions of a group of related businesses that are probable or that have

occurred subsequent to the latest fiscal year-end for which audited financial

statements of the registrant have been filed shall be treated under this section

as if they are a single business combination.” 17 C.F.R. § 210.3-05(a)(3)

(emphasis added). Deutchman asserts that these regulations demonstrate that

consolidation of two companies’ financial statements is permissible even before

the combination has occurred, as long as it is probable that it will occur.

Deutchman Post-hr’g Br. at 15–17. Nothing, however, shows that the auditors,

when reviewing Accelera’s financial statements, considered this supposed

rationale or the degree of probability in which Accelera’s transaction with

Behavioral would be consummated. The information available to the auditors

should have raised serious concerns undercutting that probability.

Moreover, Rule 3-05 merely requires the financial statements of a soonto-be subsidiary to be “furnished” to investors. See 17 C.F.R. § 210.3-05(a)(1).

It does not support the notion that the financials of two entities should be

consolidated in the situation presented by this case. See Instructions for the

Presentation and Preparation of Pro Forma Financial Information and

Requirements for Financial Statements of Businesses Acquired or To Be

Acquired, 47 Fed. Reg. 29,832, 29,834–35 (July 9, 1982) (recognizing, in the

adopting release, the distinction between furnishing an acquired or to-beacquired business’s financial statements and consolidating those financials

with the acquiree after the acquisition). Indeed, Commission rules found

elsewhere provide guidance on when consolidation is appropriate. See 17

C.F.R. § 210.3A-02(a) (stating, with exceptions, “[g]enerally, registrants shall

consolidate entities that are majority owned and shall not consolidate entities

that are not majority owned”).

Deutchman also points to Rule 4-08 of Regulation S-X, which provides that

“[a]mounts of related party transactions should be stated on the face of the

balance sheet” and that when separate financial statements are presented for

the entity or its subsidiaries, “intercompany profits or losses resulting from

transactions with related parties and the effects thereof shall be disclosed.” 17

C.F.R. § 210.4-08(k). He therefore argues that he was required to disclose

Accelera’s contractual relationship with Behavioral, and that his failure to do

so could also have been the basis for fraud charges. Deutchman Post-hr’g Br.

at 19–20. But again, Rule 4-08 is talking about disclosure, not consolidation.

Accelera could have drafted financial statements disclosing the relationship

between Accelera and Behavioral without consolidating the entities.

Finally, Anton & Chia’s audit file never referenced any of the preceding

Regulation S-X rules as a basis for consolidation, and Deutchman never

mentioned any of them in his testimony as something he considered at the

time. See Gregory M. Dearlove, CPA, Exchange Act Release No. 57244, 2008

WL 281105, at *10 n.39 (Jan. 31, 2008) (“We consider the absence of work

papers to be evidence that the audit team did not devote substantial, if any,

effort to review the areas in question.”), pet. denied, 573 F.3d 801 (D.C. Cir.

2009).

3.5. Anton & Chia’s audits and interim reviews of Accelera

3.5.1. 2013 audit

For the 2013 year-end audit, Wahl served as the engagement partner, and

Yu-Ta Chen was one of two staff accountants. Ex. 136 at 5. In its planning

memorandum, the firm stated that it would examine the agreements

surrounding Accelera’s purchase of Behavioral and would request a purchase

price allocation. Id. at 3.

The team was aware that their main correspondent at the company,

Timothy Neher—who was the founder of Accelera and was doing the

accounting at the time—had poor financial and accounting abilities. Tr. 56–57,

474, 559–60. Anton & Chia documented that it would not rely on Accelera’s

internal controls because it had no significant operations and a small board of

directors. Ex. 1, 2013 Audit Annual, WP 1105 at 2. Neher did not provide

Anton & Chia with a draft Form 10-K or draft financials until March 24, 2014,

just six days before the filing deadline. Ex. 202 at 22969.

Anton & Chia, including Wahl, received all of the agreements concerning

Accelera’s purchase of Behavioral. Exs. 302–04; Tr. 499–504. Wahl signed off

as having reviewed several of them (including the stock purchase agreement).

Ex. 138 at 1–2, 4. Accelera’s Form 10-K also noted that pursuant to the stock

purchase agreement, Accelera was required to pay $1 million 90 days from the

date of closing. Ex. 105 at F-7. Thus, it would have been obvious to the auditors,

either from the Form 10-K itself, or certainly through review of the

agreements, that payment was required to consummate the acquisition. At the

hearing, Wahl admitted that Accelera had never paid Wolfrum the initial $1

million. See Tr. 5216.

Chen prepared a memo to document the Behavioral acquisition, which

Wahl signed off on as having reviewed. Ex. 142; Ex. 138 at 4 (sign off for WP

2503); Tr. 508. Chen did not have any auditing experience at the time and had

just been hired earlier that month. Tr. 468, 471; see Ex. 280 (Chen’s resume).

He had never worked on business combinations before and had never drafted

anything like the acquisition memo previously. Tr. 514–15. He based the memo

largely on a template. Tr. 510, 513.

The memo identified ASC 805 as the relevant GAAP standard. Ex. 142 at

2–3. It also acknowledged that it is key to determine if, in the transaction,

“someone gain[ed] control.” Id. at 2. And it noted that “the usual condition for

controlling interest is the ownership of the majority voting interest in the

entity.” Id. at 4. After setting forth the basics of control, the memo then

explained that one must identify the acquisition date, which is “not necessarily

the date of an agreement or reaching binding terms.” Id. Yet curiously, the

memo did not attempt to determine the acquisition date, and turned instead

to other topics. It is not entirely clear whether Chen believed that the

acquisition had even gone through yet. The memo noted, for example, that

Accelera will pay Behavioral $4.55 million, and that “[a]s a result, [Behavioral]

would become a wholly owned subsidiary of the Issuer.” Id. at 1–2. And it

further stated that per the agreement, Accelera “will obtained [sic] 100% of the

ownership” of Behavioral. Id. at 2 (emphasis added). The memo concluded with

another ambiguous remark, that “[r]evenue will begin to accrue to the Issuer

from Target operations prospectively from the date the Issuer obtains control.”

Id. at 9. In sum, the memo failed to explain if and when Accelera obtained

control of Behavioral.

Anton & Chia performed no fieldwork for the 2013 audit. Tr. 497–98.

There is no evidence in the workpapers that the team questioned Wolfrum

about whether Accelera controlled Behavioral. Chen did not recall having any

such conversations with Wolfrum. Tr. 536–37.

Accelera’s 2013 Form 10-K had an unqualified audit opinion from Anton

& Chia. The firm opined that Accelera’s financial statements, “present fairly,

in all material respects, the consolidated financial position of Accelera

Innovations, Inc. as of December 31, 2013 and 2012, and the consolidated

results of their operations and their cash flows for each of the years then ended,

in conformity with accounting principles generally accepted in the United

States of America.” Ex. 105 at F-2. Anton & Chia further represented that it

had “conducted [its] audits in accordance with the standards of the Public

Company Accounting Oversight Board.” Id. The report included a going

concern disclosure, noting “substantial doubt about [Accelera’s] ability to

continue as a going concern” because of, among other things, the company’s

“recurring operating losses and negative cash flow.” Id.

In its report to Accelera’s board of directors related to its 2013 audit, Anton

& Chia “identified a lack of sufficient personnel” for accounting and financial

reporting “with appropriate skills, training, and experience” to ensure

compliance with GAAP. Ex. 143 at 927. The firm recommended Accelera “hire

a full time CFO with relevant experience.” Id.

3.5.2. 2014 interim reviews and year-end audit

Anton & Chia continued to audit Accelera in 2014, and Wahl remained the

engagement partner on all engagements (including year-end) except for the

third quarter review, in which he was not involved. Ex. 1.1 at 3; Ex. 1.4 at 3;

Ex. 166 at 3; Ex. 171 at 5. Tommy Shek was the audit manager for the yearend audit. Ex. 171 at 5.

No additional analysis of Behavioral’s consolidation was undertaken in

2014. See Tr. 548 (Chen testified that the issue did not come up again in the

reviews he worked on). No additional workpapers analyzed the issue. See

Tr. 1162 (confirmed by Devor’s review). Chen and others, however, wondered

on a couple of occasions whether Accelera had ever paid off its debt to

Behavioral. Ex. 206 at 27229 (August 2014 email from Chen to Neher asking

whether “the Company paid off [Behavioral]”); Ex. 207 at 27237 (draft Q2 10Q with Richard Koch’s handwritten notes asking whether the purchase price

installments had even been paid); Tr. 560–63.

Anton & Chia auditors visited Behavioral to perform fieldwork three

times. Tr. 248. In mid-April 2014, Wolfrum instructed Anton & Chia staff by

email to remain confidential and keep a low profile during the audit, and not

to mention anything about the sale to Accelera to anyone but himself. Ex. 204

at 15069. At the hearing, Wolfrum claimed he sent this email because he

“didn’t want people in the office to think that we had sold the business, because

we hadn’t.” Tr. 253. Wolfrum then told the staff who came for fieldwork that

he still “owned Behavioral, and that no one’s made any payments yet, …

although I was hoping they would soon.” Tr. 255. He further told the auditors

that he paid the taxes, wrote the checks, and managed the bank accounts,

because “it’s totally separate from Accelera. They haven’t purchased us yet.”

Tr. 256. Similarly, during field work at Behavioral in 2015, Wolfrum told the

auditors that “Accelera hasn’t paid yet, and I still own a hundred percent of

the company.” Tr. 258–59, 264. Indeed, during both audits, the auditors had

access on site to Behavioral’s bank records, which, had the auditors looked at

them, would have showed that Behavioral had not paid any of its revenues to

Accelera. Tr. 258, 266.

Anton & Chia was hired to complete an acquisition audit for Behavioral.

Ex. 839.6 at 110 (PDF). But, as of September 2014, Accelera had not completed

the required filings on its end. Id. at 494 (PDF); Tr. 2345. Anton & Chia never

completed the acquisition audit. Tr. 538–39.

Deutchman was staffed as the engagement partner on Accelera in the

third quarter of 2014. Ex. 1.4 at 3; Tr. 729. For the year-end audit, on the other

hand, he was listed as the EQR in the planning memo. Ex. 171 at 5. But while

Deutchman maintained that he was indeed EQR, Tr. 769–70, a draft of the

planning memo for the year-end audit and the engagement summary memo

instead listed Deutchman as the engagement partner and Wahl as the EQR.

Ex. 176 at 48171; Ex. 237 at 13485; Tr. 768–70. Moreover, in several emails

from the time of the year-end audit, Deutchman was referred to as the “EP,”

the “partner in charge,” or by other terms indicating he was engagement

partner. Ex. 228 at 24839; Ex. 229 at 1475; Ex. 233 at 25660. Deutchman also

took on roles that were more appropriate for an engagement partner: he

communicated directly with Accelera, proposed calls, organized field work, and

was involved in the audit planning meeting as well as other decisions at an

early stage. Ex. 229 at 1475; Ex. 231 at 93380; Ex. 234 at 25680; Ex. 235 at

25729; Ex. 237 at 1 (PDF); Ex. 311; see Ex. 88.1 at 65 (Devor opined in his

report that communicating with the company to be audited is a duty “typically

performed by the Engagement Partner”). Wahl was not even copied on some of

these emails. See Ex. 231 at 93380; Ex. 235 at 25729. Freeman testified that

he thought Deutchman was the engagement partner because Deutchman was

working with him to get ready for the audit. Tr. 132–33.

Once Freeman became the CFO of Accelera in September 2014, he was

concerned that Behavioral was inappropriately consolidated. Tr. 54, 79–80.

Freeman raised his concerns to Deutchman on a number of occasions. On a

phone call in October 2014, Freeman opined that consolidation was

inappropriate. See Ex. 214 at 492. Freeman followed up by email in December,

and asked Deutchman to forward Anton & Chia’s basis for consolidation,

including any research and analysis the firm had done supporting

consolidation. Id. Not receiving any response, Freeman pressed Deutchman

again for a copy of the research in early January 2015. Tr. 102–03; Ex. 217 at

22132–33. Deutchman, however, again did not provide any research. Tr. 103.

On February 2, 2015, Freeman sent a draft agenda for a call to Deutchman

and others, one discussion point being whether Behavioral should be

consolidated for the 2014 audit. Ex. 223 at 1283. Freeman also emailed

Deutchman directly, telling him that the issue of Behavioral’s consolidation

would come up on the conference call, and that he did not agree with Neher’s

rationale for consolidation, because Accelera’s “subsidiary never controlled”

Behavioral. Ex. 222 at 1. At some point, Freeman also told Deutchman that he

had called the hotline for the American Institute of Certified Public

Accountants (AICPA), and that they had told him that Behavioral had been

inappropriately consolidated. Tr. 111, 119–21.

During the conference call on February 9, Freeman again explained his

problems with consolidation. Tr. 121–23; see Ex. 225. Accelera’s attorneys,

although on the call, expressed no opinion on the matter, as they felt it was an

accounting matter, not a legal one. Tr. 122. According to Freeman, Deutchman

opined that the previous financial statements were fine and did not need

restatement, but did not offer any reason for his opinion. Tr. 123; but see

Tr. 712 (Deutchman could not recall much about the call). Also according to

Freeman, the parties on the call agreed to have Accelera’s attorney Bob Acri

meet with Wolfrum and enter into a supplemental agreement that would say

that Behavioral “would be under the control of Accelera to get around the issue

of consolidation.” Tr. 123. No such agreement, however, was ever entered into.

Tr. 123–24. Freeman resigned from Accelera on March 20, 2015, in part

because of “the inappropriate consolidation of Behavioral with Accelera.”

Tr. 125–26; see Ex. 124; Ex. 227 at 1.

Deutchman never acted on any of Freeman’s concerns. See Tr. 707–08,

711, 941. There is no evidence in the workpapers that Deutchman documented

Freeman’s questions or told the other members of the engagement team about

them. See Tr. 698–700, 2336 (Shek, the audit manager for 2014, testified that

he would have liked to have known), 2346 (Shek testified there were no

discussions about Accelera’s control of Behavioral during the 2014 audit).

Moreover, it seems likely that Deutchman did not go back and review Chen’s

consolidation memo. Tr. 1050–54.

Deutchman testified that he did not take Freeman’s concerns seriously for

several reasons. For one, he and Wahl had a low opinion of Freeman’s work;

the firm needed to make many audit adjustments to the financial statements

Freeman prepared. Tr. 702–03, 917, 4620, 5292. Second, he thought that if

Freeman had real concerns about consolidation, it was his job to prepare a

proper memo documenting them. Tr. 707–08, 719, 892. Third, he felt that

providing Freeman with Chen’s consolidation memo was inappropriate and

would compromise his independence as an auditor. Tr. 938–39. Fourth,

Deutchman believed that if Freeman had wanted an opinion on the legality of

consolidation, it should have come from the Commission or another accounting

firm that audited public companies, not the AICPA, which only worked with

private companies. Tr. 870, 902. Finally, to a certain extent, he did not consider

it to be his place to challenge his own firm’s prior determination. Tr. 762, 1060–

61; Ex. 839.6 at 480, 491 (PDF) (Deutchman’s 2018 and 2019 deposition

testimony in the Commission’s district court case against Accelera). Anton &

Chia had signed off on Accelera’s financial statements back in 2013, and

Deutchman was not “reordering the work or replanning the work”; he instead

assumed that consolidation had been “done correctly.” Tr. 762, 1061 (“I

deferred to the firm’s opinion and I still do.”).

Despite the fact that Deutchman deferred to Anton & Chia on

consolidation and did not formulate his own opinion, he testified (at the

hearing at least) that he accepted the firm’s position because he had seen the

stock purchase agreement, Wolfrum’s employment agreement, the promissory

note, and the operating agreement—documents which convinced him that the

firm’s position was at least reasonable. Tr. 1097–98; but see Tr. 1062

(Deutchman impeached with 2016 investigative testimony where he said he

could not recall whether he read any of the agreements). Deutchman was

aware, however, that none of the purchase price for Behavioral had been paid.

Among the workpapers for the 2014 audit on which Deutchman signed off was

a confirmation signed by Wolfrum that Accelera had not paid him any of the

$4.55 million purchase price for the company. See Ex. 239 at 1–2; Ex. 1, 2014

Audit Annual, WP 5303; Ex. 147 at line 453; see also Ex. 247; Ex. 840 ¶ 36

(Deutchman reviewed and signed off on the amendments to the stock purchase

agreement extending the payment deadline). Further, Deutchman never asked

Wolfrum about the status of the stock purchase agreement or whether Accelera

had actually acquired Behavioral. Tr. 1066.

On March 31, 2015, Brian Rusywick, the chief operating officer of Anton

& Chia, asked Deutchman to speak to an Accelera attorney and confirm which

entities should be audited in 2014. Tr. 475; Ex. 240 at 1287. Deutchman did

not think this was a legal question, however, and it appears he did not follow

up with an attorney. See Tr. 796–99. On April 6, 2015, in an email titled “Legal

- Accelera,” Shek asked Deutchman “to call the attorney and obtain written

representation for the entity to be consolidated in 2014.” Ex. 241 at 1290.

Deutchman did not follow up on this request either. Tr. 2333. The Division

suggests that these incidents are further evidence Deutchman was put on

notice that Behavioral’s consolidation may have been inappropriate and was

in fact told to obtain a legal opinion on the matter. See Div. Post-hr’g Br. at 8–

10, 34; see also Div. PFOF at 88–89; Tr. 800–01, 2330.

But this is a stretch. The emails do not ask Deutchman to obtain a legal

opinion about Behavioral’s consolidation. Rusywick told him to ask Accelera’s

attorneys “what entities need to be audited,” but there is no indication that his

query was related to the appropriateness of Behavioral’s consolidation.

Similarly, there is no indication in Shek’s request that Deutchman obtain an

attorney’s “written representation for the entity to be consolidated in 2014” is

a representation about the appropriateness of Behavioral’s consolidation with

Accelera. Shek’s subsequent email listing audit matters still outstanding,

which asks for “[l]egal representation for business [Accelera] acquired in 2013

and 2014,” is not questioning Behavioral’s consolidation; in a routine manner,

the email also asks for other information from Behavioral such as revenue

testing and confirmation about the $4.55 million not yet paid. Ex. 249 at

30160–61. This suggests that the issue of consolidation was not the target of

Shek’s emails. In any event, if Deutchman had asked Accelera’s attorneys

about consolidation, it is not clear it would have been particularly illuminating.

On the February 2015 call with Accelera—just a couple months before the

emails from Rusywick and Shek—Accelera’s attorneys saw the matter as an

accounting question and not a legal one. See Tr. 122.

Earlier, on November 25, 2014, Accelera entered into a stock purchase

agreement with Grace Home Health Care, Inc. See Ex. 113. The same day,

Accelera entered into an asset purchase agreement with Watson Health Care,

Inc., and Affordable Nursing, Inc. Id. On January 5, 2015, Accelera entered

into a stock purchase agreement with Traditions Home Care, Inc. See Ex. 116.

Accelera never made any payments toward completing these acquisitions.

Tr. 415. Unlike with Behavioral, however, Accelera did not consolidate these

companies’ financials with its own. Tr. 416. Wahl and Deutchman signed off as

having reviewed the purchase agreements for Grace, Watson, and Traditions.

Ex. 1, 2014 Audit Annual, WP 0418.01 (Grace and Watson 8-K) and WP

0419.01 (Traditions 8-K); Ex. 147 at lines 62, 66, 76, and 80 (Wahl and

Deutchman’s sign offs on 0418.01 and 0419.01). But the fact that these

companies were not consolidated did not cause the team to rethink whether

Behavioral’s consolidation was appropriate. Shek testified that he reviewed

the agreements and decided Accelera “didn’t have control.” Tr. 2340. He did

not reevaluate the Behavioral transaction because he expected that the 2013

audit team had looked into it. See Tr. 2340–41.

Although Accelera was required to prepare a goodwill impairment

analysis and purchase price allocation for Behavioral within one year of the

acquisition, it had not done so by the time of the 2014 audit. Tr. 2342–43. Shek

therefore drafted a goodwill impairment analysis, which was reviewed by both

Wahl and Deutchman. Ex. 146; Ex. 147 at lines 409 and 412; Tr. 898–99. Shek

and Deutchman decided to impair the entire amount of goodwill, over $4

million, because of Accelera’s losses and because it did “not have sufficient

support to validate the goodwill for [Behavioral].” Ex. 146 at 1487–88.

In addition to writing down all of the goodwill from the Behavioral

acquisition, Anton & Chia proposed a number of other adjustments to

Accelera’s financials for the 2014 audit. Ex. 1204 at 5; Tr. 4612–17. In total,

the firm made eight adjustments, which increased Accelera’s losses by over $18

million and just about doubled the company’s reported losses for the year.

Tr. 4612, 4616–17. Wahl testified that this showed that Accelera’s

management was “not taking their job seriously,” and that conversely, Anton

& Chia was taking its job seriously. Tr. 4614. Deutchman testified that by

making Accelera’s losses worse, and especially by impairing all of the goodwill

for Behavioral, Anton & Chia presented Accelera’s financials to investors in

the most conservative way. Tr. 703–04, 911.

Anton & Chia’s unqualified audit report for 2014, like its 2013 report,

stated that Accelera’s financials had been presented in accordance with GAAP

and that Anton & Chia’s audit had complied with PCAOB standards. Ex. 114

at F-2. It also contained a going concern disclosure. Id.

3.5.3. 2015 interim reviews

Not much changed during Anton & Chia’s quarterly reviews in 2015. The

engagement team was similar; Wahl was the engagement partner and

Deutchman was the EQR. Ex. 1.6 at 3; Ex. 152 at 3; Ex. 178 at 3.14 Although

the firm noted in the second quarter of 2015 that Accelera still had not made

any payments to Behavioral, no reassessment of the transaction was

conducted. Tr. 582–84; Ex. 1.7. No one asked whether Accelera really

controlled Behavioral. Tr. 2354–55. During the course of the 2015 reviews,

Wahl continued to note that Accelera’s internal controls were very poor.

Ex. 258 at 2214; Ex. 261 at 115024. By July 2015, Anton & Chia was aware

that Accelera was being investigated by the Commission for its financial

reporting related to the Behavioral consolidation. Ex. 840 ¶ 40.

3.6. Wahl and Deutchman failed to follow PCAOB standards.

In their respective roles in the Accelera engagement, Wahl and

Deutchman did not adhere to several PCAOB standards in effect at the time.15

3.6.1. Inadequate audit evidence, insufficient professional skepticism,

and improper acceptance of management representations

“The auditor must plan and perform audit procedures to obtain sufficient

appropriate audit evidence to provide a reasonable basis for his or her opinion,”

and appropriateness is measured by “relevance and reliability.” PCAOB

Auditing Standard (AS) No. 15.4, .6. But in 2013, the team did not perform

field work at Behavioral or ask Wolfrum any questions to determine whether

Deutchman’s testimony that he did not believe he was involved in the 2015

third quarter review is contradicted by the planning memo for that quarter.

Compare Tr. 639, with Ex. 178 at 3.

Wahl and Chung make a global argument pertaining to all three

engagements, suggesting that many of the professional standards the Division

claims they violated are not obligatory, as the standards use words like “shall”

and “should” instead of “must.” See Wahl Response to Div. PFOF at 2–3, 823

(PDF). But the PCAOB considers “shall” to denote an “unconditional

responsibility” and “should” a “presumptively mandatory” responsibility

“unless the auditor demonstrates that alternative actions he or she followed in

the circumstances were sufficient to achieve the objectives of the standard .”

PCAOB Rule 3101(a)(1)–(2), https://pcaobus.org/Rules/Pages/Rule_3101.aspx.

Similarly, FASB considers the words “shall” and “should” to be comparable,

and notes that both represent “the requirement to apply a standard.” FASB

Accounting Standards Codification, About the Codification (v 4.10), at 23 (Dec.

2014), https://asc.fasb.org/imageRoot/71/58741171.pdf. The fact that neither

Wahl or Chung understood the meaning of “shall” or “should” in the

professional standards that were obliged to follow—either then or now—lends

further credence to the proposition that they engaged in improper professional

conduct.

Accelera was actually controlling Behavioral. The memo prepared by Chen and

reviewed by Wahl failed to properly interpret the stock purchase agreement,

and did not even opine on whether the acquisition had actually taken place.

Wahl thus also failed to “consider the competency and sufficiency of the

evidence.” PCAOB AU § 230.08.

Further, “[i]f a representation made by management is contradicted by

other audit evidence, the auditor should investigate the circumstances and

consider the reliability of the representation made.” AU § 333.04. However, the

engagement team improperly accepted management’s representation in its

financial statements that Behavioral should be consolidated without properly

evaluating the obviously contrary evidence in the legal agreements. All these

failures contradict “an attitude that includes a questioning mind and a critical

assessment of audit evidence” and demonstrate that they did not exercise due

professional care and professional skepticism. AU §§ 230.01, 230.07.

In 2014, these failures were compounded. The engagement team stuck to

their earlier position despite numerous red flags and additional evidence that

consolidation was improper. Deutchman, as EQR, also failed to address several

red flags of which he was aware. (1) On more than one occasion during

fieldwork at Behavioral, Wolfrum told the team that he had never sold his

company and that he did not work for Accelera. (2) Both Wahl and Deutchman

knew that Accelera did not consolidate Grace, Watson, and Traditions because

Accelera had never paid for those companies, but they did not reevaluate

Behavioral’s consolidation even though they knew Accelera had not paid for it

either. (3) Accelera failed to complete its paperwork to support Anton & Chia’s

acquisition audit of Behavioral, but this did not cause the team to wonder

whether Accelera had actually acquired the company. (4) Deutchman ignored

Freeman’s repeated concerns that Behavioral was inappropriately

consolidated, and did not question former management representations in

light of the arguments Freeman made. (5) Deutchman impaired all of the

goodwill from Accelera’s purchase of Behavioral, but then failed to take a closer

look at the transaction itself and whether control had been obtained and

consolidation was appropriate. All of these matters demonstrate a failure to

obtain appropriate audit evidence, a failure to exercise due professional care

and skepticism, and unreasonable acceptance of management representations

in light of conflicting evidence. Accelera’s transaction with Behavioral, which

accounted for 90% of Accelera’s revenues in 2013 and 2014, demanded much

more scrutiny than it received.

The Division further alleges based primarily on AU § 230’s requirement

to exercise due professional care and professional skepticism that Anton &

Chia and Wahl also failed to properly plan the 2013 and 2014 audits. See Div.

Post-hr’g Br. at 8–10; see also Div. PFOF at 56–57, 60–61, 81–82. For example,

the team noted at the outset of the 2013 audit that they could not rely on

Accelera’s internal controls, which means that they should have exercised

heightened skepticism. But whether one characterizes the problems as being

in the planning or in the execution, it is unquestionable that Wahl and

Deutchman failed to exercise due professional care in conducting the audits.

3.6.2. Failure to document significant issues and findings

In 2013, Wahl failed to prepare audit documentation “in sufficient detail

to provide a clear understanding of its purpose, source, and the conclusions

reached” with appropriate organization “to provide a clear link to the

significant findings or issues.” AS No. 3.4. Chen’s memo exploring Accelera’s

stock deal with Behavioral, which Wahl reviewed, did not sufficiently support

the conclusion that Accelera had acquired Behavioral. To the contrary, it was

vague on essential points such as when the acquisition date was and whether

Accelera actually exercised control over Behavioral. The engagement team

prepared no other documentation concerning the purported acquisition. AS

No. 3.6 requires audit documentation to “contain sufficient information to

enable an experienced auditor, having no previous connection with the

engagement: [t]o understand the nature, timing, extent, and results of the

procedures performed, evidence obtained, and conclusions reached.” But from

the memo alone, an auditor unconnected to the engagement would not have

been able to determine Accelera’s basis for consolidation.

Deutchman failed to document the concerns raised by Freeman about

improper consolidation. Instead, he did nothing. His approach was inconsistent

with AS No. 3 because the auditor must retain “records documenting

consultations on, or resolutions of, differences in professional judgment …

between the engagement team and others consulted,” and “audit

documentation must include information the auditor has identified relating to

significant findings or issues that is inconsistent with or contradicts the

auditor’s final conclusions.” AS No. 3.8. Further, if correct, Freeman’s concerns

indicated that Accelera’s financial statements were misstated, and the auditor

must document the actions taken to address significant findings, which include

“the existence of material misstatements.” AS No. 3.12(b). But this was not

done.

3.6.3. Insufficient experience and supervision

“The audit is to be performed by a person or persons having adequate

technical training and proficiency as an auditor,” and “[t]he junior assistant,

just entering upon an auditing career, must obtain his professional expe rience

with the proper supervision and review of his work by a more experienced

superior.” AU §§ 210.01, .03. Likewise, “[a]n auditor should possess ‘the degree

of skill commonly possessed’ by other auditors’” and “should be assigned to

tasks and supervised commensurate with their level of knowledge, skill, and

ability so that they can evaluate the audit evidence they are examining.” AU

§§ 230.05, .06. The Division maintains that Wahl should not have assigned

Chen, who had no auditing experience, to the Accelera audit, or, at the very

least, should not have tasked him with drafting the acquisition memo for

Behavioral.

Given that Chen had no experience in business combinations and the

Behavioral acquisition was a significant part of the audit, it is indeed

questionable whether Wahl should have assigned him to draft the memo. Yet

regardless, Wahl failed to adequately supervise Chen. “[T]he engagement

partner is responsible for proper supervision of the work of engagement team

members” and must “[r]eview the work of engagement team” taking into

account “[t]he knowledge, skill, and ability of each engagement team member.”

AS No. 10.3, .5(c), .6(d); see AU § 230.06. Wahl reviewed the memo, but did not

catch its glaring errors, including the fact that it failed to determine when

Accelera had actually acquired Behavioral. If anything, Wahl had a heightened

requirement to carefully supervise Chen given his lack of experience.

In light of Deutchman’s disciplinary history and performance issues at

Anton & Chia, the Division argues that Wahl should not have assigned him to

be the EQR for the 2014 Accelera audit. See Div. Post-hr’g Br. at 9–10; see also

Div. PFOF at 79–80. In 2008, Deutchman was censured by the Commission for

auditing a public company without being registered with the PCAOB. Tr. 643;

Michael Deutchman, Exchange Act Release No. 58240, 2008 WL 2902011, at

*1–2 (July 29, 2008). In 2015, the PCAOB found he participated in an effort to

alter audit files in an attempt to deceive PCAOB inspectors in 2008. Tr. 647;

Kabani & Co., PCAOB File No. 105-2012-002, at 4–6, 18–19 (PCAOB Jan. 22,

2015), https://pcaobus.org/Enforcement/Adjudicated/Documents/105-2012-002Kabani.pdf. And while at Anton & Chia, in February 2015, Deutchman was

written up for “[s]ubstandard job performance.” Ex. 226 at 51112. The warning

was never signed or made effective, however, and Deutchman testified he was

never presented with it. Tr. 659–61, 876; see Tr. 5593 (Wahl testified that he

had wanted the document destroyed but that it was put in Deutchman’s file

against his wishes). At one point in March or April of 2015, Wahl told

Deutchman that he was too old to be an engagement partner. Tr. 661–62, 664.

But Deutchman “didn’t take it personally,” and moved to San Diego to do

marketing work for the firm instead. Tr. 662–63. After learning of

Deutchman’s resignation in August 2016, Wahl wrote in an email that there

were a “number of issues with Mike” and that he had hoped to “properly retire

him in October,” but did not specify what the issues were. Ex. 271 at 50868;

Tr. 5130.

Yet, despite these issues, Deutchman was an experienced auditor who had

once worked for the Commission, Tr. 662, and there is no evidence that he was

incapable of being an EQR or that he was inadequately supervised. His censure

by the PCAOB was years prior, and the PCAOB’s decision about his second

offense—the allegation that he altered documents—came out in the middle of

the 2015 audit, and was promptly appealed. Kabani, 2017 WL 947229

(Commission decision on appeal released in March 2017). It is not clear that

Wahl should have been required to remove Deutchman from the audit at that

time. In terms of his performance at Anton & Chia, the warning drafted was

never placed in his record, and Wahl’s comments about Deutchman’s age or

other issues were vague. These matters are insufficient to show that Wahl

violated PCAOB standards by having Deutchman work on the Accelera audit.

3.6.4. Lack of independent and appropriate engagement quality

review in 2014

“To maintain objectivity, the engagement quality reviewer and others who

assist the reviewer should not make decisions on behalf of the engagement

team or assume any of the responsibilities of the engagement team.” AS

No. 7.7. But Deutchman, as the EQR for the 2014 audit, assumed several

engagement team responsibilities, such as communicating with Accelera. In

fact, due to Deutchman’s extensive involvement in communicating about and

planning the audit, Freeman thought Deutchman was the engagement partner

and not the EQR.

Further, “the engagement quality reviewer should evaluate the significant

judgments made by the engagement team and the related conclusions reached

in forming the overall conclusion on the engagement and in preparing the

engagement report.” AS No. 7.9. But Deutchman did not properly do so. As

discussed above, he failed to acknowledge several red flags about Behavioral’s

consolidation, including: (1) the fact that the agreements themselves indicated

consolidation was inappropriate until the initial $1 million payment was made;

(2) Accelera’s disparate treatment of Behavioral and Grace, Watson, and

Traditions; (3) Freeman’s repeated warnings that consolidation was

inappropriate; and (4) that the lack of support for goodwill from the Behavioral

transaction might indicate the acquisition did not really take place. While it is

true that Anton & Chia approved Accelera’s decision to consolidate Behavioral

in 2013 before Deutchman got involved, he became aware of sufficient red flags

as EQR in 2014 and should have reconsidered the firm’s earlier decision.

3.6.5. Failure to identify non-conformance with GAAP during interim

reviews

“The objective of a review of interim financial information” under AU

§ 722 “is to provide the accountant with a basis for communicating whe ther he

or she is aware of any material modifications that should be made to the

interim financial information for it to conform with generally accepted

accounting principles.” AU § 722.07. If, during this review, the accountant

becomes aware of possible non-conformance with GAAP, “the accountant

should make additional inquiries or perform other procedures that the

accountant considers appropriate to provide a basis for communicating

whether he or she is aware of any material modifications that should be made

to the interim financial information.” AU § 722.22.

Wahl was involved in all but one of Anton & Chia’s reviews of Accelera’s

finances for its quarterly reports in 2014 and 2015. During those reviews,

various red flags should have caused Wahl and the engagement team to

reconsider whether Behavioral’s consolidation complied with GAAP. For

example, in late April or early May 2014, Wolfrum told the members of the

engagement team who did fieldwork at Behavioral that he still owned the

company and Accelera’s purchase had not been completed. In August 2014,

Chen wondered whether Behavioral had ever been paid for its stock, and

Koch’s handwritten notes on the Q2 10-Q similarly asked whether the

purchase price installments had even been paid. During the second quarter of

2015, Anton & Chia noted that Accelera still had not made any payments to

Behavioral. Yet in none of these instances did the engagement team examine

the original sale documents or reassess whether the transaction was

consummated and whether consolidation was appropriate. Nor, for example,

did the team make further inquiries of Accelera management to determine

what should be done. Finally, in no instance did the engagement team mark

the Behavioral transaction as having continuing significance on forms and

checklists prepared during its interim reviews. See Div. Post-hr’g Br. at 9; see

also Div. PFOF at 69–70, 76–77, 97–98, 101–02; AU § 722.11 (procedures for

interim reviews should include reading prior audit documentation to

determine whether there are “significant financial accounting and reporting

matters that may be of continuing significance, such as weaknesses in internal

control”); see, e.g., Ex. 164 ¶ 4(a)(iv); Ex. 1.2 ¶ 4(a)(iv); Ex. 1.3 ¶ 4(a)(iv); Ex. 1.8

at 1; Ex. 1, 2015 Q1, WP 3001 at 1; Ex. 1, 2015 Q2, WP 3001 at 1; Ex. 1, 2015

Q3, WP 3001 at 1. Although the firm believed that Behavioral had been

appropriately consolidated, and thus would have had no reason to flag the

transaction as having continued significance, the failure to do so nonetheless

demonstrates that Wahl and his the team neglected to notice red flags

indicating that consolidation was inappropriate.

4. Premier facts and accounting violations

4.1. Introduction and summary

An audit team from Anton & Chia led by Wahl audited the 2013 year-end

financial statements of Premier Holding Corporation. In those financial

statements, in violation of GAAP standards, Premier recorded the value of an

unsecured promissory note (the Note) it had received from a related party as

$869,000 even though the note was worthless. In further contravention of

GAAP, Premier recorded the entirety of its $4.5 million acquisition of The

Power Company (TPC) as goodwill even though the transaction included

identifiable assets that should have been recorded differently. Anton & Chia’s

engagement team did not adequately review these problematic transactions

according to PCAOB standards. Rather, in his work on and review of the audit,

Wahl failed to: (1) exercise due professional care and skepticism; (2) prepare

appropriate audit documentation and obtain sufficient audit evidence; (3)

properly use the work of a valuation specialist; (4) consider the possibility of

fraud in Premier’s financial statements; or (5) perform alternative

confirmation procedures.

4.2. Premier’s initial accounting for the Note

4.2.1. Premier entered into several transactions with related parties

that eventually led to the issuance of the Note.

Premier is a Nevada corporation with its principal place of business in

Tustin, California. Ex. 840 ¶ 26. Premier’s common stock is and was at all

relevant times registered with the Commission pursuant to Exchange Act

Section 12(g) and quoted on the OTC Link under ticker symbol PRHL. Id.

Premier files periodic reports with the Commission, including Forms 10-K and

10-Q. Id. Throughout the relevant period, Premier raised funds through

private sales of stock. Id.

In 2011, Premier’s primary intended line of business was to sell discount

caskets to Native Americans and low-income groups. Ex. 400 at 3 (Premier

2011 Form 10-K). Premier recorded $10,000 of revenue in 2011, and no revenue

in 2010. Id. at 8. From late 2011 to early 2012, Premier exited the casket

business and entered the green energy business. Ex. 401 at 5 (Premier 2012

Form 10-K).

By the end of December 2011, Premier completed asset purchase

agreements with WePower, LLC,16 a Delaware limited liability company, and

Green Central Holdings, Inc., a Nevada corporation, for assets to enable

commercial buildings to reduce energy consumption. Ex. 407 at Item 2.01.

Premier acquired those green energy assets from WePower, LLC, and Green

Central in exchange for approximately 30.5 million shares, representing

around 70% of Premier common stock. Ex. 401 at 12, 30. At the time, WePower,

LLC, was managed by Marvin Winkler, and Green Central was managed by

Randall Letcavage. Ex. 401 at 19; Ex. 433 at 3; Tr. 1290–91, 5764. Premier

contributed the newly acquired assets to its newly formed, wholly owned

subsidiary called WePower Ecolutions Inc., through which it planned to

operate the green energy business. Ex. 407 at Item 1.01; Ex. 400 at 3, 9.

Premier reshuffled its management shortly after purchasing the green

energy assets. On February 22, 2012, Premier appointed Kevin Donovan as

one of its directors and as CEO of WePower Ecolutions. Ex. 401 at 5; Ex. 839.5

at 4 (PDF); Tr. 1301. On February 24, 2012, the two other directors of Premier

resigned, making Donovan the sole director. Ex. 400 at 27. On April 11, 2012,

Donovan became the CEO of Premier. Ex. 401 at 5; Ex. 408 at Item 5.02.

In early 2012, Premier engaged the valuation firm of Doty Scott

Enterprises, Inc., to perform a purchase price allocation for its transactions

with WePower, LLC, and Green Central, including valuing the assets Premier

acquired as of December 29, 2011. Ex. 440 at 1 (PDF); Tr. 1362–63. On April

24, 2012, Doty Scott issued a final report that valued the assets WePower

Ecolutions acquired from WePower, LLC, and Green Central, including sales

leads, marketing materials, intellectual property, and contracts, at $48,874.

Ex. 440 at 2. Notwithstanding the final valuation report, in its 2011 Form 10K, Premier valued the green energy assets as of December 31, 2011, at zero,

because the acquisitions from WePower, LLC, and Green Central were relatedparty transactions and because the inventory acquired had been found to be

impaired. Ex. 400 at 27.

Throughout 2012, WePower Ecolutions operated the green energy assets

at a loss; the total loss came to $756,912. Ex. 401 at 14, 46. Because Donovan

was unsuccessful in generating revenue or value from the green energy assets,

Letcavage moved to end Donovan’s tenure. Tr. 5664, 5687–88.

There are three distinct “WePower” entities discussed in this section: (1)

WePower, LLC, which sold green energy assets to Premier; (2) WePower

Ecolutions, the Premier subsidiary that operated those assets; and (3)

WePower Eco Corp. (aka “New Eco”), which exchanged the Note with Premier.

In October 2012, Premier announced its intent to spin off WePower

Ecolutions. Ex. 409 at Item 5.07. Premier also announced that Donovan was

ending his role as an officer and director of Premier and Letcavage had been

appointed Premier’s CEO, president, treasurer, principal executive officer, and

principal accounting officer. Id. at Item 5.02; Ex. 411, Shareholder Letter, at

2. Concurrently, Letcavage, Winkler, and one other person became directors.

Ex. 409 at Item 5.02.

In November 2012, Premier announced an agreement in principle to

transfer the green energy assets from WePower Ecolutions to WePower Eco

Corp (New Eco), a newly formed company controlled by Donovan, in exchange

for the Note, which was an unsecured promissory note with a face value of

$5,000,000. Ex. 410 at Item 8.01; Ex. 411, Shareholder Letter, at 3. As a result

of this agreement in principle, Premier classified its WePower Ecolutions

subsidiary as “held for sale” and reported it as “discontinued operations.” Ex.

401 at 46. Premier recognized a “loss from discontinued operations” of

$756,912, which was the amount of WePower Ecolutions’ net operating loss for

2012. Id.; see id. at 28.

On January 7, 2013, Premier’s WePower Ecolutions sold the green energy

assets, including three patents, six trademarks, 28 contracts, and certain

“exclusive” business opportunities, to New Eco. Id. at 46; Ex. 402 at F-14

(Premier 2013 Form 10-K); see Ex. 840 ¶ 28; Ex. 442. In addition, WePower

Ecolutions agreed to immediately cease using the WePower name. Ex. 442

¶ 6(h); see Ex. 411, Shareholder Letter, at 3. The principal assets transferred

from WePower Ecolutions to New Eco were those originally purchased from

WePower, LLC, in December of 2011—trademarks, patents, and certain

contracts. Ex. 402 at F-14; compare Ex. 433, Schedule 1, with Ex. 442, Schedule

2(a).

In exchange for the assets, WePower Ecolutions received the Note from

New Eco and New Eco assumed roughly $100,000 in liabilities. Ex. 402 at F14; Ex. 412 at Ex. 10.3; Ex. 442 ¶ 2 & Schedule 2(b). The Note had a term of 20

years, did not require New Eco to pay any principal for five years, and had an

interest rate of 2%. Ex. 442 at Promissory Note ¶ 1. Before semi-annual

interest payments commenced, New Eco was not required to pay interest for

eleven months, so its initial semi-annual interest payment of $50,000 was due

on December 7, 2013. Id. ¶ 1(a). If New Eco failed to make that payment within

15 days of the due date, it would be in default. Id. ¶ 4(a). At the time, New

Eco’s CEO, Donovan, understood there was a likelihood that New Eco would

default on the Note. Ex. 839.5 at 23–24 (PDF). Yet, in the event that Donovan

was successful, Letcavage viewed the Note as a means to provide value to

Premier shareholders. Tr. 5668.

New Eco never paid any interest on the Note, Ex. 839.5 at 12 (PDF), so

the Note was in default on December 22, 2013, 15 days after New Eco failed to

make the first $50,000 interest payment on December 7, 2013. Ex. 441 ¶ 4(a).

Premier never attempted to collect on the Note. Tr. 3218; Ex. 839.5 at 12–14

(PDF).

On March 4, 2014, Premier entered into an agreement to, among other

things, transfer the Note to WePower, LLC, in exchange for the return of 2.5

million shares of Premier common stock. Ex. 402 at F-14. This was part of an

overarching agreement that resolved multiple disputes among multiple

parties. Ex. 454; Tr. 1318. One of those disputes related to Premier’s purchase

of TPC, discussed below: Winkler previously promised to return 5 million

shares of Premier stock to facilitate the TPC acquisition but had not yet done

so. Tr. 1322–23. Under the agreement, to resolve the dispute related to the

TPC acquisition, WePower, LLC, was to return 5 million shares of Premier

common stock to Premier and deliver 2.5 million shares of Premier common

stock to Premier in exchange for the Note. Ex. 454 at Ex. B. These two

transactions were entirely separate. Tr. 1325.

4.2.2. Doty Scott’s valuation of the Note

To prepare its financial statements, Premier needed to assign a value to

the Note. Premier again engaged the valuation firm Doty Scott to determine

the fair value of the Note as of the January 7, 2013, acquisition date. Exs. 443,

444, 447; Tr. 1994–95. Doty Scott planned to determine the fair value of the

Note by discounting the expected cash flows on the Note at New Eco’s

estimated weighted average cost of capital (WACC). Tr. 6006. Doty Scott also

needed to value New Eco, because the value of the Note depended on New Eco’s

ability to pay it. Ex. 447.

On March 19, 2013, Phil Scott, Doty Scott’s manager, requested various

information from the Premier officials responsible for its accounting function—

then Joseph Greenblatt and Eric Rosenberg—concerning New Eco and the

performance of its assets in order to carry out the valuation. Ex. 444; Tr. 2186.

Instead of providing the information Scott requested, Premier directed him to

speak to Donovan. Tr. 1389. Scott then requested the information from

Donovan and Winkler, but neither had financial projections, and they were

unwilling to provide them even if they had them. Tr. 1389–90; see Exs. 445–

46; Ex. 839.5 at 15 (PDF). New Eco never provided any information to Doty

Scott. Tr. 1391. As a result, Scott told Premier that he needed its “best

estimates of future projections based on the sales leads you were able to

generate during your year of ownership” of the assets. Ex. 446. Premier never

sent Doty Scott any updated projections or other data. Tr. 1392.

In the interim, Alfred Haddad, who conducts financial modeling and

analytics for Doty Scott, prepared a template of the valuation model that Doty

Scott would use to value New Eco and the Note once it received the necessary

information. Tr. 1991, 2005. Because Doty Scott never received financial

projections for New Eco, as a placeholder, the valuation template used

financial projections that Doty Scott had received when it valued the assets

Premier had acquired from WePower, LLC, and Green Central at the end of

2011. Tr. 2011. At that point, Haddad “had no evidence of anything,” but “was

just … sitting in front of the computer making up numbers until we got some

data.” Tr. 2008. The draft tables he prepared had “so many unsupported

assumptions built into it, that there really wasn’t a reasonable valuation of

anything.” Tr. 2010.

On March 29, 2013, Scott sent these placeholder valuation tables to Doty

Scott’s then-designated point of contact at Premier, Larry Young, in order to

elicit information about New Eco’s performance and prospects, so that Doty

Scott could complete a valuation. Ex. 447; Tr. 1393, 1396, 2008. In his

transmittal email, Scott reiterated that Doty Scott sought to value New Eco in

addition to the Note itself, and cautioned that since New Eco refused to provide

Doty Scott with any information, the initial valuation tables made

assumptions that needed to be verified and supported by management. Ex.

447. Finally, Scott warned, “[t]his preliminary valuation is not to be quoted at

this time.” Id.

The initial valuation tables contained three placeholder valuation figures:

one figure for the fair value of the Note—$698,377—and two figures for the fair

value of New Eco: $869,000 for the fair value of the New Eco enterprise and

$861,000 for fair market value of the intellectual property, patents, and trade

secrets acquired by New Eco. Ex. 447 at 2.

On April 22, 2013—just a few weeks after Doty Scott’s admonition to

Premier not to quote the figures in its initial valuation tables—Premier

nonetheless used $869,000, the value of the New Eco enterprise, as the

“preliminary valuation” of the Note in its 2012 Form 10-K, Ex. 401 at 46, and

concurrently stated that New Eco’s “product line and prospects have been

conservatively valued at approximately $869,000.” Id. at 5 (emphasis added).

On April 24, 2013, unaware of the 10-K language, Scott forwarded his

March 29 email to three Premier officials, advising them that there were still

several issues requiring Premier’s input before Doty Scott could issue a report.

Ex. 450. Premier never provided the requested information. Tr. 1413.

4.3. Anton & Chia’s initial review and subsequent audit of Premier’s

accounting for the Note

4.3.1. Anton & Chia reviewed Premier’s treatment of the Note in the

first quarter of 2013.

Just as it did in its 2012 Form 10-K, Premier included the Note as an asset

worth $869,000 in its financial statements for the first quarter of 2013. Ex. 404

at 3, 19 (Premier Q1 2013 Form 10-Q). The company also represented that the

Note had “been independently valued at approximately $869,000.” Id. at 20;

see id. at 9. Premier further reported a gain from the sale of discontinued

operations of $985,138 comprised of the purported $869,000 value of the Note

and New Eco’s assumption of $116,138 in liabilities. Id. at 9.

Unlike Doty Scott, at the time of Anton & Chia’s Q1 2013 review, Wahl

was aware Premier had already disclosed to investors that the Note had a

preliminary value of $869,000. Tr. 5306. As part of Anton & Chia’s review of

Premier’s Q1 2013 financial statements, Chris Wen was assigned to evaluate

the propriety of the recording of Premier’s note receivable balance as of quarter

end. Tr. 2118–19. When Wen asked Premier’s accounting consultants for

support for the $869,000 value for the Note, they advised him that the $869,000

“was validated by a third-party firm” and sent him a copy of the hard-coded

initial valuation tables by Doty Scott, which did not include the formulas used

to calculate the valuation tables. Tr. 2119–21. Wen then asked for Premier’s

help in obtaining a version of the tables that included the formulas. Tr. 2123–

24.

On May 22, 2013, Rosenberg asked Haddad to send copies of the Excel

spreadsheets that contained the formulas to Anton & Chia. Ex. 451. Haddad

then sent Wen three Excel files that contained the formulas and were clearly

labeled as drafts, not final valuations. Ex. 452; Tr. 2125. Haddad’s email

advised Wen not to share the proprietary models with anyone outside of Anton

& Chia, including Premier, and to email with any questions. Ex. 452.17 Haddad

assumed that Wen was a valuation professional, because Doty Scott typically

deals with an audit firm’s valuation division, auditors with valuation expertise,

or outside valuation consultants. Tr. 1354–55, 2028, 2032. However, at that

time, Wen had no prior experience working with valuation and did not

understand discount rate, enterprise value, or WACC. Tr. 2122, 2128, 2131.

Wen was unfamiliar with complex Excel tables, and did not understand the

Upon request, Doty Scott generally sends its models to the auditors so that

the auditors can confirm that they are comfortable with Doty Scott’s

methodology. Tr. 1353, 1423–24, 2030.

meaning and relationship of the three valuation figures that appeared on the

Doty Scott spreadsheets. Tr. 2126–27, 2129. Even after reviewing them, Wen

did not understand the models, the assumptions used, or the relationships of

the fair value figures produced by the models. Tr. 2127–29.

On a brief telephone call, Scott provided Wen with some basic guidance

about how to navigate and use the files so that Wen could conduct some form

of review. Tr. 1424–25. No one from Doty Scott concluded, or would have said

they concluded, that the fair value of the promissory note was $869,000,

because the figure was unsupported by verified data, and because it was not

even a provisional figure for the value of the Note. Tr. 1425–26, 1479, 1487,

2023, 6027. After that, from Doty Scott’s perspective, the Note valuation

engagement “went radio silent,” and Doty Scott ceased working on it for about

a year. Tr. 1426.

After his conversation with Scott and conducting further research, Wen

still did not understand the Doty Scott spreadsheets, and he told that to Wahl.

Tr. 2140–41. In response, Wahl told Wen to make sure that the math was

correct, i.e., to use the formulas and numbers provided to confirm the

calculation of the $869,000 value. Tr. 2140–41. Wen focused on the table’s

$869,000 enterprise value, which was the one used by Premier in its financials,

and never paid attention to the $698,377 value the table assigned to the Note.

Tr. 2142–43. Wen did not pay attention the fact that the Doty Scott

spreadsheets were labeled as drafts. Tr. 2132.

Wen prepared a workpaper for the Note valuation. Ex. 860; Tr. 2134. The

workpaper consisted of Doty Scott’s initial draft spreadsheet with six lines of

text that Wen inserted at the top of the summary sheet. Ex. 860; Tr. 2134–35.

Wen’s text read:

Purpose: To evaluate the value of the Note receivable

balance as of March 31, 2013 appropreately [sic] recorded.

Procedures: AnC has directly contact[ed] the thrid [sic]

party Appraiser to obtain the valuation report.

AnC team has review[ed] the reasonableness of the

assumptions, estimates of the fair value.

Conclusion: Based on the review of the reasonableness of

the valuation, AnC agreed that the estimated fair value

appropreately [sic] presented.

Ex. 860. Despite what Wen wrote, he could not have reviewed the

reasonableness of Doty Scott’s assumptions used to estimate the fair value, as

he did not understand them. Tr. 2127–31, 2137–40.

4.3.2. Anton & Chia audited Premier’s treatment of the Note for yearend 2013.

Wahl was the engagement partner on Anton & Chia’s audit of Premier’s

FY 2013 financial statements. Ex. 840 ¶ 42; Ex. 402 at F-1. Premier paid the

firm $31,200 for the audit. Ex. 482. Anton & Chia’s team for the 2013 audit

also included Richard Koch as the engagement quality reviewer, Tommy Shek

as audit manager, and Monique Lai, Ivan Shing, and Chris Wen as staff. Ex.

419 at 1857; see Tr. 2143, 2218–19, 2222.

In Anton & Chia’s December 31, 2013, audit planning memorandum, the

engagement team determined that they would address two of Premier’s

financial assertions: (1) the notes receivable balance, i.e., the value of the Note,

which was Premier’s only note receivable; and (2) the value of goodwill. Ex. 419

at 1854. As to the Note, Anton & Chia planned the following audit procedures:

(1) “Valuation – [Anton & Chia] will test the assumptions for the discounted

cash flow for the [Note] from disposal of WePower Co in Q1 2013” and (2)

“Existence – [Anton & Chia] will send direct confirmation to verify the balance

as of 12/31/2013 and also reconcile with the disposal agreement between

[Premier] and the buyer.” Id. As to the second point, Anton & Chia never

received confirmation of the balance due on the Note. Ex. 459; Tr. 2248–49.

As to the first point—the valuation of the Note—Shek asked Premier for

a valuation report. Ex. 419; Tr. 2238–40. On March 7, 2014, Wen told Haddad

and Scott that Premier requested that Anton & Chia review the note valuation

report provided by Doty Scott. Ex. 455 at 3. Scott responded that the firm had

not prepared a report on the Note. Id. at 1.

On April 1, 2014, Shek emailed Premier’s CEO’s assistant, Connie Absher,

asking for the official report that valued the $5 million note at $869,000. Ex.

461 at 13227. On April 2, Absher emailed Shek to advise him that Letcavage

said Anton & Chia “should have everything” since it was something handled

in 2012 and should already be presented in the 2012 Form 10-K. Id. at 13226.

Shek then checked with Wen about what Anton & Chia previously received

from Doty Scott, Ex. 460, and emailed Absher that Anton & Chia only had

“numbers” from Doty Scott and would need “to spend a lot of time to

understand his calculations without anything in writing.” Ex. 461 at 13226.

On April 3, 2014, Shek emailed Scott to see if Doty Scott would prepare a

report. Ex. 465. In an April 7, 2014, email, Scott explained to Shek that the

Excel spreadsheets Doty Scott had prepared in 2013 were merely a “draft

analysis” and that the firm would need additional information in order to

complete its analysis and prepare a report, including New Eco’s financial

statements at the time of the issuance of the Note and New Eco’s budget and

financial projections. Ex. 466 at 131. Anton & Chia forwarded Scott’s email to

Letcavage, Absher, and one other individual. Ex. 466 at 132. Later on April 7,

2014, Absher told Scott that New Eco had paid “nothing” on the Note and

Premier had no financial information from New Eco. Ex. 469 at 7544. Absher

closed her email by stating: “Please advise us on how we should handle this.

We do need to get this completed ASAP.” Id.

On April 8, 2014, Scott responded by reiterating Doty Scott’s need for

financial information, including WePower’s 2012 financial statements, to

prepare the valuation as Doty Scott had no financial information or projections

from the buyer. Id. at 7542–43. Later that day, Young emailed Scott a copy of

the asset purchase agreement and some unspecific, unconfirmed information

about financing New Eco might receive, “[h]oping this is sufficient as we are in

a hurry.” Id.

Anton & Chia never received anything else from Doty Scott while it

worked on the audit. Wen ended up including two workpapers concerning the

Note valuation for the audit. First, he created WP 4451, which Wahl instructed

him to “roll forward” from the Q1 quarterly review to support the year-end

Note valuation. Ex. 423; Tr. 2153–54. Second, at the request of Shek or Wahl,

he prepared a second workpaper for the Note valuation: a one -page

memorandum labeled WP 4452. Ex. 424; Tr. 2158.

Workpaper 4451 is virtually identical to the Note valuation workpaper

Wen prepared for the 2013 first quarter review. It is a copy of the same Doty

Scott “initial valuation” Excel workbook that served as the Note valuation

workpaper for the Q1 review with largely the same legend that Wen inserted

at the top of the first page. Ex. 423. Wen’s only addition to the legend indicates

that Anton & Chia also checked the valuation firm’s credentials. Id. Other than

checking Doty Scott’s credentials, Wen performed no additional substantive

work on the Note valuation for the audit beyond what he did for the 2013 Q1

review. Tr. 2157–58. With the exception of Wen’s conversation with Scott

during the Q1 review, no one from Anton & Chia asked how the Note valuation

was calculated. Tr. 6009. Wen did not even change the “as of” date of the

workpaper from March 31, 2013, to December 31, 2013. Compare Ex. 860, with

Ex. 423; Tr. 2156–57.

Workpaper 4451 states that Anton & Chia reviewed the “reasonableness

of the assumptions” but does not indicate what assumptions Anton & Chia

evaluated or how it determined if they were reasonable. Ex. 423. It does not

contain any financial projections of New Eco, the payor under the Note, but

instead contains projections for WePower Ecolutions, the subsidiary of

Premier, once it purchased the assets from WePower, LLC. Id. The “Financial

Projections” tab reveals that it involves a different transaction between the

different companies in a prior year. The top of that page reads, in bold type:

“Asset Sale Valuation (WePower, LLC, to WEPOWER Ecolutions, Inc.) as of

12/31/12.” Similarly, many other tabs contain the same header. Id. Neither the

“Project Overview” tab nor the “Value Assumptions” tab mentions the New Eco

Note. Id. The workpaper incorporates over forty tabs/spreadsheets and

includes complicated formulas, critical assumptions, and multi-year financial

projections, but nowhere does it discuss whether any of those formulas,

assumptions, or projections were reasonable. Id. The Excel workbook that Wen

used to create WP 4451 does not contain any basis for the Note’s fair value or

any reference to the Note other than on the summary page. Wahl has no

memory of reviewing any tabs of WP 4451. Tr. 5345.

Workpaper 4452, the note valuation memo that Wen prepared, is in many

ways similar to WP 4451. It includes, for example, a list of many of the same

procedures Wen placed in the legend of WP 4451 to test whether the Note was

reasonably recorded, and like WP 4451, contains no substantive analysis of

how Wen actually made the determination. Ex. 424; Tr. 2161, 2165–66. It also

indicates that no payment had been received on the Note as of December 31,

2013, but does not discuss that New Eco was in default and that Premier made

no effort to collect. See id. Wahl did not review WP 4452. See Ex. 417 at A&CPremier 144 (sign-offs for 2013 Premier audit).

Neither of the workpapers discussed the terms of the Note, which were

highly favorable to New Eco. Ex. 441; Tr. 1448–49. Neither referred to a sale

or settlement of the Note in early 2014. See Exs. 423 & 424. Anton & Chia’s

workpapers do not reflect any analysis or consideration of how the same assets

that generated losses for WePower Ecolutions in 2012 would generate pr ofits

for New Eco. Id.; see Ex. 401 at 28.

Like Wen, Shek did not understand the Doty Scott spreadsheets or what

they did. Tr. 2237. Shek and Wen knew that Doty Scott had not completed a

valuation of the Note. Ex. 455 at 1; Ex. 466 at 131; Tr. 2238–39, 2255. Beyond

the Excel file, Shek told Wahl he was unable to obtain information to audit the

Note valuation. Tr. 2255–56; Ex. 461. Shek refused to sign off on either Note

valuation workpaper because he was unable to understand the spreadsheets.

Tr. 2257; Ex. 417 at AnC-Premier 143–44 (showing that Wen and Wahl, but

not Shek, signed off on workpaper 4451, and that Wen signed off on workpaper

4452, but Shek and Wahl did not).

Wahl testified at the hearing that the $869,000 valuation was reasonable

because it was an 83% discount on the $5 million face value of the Note. Tr.

5348–49. He explained that he did not use the $698,000 figure in the draft

tables, even though it was labeled as the value of the Note, because it would

have been an inappropriate “double discount” off the face value of the note. Tr.

4443, 5359–60. Essentially, Wahl believed that the $869,000 figure was

already appropriately discounted, and that Doty Scott must have applied the

WACC discount a second time to $869,000 to arrive at $698,000. Tr. 5360–63.

But Wahl never discussed his assumptions with anyone at Doty Scott. Tr.

4444–45, 5364–65. In fact, Scott testified that there was no “double discount”;

he applied the WACC only once to reach $698,000, and that the two figures—

$869,000 and $698,000—were “completely independent” of each other. Tr.

6009–10, 6013–15. Moreover, Wahl never documented his analysis in the

workpapers, Tr. 5365–66, and during a deposition in 2014, he could not recall

why he had chosen $869,000 over $698,000, which suggests that his

explanations at the hearing were post-hoc rationalizations. Tr. 5319, 5324.18

Wahl further testified that he chose $869,000 as the value of the Note

because he was aware of discussions that the Note was to be settled by the

return of as many as 7.5 million shares to Premier, and that this would roughly

match the chosen value. Tr. 5348, 5375, 5381–82. But neither Wahl nor Shek

ever told Wen to document an analysis of the value of 7.5 million shares of

Premier stock exchanged for the Note. Tr. 2159. Indeed, nothing about this

rationale for using the $869,000 figure is found anywhere in the workpapers.

See Tr. 1717 (Devor’s testimony). In addition, Premier’s 2013 10-K reflects that

only 2.5 million shares were returned in exchange for the Note. Ex. 402 at F14.

4.3.3. Doty Scott completed its valuation report before Premier filed

its 10-K, but Anton & Chia did not receive it.

Although neither New Eco nor Premier ended up providing Doty Scott

with the financial information requested, Doty Scott complete d its analysis

using the information it had, including WePower Ecolutions’s 2012

performance as reported by Premier in its FY 2012 Form 10-K. Tr. 2051, 1453–

54.

Misuraca’s expert testimony does not help Wahl either. Misuraca opined

that the method Doty Scott used to reach $869,000 was reasonable, but

withheld judgment on whether Wahl should have relied on the spreadsheet.

Tr. 3461, 3567. Further, Misuraca never spoke with anyone at Doty Scott, and

did not know that the $869,000 figure in the spreadsheet was supposed to

represent the fair value of the entire enterprise, not just the value of the Note.

Tr. 3586–87, 3589; Ex. 1122 at 5.

On April 9, 2014, Doty Scott sent Premier a draft report that valued the

Note at $0. Ex. 472. In the report, Doty Scott gave the following reasons for

valuing the Note at $0: (1) it was unsecured and secondary to all secured debt

obtained by the borrower; (2) the terms were 20 years with no principal

payments for five years and a significantly below market 2% interest rate with

interest payments deferred until 11 months after issuance; (3) the payor, New

Eco, was a start-up company incorporated in late 2012 with no other known

assets; (4) New Eco had no known revenues; (5) New Eco had an undisclosed

and unknown quantity of secured and unsecured liabilities; (6) the assets

transferred generated no revenue for Premier in 2012; (7) the assets generated

a net loss in excess of $750,000 for Premier; 19 and (8) New Eco refused to

provide any information regarding its financial status or projections. Ex. 472

at 48, 53; see Tr. 1446–49.

Scott explained that a discounted cash flow analysis of the Note’s payment

terms netted a value of $272,488, with a WACC of 52.1%, which Scott

concluded was more reasonable under the circumstances than the 27.91% used

in the initial valuation tables. Ex. 472 at 48; see Tr. 1452. The firm also

estimated the value of New Eco, which served as a cap on the value of the Note.

Doty Scott found that the net enterprise value of New Eco was less than

$10,000 and the net value of New Eco’s intangible assets was negative, so the

Note was worthless. Ex. 472 at 48; Tr. 1451–52.

Despite having received Doty Scott’s report six days prior, Premier filed

its 2013 audited financial statements on Form 10-K on April 15, 2014, and

reported the Note as a note receivable valued at $869,000 on its balance sheet,

as it had in 2012. Ex. 402 at F-2; see id. at F-4, F-9, F-14. Based on the Note

valuation and New Eco’s agreement to assume $116,138 of WePower

Ecolutions’s liabilities, Premier also reported $985,138 in income from

discontinued operations. Id. at F-3. It does not appear, however, that Anton &

Chia received Doty Scott’s valuation report before completing its audit. See

Div. Response to Wahl PFOF at 275.

4.4. The TPC acquisition

4.4.1. Premier’s acquisition of TPC and its accounting for the

transaction in its 2013 Form 10-K

On February 28, 2013, Premier acquired an 80% interest in TPC, a

deregulated power broker in Illinois, in exchange for 30,000,000 shares of

At the hearing, Scott corrected a typographical mistake in the report,

clarifying that the year that the assets generated a loss in excess of $750,000

was 2012, not 2011. Tr. 1450.

Premier stock. Ex. 840 ¶ 29; Ex. 402 at 4, F-11. TPC’s customer contracts were

the source of TPC’s revenue and receivables. Tr. 2478. Premier touted the TPC

acquisition to the market by publicly emphasizing the quantity and the value

of customer contracts:



Its December 27, 2012, letter to shareholders preceding the

acquisition stated that TPC had “significant assets,” including

“receivables of over $1,000,000” and “power contracts with 8,600

customers that we believe represent in excess of $8,000,000 of

assets that will become part of Premier.” Ex. 411, Shareholder

Letter, at 3.



Its February 27, 2013, press release announcing the TPC

acquisition claimed that TPC had “contracts with over 14,000

customers representing assets estimated to be valued from

$6,000,000 to $10,000,000.” Ex. 413 at Ex. 99.1 Press Release.



Its May 30, 2013, press release quoted Letcavage and said Premier

believed that TPC’s “contracts in hand today are worth

approximately $20,000,000 … if the company chose to sell them off

in the deregulated energy markets” and that “[t]he market value of

[TPC’s] contracts at year end, December 31, 2013, should exceed

$35,000,000.” Ex. 414.



Its 2013 first quarter Form 10-Q reported that “[a]s of March 31,

2013, TPC had over 12,000 commercial contracts, and now has

almost 18,000.” Ex. 404 at 21. Premier also reported: “The Power

Company has over 12,000 residential and commercial customers,

and has been adding between 1,000 and 1,500 clients per month,

and it expects to add over 2,000 residential and commercial

customers per month beginning as early as May 2013.” Id. at 20.



Its 2013 second quarter Form 10-Q reported that TPC “clos[ed]

second quarter 2013 with 18,000 contracts” and had “over 18,500

residential and commercial customers.” Ex. 405 at 12, 21.



Its 2013 third quarter Form 10-Q reported that TPC “clos[ed] third

quarter 2013 with 40,000 contracts” and had “over 18,500

residential and commercial customers.” Ex. 406 at 12, 16.

Premier engaged Doty Scott to do a purchase price allocation for the TPC

acquisition and Doty Scott requested information it needed to value TPC’s

assets. Ex. 451; Tr. 2027. Doty Scott never received any of the requested

information, and never completed the TPC purchase price allocation. Tr. 2027.

In its 2013 Form 10-K, Premier stated that because an independent

valuation of TPC’s identifiable assets and liabilities was “still in process,” it

was reporting the entire $4.5 million purchase price—the purported value of

the 30 million shares Premier issued to the sellers as consideration for the

acquisition—as goodwill. Ex. 402 at F-11.

Premier’s decision to recognize the full purchase price from the TPC

acquisition as goodwill was the primary reason that Premier’s reported

goodwill increased from $138,000 as of December 31, 2012, to $4,555,750 as of

December 31, 2013. Ex. 894 at F-11. Goodwill thus became the largest piece of

Premier’s total reported assets of $6,879,145, with the goodwill attributed to

the TPC acquisition constituting more than 65% of Premier’s total assets. Ex.

402 at F-2.

In its 2013 Form 10-K, Premier further stated that it “periodically reviews

the carrying value of intangible assets not subject to amortization, including

goodwill, to determine whether impairment may exist.” Ex. 402 at F-8. It also

represented that “[g]oodwill and certain intangible assets are assessed

annually, or when certain triggering events occur, for impairment using fair

value measurement techniques.” Id. Premier did not report any impairment of

goodwill in its 2013 financial statements. See id.

In a September 19, 2013, email, Greenblatt, one of Premier’s accounting

consultants, told Young that Premier had valued the TPC stake “solely based”

on its 12,000 customers. Ex. 478. According to Rosenberg, another of Premier’s

accounting consultants, Anton & Chia knew that Premier had valued TPC

based on its customer contracts, and Rosenberg would have provided Anton &

Chia with worksheets he had received from TPC showing that TPC was adding

1,500 to 2,000 contracts each month. Tr. 2191–95. Premier’s CEO would have

provided information about the number and value of the TPC contracts if

Anton & Chia asked for it. Tr. 5788.

4.4.2. Anton & Chia’s audit of the TPC acquisition

Anton & Chia’s planning memo for the 2013 audit stated that Premier

“has to complete a purchase price allocation [for the TPC acquisition] within a

year per SEC requirement” and that Anton & Chia would “look … [at] the

reasonableness of the purchase price allocation.” Ex. 419 at 1854. Anton &

Chia’s audit team knew Premier engaged Doty Scott to complete a purchase

price allocation for TPC, and that, as of April 3, 2014, Doty Scott was “awaiting

data from the client to complete the engagement.” Ex. 480. Shek acknowledged

that he was concerned that the purchase price allocation was not completed at

the time of the audit even though over a year had passed since the TPC

acquisition. Tr. 2264, 2267. Nonetheless, the purchase price allocation was not

completed, so Anton & Chia did not review it. Tr. 2027, 2267. Anton & Chia’s

audit team, including Wahl, knew that $4,500,000 of Premier’s reported

goodwill of $4,555,750 was attributable to the full purchase price of the TPC

acquisition. Tr. 2266–67; Ex. 402 at F-2.

Despite its failure to obtain or consider a purchase price allocation, Anton

& Chia did look at “impairment issues in the goodwill” regarding the TPC

acquisition as it had stated in its audit planning memo. Ex. 419 at 3; Ex. 428;

Tr. 2269. But because Premier never provided a goodwill impairment analysis,

Anton & Chia considered goodwill impairment on its own. Tr. 2268–69; see Ex.

428. Shek prepared WP 4500.04, titled “Goodwill Impairment Analysis.” Ex.

428; Tr. 2269. That workpaper reflected the methodology Wahl directed: take

two months of TPC’s cash inflows (not net cash flows), calculate the average,

and project future income using that average monthly number. See Ex. 428;

Tr. 2274–76. Although the workpaper stated it calculated cash inflow

projections for 60 months, it included only 36 months of projections. Ex. 428 at

2. Contrary to Wahl’s approach, Shek testified that analyzing impairment

using net cash flow would have been more accurate. Tr. 2274–75. Indeed,

according to bank records summarized in Devor’s report, TPC’s net cash flow

was negative over the two months used for Shek’s impairment analysis from

January to February 2014. Specifically, TPC had net cash flow of $13,205 in

January, but net cash flow of negative $17,322 in February. Taken together,

TPC had a net cash flow of negative $4,117, an average of negative $2,058 per

month. See Ex. 88.1 at 130–31 (Devor’s mathematical summary).

After calculating cash inflows, the workpaper then documented Anton &

Chia’s inquiry “with the management,” where Premier purportedly advised

that they expected TPC to keep growing “and did not see any factors that

[would] significantly impair[] the goodwill.” Ex. 428 at 2. The workpaper also

stated it would employ Wahl’s methodology of analyzing how many new

customers TPC signed up in the first quarter of 2014 compared to the first

quarter of 2013 to see whether the business was growing, but did not say it

would consider whether TPC was actually making money from the new

contracts. Id. at 2–3; Tr. 2282–83. Despite the fact that the information about

growth came entirely from Premier and not independent inquiry on Anton &

Chia’s part, the workpaper does not reflect any evaluation of whether the

numbers Premier provided were reliable. See Ex. 428.

4.5. Wahl reviewed the audit workpapers very quickly.

Wahl signed off on 150 workpapers for the Premier audit between April

10 and April 15, 2014, which was the day that Anton & Chia issued its

unqualified audit opinion. Ex. 402 at F-1; Ex. 417 (workpaper sign off history

report). Specifically, Wahl signed off on: 36 workpapers on April 10; 60

workpapers on April 14; and 54 workpapers on April 15, 2014, including WP

4451, Wen’s consideration of the Note’s valuation that was rolled forward from

the 2013 Q1 review. Ex. 417 at A&C-Premier 144 (noting that Wahl signed off

on WP 4451); Ex. 88 at Ex. 4 (Devor’s summary chart); see Ex. 423. According

to Anton & Chia’s records, Wahl spent a total of 8.5 hours on his review; and

of the six hours he spent from April 10 through 15, he only spent a half hour

on the last day signing off on 54 workpapers including WP 4451 concerning the

valuation of the Note. Ex. 417 at A&C-Premier 144; Ex. 418 at A&C-Premier

149.20

4.6. Anton & Chia’s audit report asserted compliance with GAAP and

PCAOB standards.

Anton & Chia’s audit report in Premier’s 2013 Form 10-K represented that

it had conducted its audit “in accordance with the standards of the Public

Company Accounting Oversight Board” and that Premier’s financial

statements were materially accurate and in conformity with GAAP. Ex. 402 at

F-1. The audit report contained a going concern qualification and a related

party qualification, but neither were related to the valuation of the Note or the

way the TPC transaction was recorded. Id.

4.7. Premier’s failures to comply with GAAP

4.7.1. Premier’s accounting for the Note did not comply with GAAP.

ASC 310 governs the accounting for notes receivable. ASC 310-10-05-4.

When the face value of a note is materially different from its fair value, ASC

310 requires the company to record the receivable at fair value. ASC 310-1030-5. After the initial transaction and measurement, ASC 310 requires a

company to periodically measure receivables for impairment to ensure that the

recorded amounts still reflect the likelihood of collection. ASC 310-10-35-8,

-35-16.

In this case, there can be no disagr

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