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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933
Release No. 8103 / June 5, 2002

SECURITIES EXCHANGE ACT OF 1934
Release No. 46034 / June 5, 2002

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1567 / June 5, 2002

ADMINISTRATIVE PROCEEDING
File No. 3-10716


In the Matter of

JAMES E. SLAYTON, CPA,

Respondent.


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ORDER MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER, AND IMPOSING SANCTIONS PURSUANT TO RULE 102(e) OF THE COMMISSION'S RULES OF PRACTICE

I.

On March 6, 2002, the Securities and Exchange Commission ("Commission") instituted public administrative and cease-and-desist proceedings pursuant to Section 8A of the Securities Act of 1933 ("Securities Act"), Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 102(e)(1)(ii) and (iii) of the Commission's Rules of Practice against James E. Slayton ("Slayton").1

Following the institution of those proceedings, Slayton submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, Slayton consents to the entry of this Order Making Findings and Imposing A Cease-and-Desist Order, and Imposing Sanctions Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order") without admitting or denying the findings set forth in this Order, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which are admitted.

The Commission has determined that it is appropriate to accept Slayton's Offer and accordingly is issuing this Order.

II.

On the basis of this Order and the Offer, the Commission finds2 the following:

  1. James E. Slayton, age 54, is a resident of Overton, Nevada. Slayton became licensed as a CPA in 1983, and is licensed to practice as a CPA in Ohio.

  2. Freestar Technologies, formerly known as Freedom Surf Inc., is a Nevada corporation located in Los Angeles, California. Its common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on the OTC Bulletin Board under the symbol FSTI.

  3. Freedom Surf engaged Slayton as its independent auditor in December 1999. Slayton issued an audit report on the financial statements of Freedom Surf for the year ended December 15, 1999. Those financial statements reflected assets valued at $5.18 million, consisting entirely of equipment purportedly purchased from an entity in Costa Rica. The reported value of that equipment was supported by a fabricated appraisal, which Slayton relied upon in rendering his audit report. In that report, Slayton stated that Freedom Surf's financial statements fairly presented its financial condition in all material respects in conformity with generally accepted accounting principles ("GAAP") and that he conducted his audit in accordance with generally accepted auditing standards ("GAAS").

  4. Slayton failed to perform an audit and to otherwise comply with GAAS, as follows:

    1. Slayton failed to plan his audit by preparing audit programs or conducting audit risk assessments sufficient to determine matters requiring special consideration;

    2. Slayton failed to obtain sufficient competent evidential matter upon which to base his opinion;

    3. Slayton failed to exercise due professional care and maintain an attitude of professional skepticism to provide reasonable assurance of detecting both material errors and fraud in the financial statements;

    4. in relying on the appraisal, Slayton failed to determine whether the appraiser had the skill or knowledge to perform a valid appraisal and failed to understand the assumptions and methods used by the appraiser to ensure that the appraisal supported the values included in the financial statements; and

    5. Slayton issued an audit report containing an opinion without performing basic audit steps to provide a basis for that opinion.

  5. Freedom Surf purportedly purchased $5.18 million of equipment from a company located in Costa Rica for 969,000 shares of its common stock and a promissory note for $335,000.

  6. Under GAAP, assets received by a corporation in return for stock must be recorded at fair value, which may be determined by reference either to the value of the assets received or the stock issued, whichever is more clearly evident. See Accounting Principles Board Opinion No. 16 paragraph 67 (APB 16). As Freedom Surf was a start-up at the time, with no public trading and no history of private arms-length transactions, the value of Freedom Surf's stock was not clearly evident. Freedom Surf, should, therefore, have determined the fair value of the assets received.

  7. Instead, Freedom Surf's officers devised a scheme to fabricate an appraisal falsely showing those assets to be worth over $5 million. Consequently, Freedom Surf's financial statements were not prepared in conformity with GAAP.

  8. Freedom Surf filed a registration statement on Form 10-SB on January 3, 2000, which included financial statements opined on by Slayton that materially overstated the company's assets.

  9. Slayton acted knowingly or recklessly by relying on an unexecuted purchase agreement to establish the ownership of the assets and by relying on a fabricated appraisal without testing the qualifications of the appraiser or the source and nature of the information relied upon by the appraiser in issuing that appraisal. In fact, the appraiser had no knowledge of the value of the assets except through values provided to him by Freedom Surf's vice president.

  10. For these reasons, Slayton willfully violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and caused and willfully aided and abetted Freedom Surf's violations of Section 12(g) of the Exchange Act and Rule 12b-20 thereunder.

  11. Thus, Slayton also recklessly engaged in improper professional conduct and willfully violated, or willfully aided and abetted the violation of, provisions of the Federal securities laws and rules, for purposes of Rule 102(e)(1)(ii) and (iii) respectively, of the Commission's Rules of Practice.

III.

In view of the foregoing, it is appropriate to impose the sanction agreed to in the Offer. Accordingly, IT IS HEREBY ORDERED that:

  1. Slayton cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and cease and desist from causing any violation and any future violation of Section 12(g) of the Exchange Act and Rule 12b-20;

  2. effective immediately, Slayton is denied the privilege of appearing or practicing before the Commission as an accountant; and

  3. within thirty (30) days following the entry of the Order, Slayton shall pay $3,000 in disgorgement, plus prejudgment interest of $544.19. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter that identifies James E. Slayton as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to William F. Baker, III, Associate Director, Division of Enforcement, 450 5th Street, N.W., Washington, D.C. 20549-0801.

By the Commission.

Jonathan G. Katz
Secretary

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1 Paragraph 1 of Rule 102(e) provides, in relevant part, that: The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: . . . (ii) [t]o be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) [t]o have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.
2 The findings herein are made pursuant to the Offer of Settlement of Slayton and are not binding on any other person or entity in this or any other proceeding.


http://www.sec.gov/litigation/admin/33-8103.htm


Modified: 06/05/2002